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Keynesian Political Economy Is Theft – Monty Pelerin’s World : Monty Pelerin’s World

Keynesian Political Economy Is Theft – Monty Pelerin’s World : Monty Pelerin’s World.

FEBRUARY 28, 2014

keyneshayekimages (2)The plague of our time is Keynesian economics. It has destroyed the economics profession and enabled the political class to obtain powers never intended.

Keynesian economics provided the intellectual cover for the criminal class we politely call “government” to plunder its citizenry. In the beginning, clear-thinking, independent economists (not dependent on government largess) expressed objections to this “new economics.” There was little new in Keynes’ work and many errors that had been debunked decades before Keynes was even born. Bastiat’s parable of the “broken window” in 1850 is probably the best-known refutation, although similar arguments preceded Bastiat by a century or more.

In the 1930s leaders were desperate and willing to try anything. Keynes General Theory was published in 1936, during the middle of the greatest depression the world had ever experienced. Politicians, more so than economists, welcomed his ideas as a new approach.

The Austrian economists  represented by Mises and Hayek saw the fallacies in this new approach immediately. Some of the Chicago School (Knight, Simons, Viner) did also. Ludwig von Mises, never one to mince words, described Keynesian economics in the following manner:

What he really did was to write an apology for the prevailing policies of governments.

Mises likely was one of the few who saw the full ramifications of what Keynesian economics would provide for government. Most early criticisms were in terms of the economic unsoundness of the theory.

To contrast the blatant differences between proper economics and Keynesian prescriptions, the following two prescriptions were offered early in this century:

austriankeynesian

It was proper that one of these men should have won the Nobel Prize in economics. It just happened to be the wrong one.

buchananeconomy-1986-1

JAMES BUCHANAN, NOBEL LAUREATE

In 1977 James M. Buchanan and Richard E. Wagner wrote “Democracy In Deficit — The Political Legacy of Lord Keynes” (available online). It was the first comprehensive attempt to apply public-choice theory to macroeconomic theory and policy. According to Robert D. Tollison:

The central purpose of the book was to examine the simple precepts of Keynesian economics through the lens of public-choice theory. The basic discovery was that Keynesian economics had a bias toward deficits in terms of political self-interest.

From Buchanan and Wagner came this judgment regarding Keynesian economics:

The message of Keynesianism might be summarized as: What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation. (p. 3)

This fundamental confusion was responsible for the political acceptance of Keynesian economics. Politicians saw the potential for themselves in this new doctrine which advocated central control of the economy and fiscal irresponsibility as a necessary and patriotic thing. Giving them this gift was like providing matches and gasoline to an arsonist. (“I don’t want to spend money, but I have to otherwise the economy will tank.”)

Once government took control of the economy, they needed economists to provide the analysis and justifications for their new policies. Many in the economics profession were procured in similar fashion used with prostitutes. Money and power were heady incentives for a profession that had rightly been consigned to a section in their own ivory tower.

Justifying what government wanted to do and was doing was the only requisite. But, in order to qualify, it became necessary to convert to Keynesianism. Other branches of economics condemned government policies, at least on economic grounds.

Economists more than most understand incentives. When the payoffs increase, some men in any profession find it easy to modify ethics and integrity.

Buchanan and Wagner knew the damage that Keynesian economics had already inflicted and knew its potential was much greater. Thirty-seven years ago they commented:

What happened? Why does Camelot lay in ruin? Viet Nam and Watergate cannot explain everything forever. Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists. (p. 4)

They answered their own question:

The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose, it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax. “Democracy in deficit” is descriptive, both of our economic plight and of the subject matter for this book. (p.4)

Now, thirty-five plus years later, one may judge the merit in this book. Prescience, while not limited to them alone, was amazing.

One must also marvel at the continuation and acceleration of the ruinous policies. Whether Buchanan and Wagner imagined things could go on for so long and to such an extent is not known. However, to appreciate these changes, this graph from Zerohedge shows the effects of Keynesianism and what it has done to governments around the world:

keynesian legacy

The deterioration in fiscal discipline was astounding and in line what they predicted.

As this false economic theology known as Keynesianism runs its course, the following conclusions are probable:

  • Regardless of whether this generation escapes or not, we have impoverished our children and grandchildren.
  • Politicians now control most of the economy, including what passes for acceptable economics.
  • No honest economist can work for government; nor would one want to.
  • The tipping point for reversing this condition has long past.
  • Politicians have no incentive to stop the process underway.
  • Markets (and perhaps societies and governments) will eventually collapse, ending this terrible period of economic madness.

When this flawed paradigm is finally exhausted, the world may enter a better place in terms of economics and limited government. Without this shift, poverty and misery will grow along with wars used as political diversions.

One can only hope that the world avoids an Economic Dark Age when the collapse occurs.

Keynesian Political Economy Is Theft – Monty Pelerin's World : Monty Pelerin's World

Keynesian Political Economy Is Theft – Monty Pelerin’s World : Monty Pelerin’s World.

FEBRUARY 28, 2014

keyneshayekimages (2)The plague of our time is Keynesian economics. It has destroyed the economics profession and enabled the political class to obtain powers never intended.

Keynesian economics provided the intellectual cover for the criminal class we politely call “government” to plunder its citizenry. In the beginning, clear-thinking, independent economists (not dependent on government largess) expressed objections to this “new economics.” There was little new in Keynes’ work and many errors that had been debunked decades before Keynes was even born. Bastiat’s parable of the “broken window” in 1850 is probably the best-known refutation, although similar arguments preceded Bastiat by a century or more.

In the 1930s leaders were desperate and willing to try anything. Keynes General Theory was published in 1936, during the middle of the greatest depression the world had ever experienced. Politicians, more so than economists, welcomed his ideas as a new approach.

The Austrian economists  represented by Mises and Hayek saw the fallacies in this new approach immediately. Some of the Chicago School (Knight, Simons, Viner) did also. Ludwig von Mises, never one to mince words, described Keynesian economics in the following manner:

What he really did was to write an apology for the prevailing policies of governments.

Mises likely was one of the few who saw the full ramifications of what Keynesian economics would provide for government. Most early criticisms were in terms of the economic unsoundness of the theory.

To contrast the blatant differences between proper economics and Keynesian prescriptions, the following two prescriptions were offered early in this century:

austriankeynesian

It was proper that one of these men should have won the Nobel Prize in economics. It just happened to be the wrong one.

buchananeconomy-1986-1

JAMES BUCHANAN, NOBEL LAUREATE

In 1977 James M. Buchanan and Richard E. Wagner wrote “Democracy In Deficit — The Political Legacy of Lord Keynes” (available online). It was the first comprehensive attempt to apply public-choice theory to macroeconomic theory and policy. According to Robert D. Tollison:

The central purpose of the book was to examine the simple precepts of Keynesian economics through the lens of public-choice theory. The basic discovery was that Keynesian economics had a bias toward deficits in terms of political self-interest.

From Buchanan and Wagner came this judgment regarding Keynesian economics:

The message of Keynesianism might be summarized as: What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation. (p. 3)

This fundamental confusion was responsible for the political acceptance of Keynesian economics. Politicians saw the potential for themselves in this new doctrine which advocated central control of the economy and fiscal irresponsibility as a necessary and patriotic thing. Giving them this gift was like providing matches and gasoline to an arsonist. (“I don’t want to spend money, but I have to otherwise the economy will tank.”)

Once government took control of the economy, they needed economists to provide the analysis and justifications for their new policies. Many in the economics profession were procured in similar fashion used with prostitutes. Money and power were heady incentives for a profession that had rightly been consigned to a section in their own ivory tower.

Justifying what government wanted to do and was doing was the only requisite. But, in order to qualify, it became necessary to convert to Keynesianism. Other branches of economics condemned government policies, at least on economic grounds.

Economists more than most understand incentives. When the payoffs increase, some men in any profession find it easy to modify ethics and integrity.

Buchanan and Wagner knew the damage that Keynesian economics had already inflicted and knew its potential was much greater. Thirty-seven years ago they commented:

What happened? Why does Camelot lay in ruin? Viet Nam and Watergate cannot explain everything forever. Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists. (p. 4)

They answered their own question:

The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose, it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax. “Democracy in deficit” is descriptive, both of our economic plight and of the subject matter for this book. (p.4)

Now, thirty-five plus years later, one may judge the merit in this book. Prescience, while not limited to them alone, was amazing.

One must also marvel at the continuation and acceleration of the ruinous policies. Whether Buchanan and Wagner imagined things could go on for so long and to such an extent is not known. However, to appreciate these changes, this graph from Zerohedge shows the effects of Keynesianism and what it has done to governments around the world:

keynesian legacy

The deterioration in fiscal discipline was astounding and in line what they predicted.

As this false economic theology known as Keynesianism runs its course, the following conclusions are probable:

  • Regardless of whether this generation escapes or not, we have impoverished our children and grandchildren.
  • Politicians now control most of the economy, including what passes for acceptable economics.
  • No honest economist can work for government; nor would one want to.
  • The tipping point for reversing this condition has long past.
  • Politicians have no incentive to stop the process underway.
  • Markets (and perhaps societies and governments) will eventually collapse, ending this terrible period of economic madness.

When this flawed paradigm is finally exhausted, the world may enter a better place in terms of economics and limited government. Without this shift, poverty and misery will grow along with wars used as political diversions.

One can only hope that the world avoids an Economic Dark Age when the collapse occurs.

Less Inflation, Not More – Ludwig von Mises Institute Canada

Less Inflation, Not More – Ludwig von Mises Institute Canada.

Amongst other things, inflation is a form of taxation. As prices rise the purchasing power of savings falls. As a consequence, savers are harmed while creditors gain by having to repay their debts with less valuable money than when they originally borrowed.

With this in mind it is troubling that so many within the central banking establishment are currently arguing that what the world needs is higher inflation.

Janet Yellen, President Obama’s nominee to become the new Chair at the Federal Reserve, has long argued that higher inflation is invaluable when the economy is weak. After all, as her reasoning goes, rising prices bring greater profits to businesses. Rising wages help borrowers repay their debts. And let’s not forget that inflation encourages people and businesses to borrow money to spend more than might otherwise be the case.

Harvard economist and co-author of the influential book This Time It’s Different, Kenneth Rogoff, wrote recently that inflation “should be embraced.” He goes on to explain that “moderate” inflation of 4-6% is helpful when “massively over-valued” assets, such as housing, are in danger of deflating. (I have reviewed Rogoff’s arguments in this book in the first issue of Mises Canada’s Journal of Prices and Markets.)

Such views are no longer in the minority. Indeed, a great number of commentators echo the sentiment that higher inflation is needed now more than ever to “save” the economy. Nothing could be further from the truth.

In formulating his business cycle theory that earned him his Nobel Prize in economics, Friedrich Hayek called the effects of inflation “forced savings.” Inflation induces producers to take on investments through capital expenditures that would be inherently less stable than those brought about by voluntary savings. The unsustainable nature of these investments comes from two facts.

First is that as inflation increases nominal profits, businesses are fooled into thinking that their investments are more profitable than in real (inflation-adjusted) terms. Indeed, cost-based accounting compounds this problem as depreciation allowances, for example, are based on the historical purchase price of an asset and not the higher replacement cost brought about by inflation. Consequently businesses take on investments that are less profitable on the margin than would be the case lacking inflation.

On the other hand, Hayek focused on the time structure of production. It is insufficient for a business to merely produce the amount of goods demanded by consumers. It must also structure its production processes so that its investment yields a profit at that time when consumers stop saving and start demanding goods. This is important as any production process relies on savings to sustain it until it reaches a point of payoff. This point is identified, in the terms of modern finance, as the moment that the net present value of a project turns from negative (e.g., during the initial investment stage) to positive (e.g., when the fruits of this process generate sales).

Inflation skews the structure of production and induces businesses to take on more time consuming, or roundabout, production techniques. This is so because the net present value of any investment project is interest-rate sensitive. As rates fall, as is the case in the short term in real terms as inflation rises, longer durations until payoff will be profitable compared to a lower interest rate environment.

The forced saving that Hayek focused on was the increased investment brought on by inflationary central bank policies. More to the point, his emphasis was on the fact that the investment would be of the incorrect type. Because it does not coincide with real saving preferences, longer-dated and less profitable investments will be made than would otherwise be the case.

These forced investments are not sustainable because they are inconsistent with underlying preferences. Resulting only from the illusion of profitability that low interest rates bring about, these investments will be liquidated when interest rates rise (as would be the case in the long run as higher inflation pushes up borrowing costs) or as their generally unprofitable nature is exposed.

The concerted effort to increase inflation is the same medicine that caused the current economic malaise. The world is rife with poor investments that were undertaken in the past because of inflation-induced forced saving. As central banks pursued inflationary monetary policies businesses were induced into making investments inconsistent with the sustainable needs of the economy.

Calls for further inflation are akin to demands for higher taxes. As inflation redistributes wealth of savers to investors it favours a spendthrift attitude. This has much in common with the idea that increased taxes to allow governments to continue spending will somehow miraculously cure the economy’s woes.

Unfortunately and similar to all redistribution schemes, the result is tenuous. Just as bloated public sectors are now increasingly seen as the causes of the current crisis in such basket-case countries as Greece, for example, so too should inflationary policies be seen in a similar light. By artificially altering savings preferences, inflationary policies breed the unsustainable situations that we call recessions. To the extent that they cause these problems, economists should not be advocating them as means to exit recessions as well.

David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute’s Douglas E. French Prize. Send him mail.

 

Dambisa Moyo on on the need to depolarize economic-policy debates. – Project Syndicate

Dambisa Moyo on on the need to depolarize economic-policy debates. – Project Syndicate.

NEW YORK – Last month’s US government shutdown – the result of a partisan standoff in congressional budget negotiations – epitomizes the polarization that prevails in modern economic-policy debates.

On one side, John Maynard Keynes’s cohort argues that government intervention can help any economy grow its way out of crisis by spurring aggregate demand and, in turn, raising the employment rate. A country’s government, Keynesians contend, has the capacity – and responsibility – to solve many, if not all, of its economic problems.On the opposite side, followers of the Austrian School of economic thought, especially the ideas of Friedrich Hayek, assert that limited government and free enterprise form the only viable path to liberty and prosperity. The market is the best arbiter of how to allocate scarce resources, and thus should serve as an economy’s main driver.

In recent years, this long-running debate has become increasingly contentious – and the costs of stalemate are mounting. In order to restore growth in developed economies, while sustaining strong GDP growth and reducing poverty in the developing world, a more unified approach to economic policymaking that draws from both traditions is needed.Official responses to the global economic crisis highlight the interventionist model’s merits, proving that decisive government action can help to enhance efficiency and clear unbalanced markets, thereby protecting the economy from the demand shortfall caused by falling investment and rising unemployment. But the free market also has a crucial role to play, with longer-term, incentive-based policies catalyzing scientific and technological advancement – and thus boosting economies’ growth potential.

In determining how to promote innovation without sacrificing social protection, economists and policymakers should take a lesson from the field of physics. For nearly a century, physicists have attempted to merge the competing ideas of the field’s titans, including Wolfgang Pauli, the first physicist to predict the existence of neutrinos (the smallest particles of matter), and Albert Einstein, who explained the curvature of space-time. The so-called “theory of everything” would reconcile the inconceivably small with the unimaginably large, providing a comprehensive understanding of the universe’s physical properties.Policymakers should be working to unite seemingly disparate theories to align policy decisions with the business cycle and the economy’s level of development. Such an approach should seek to protect economies from the destabilizing impacts of politically motivated policy changes, without impeding governments’ ability to correct dangerous imbalances. Officials must be at least as vigilant about reducing expenditure and withdrawing stimulus measures during periods of growth as they are inclined to introduce such policies during downturns.

To the extent that this approach reflects the view that policymaking is an art, not a science, that is a good thing: the world needs more flexibility in economic policymaking. But some might consider it a cause for concern, especially given growing suspicion of incentive-based economic policies in the wake of the global economic crisis.

Many blame the crisis on the decades-long ascendancy of a laissez faire approach to economic policymaking, and rightly credit government intervention with facilitating recovery. The tremendous economic success of countries like China, where hundreds of millions of people have escaped abject poverty in a single generation, has reinforced support for state-led systems.In developed countries, too, many advocate a greater role for the state, in order to ensure that promised social benefits are delivered to rapidly aging populations. In fact, in many countries, the government’s capacity is already strained. As German Chancellor Angela Merkel has pointed out, though Europe is home to just 7% of the world’s population and produces 25% of the world’s wealth, it accounts for 50% of global welfare payments. When the United States is included, 11.5% of the global population receives 88% of the world’s welfare payments.

But relegating free-market principles to the past would simply create a new set of imbalances. Rather than allow extremists to continue to hijack economic-policy debates, policymakers must work to bridge competing schools of thought. Only then will productive discourse – the kind that does not end in government shutdown – be possible.

Keynes once wrote that he agreed with “almost all” of Hayek’s ideas. And Hayek found it “reassuring” to know that he and Keynes agreed “so completely.” This raises the question: What is really preventing economists and policymakers from devising – or even seeking – a unified theory of economic?

Read more at http://www.project-syndicate.org/commentary/dambisa-moyo-on-the-need-to-depolarize-economic-policy-debates#pUG7bZ15DoCimRvc.99

 

The Surprising Answer For How To Handle The Next Recession | Zero Hedge

The Surprising Answer For How To Handle The Next Recession | Zero Hedge. (source/link)

When economic troubles strike, policymakers are eager to do something (anything) to try to help the citizenry. But, as Prof. Lawrence H. White argues in this brief clip, government doesn’t necessarily know how to relieve economic woes, and in fact, often wastes and mismanages resources. Individuals in the market know better what they need in their circumstances, as economist Friedrich Hayek argued during the Great Depression. Critically, he points out,relying on government to fix our economic woes instead of allowing individuals to make decisions for themselves means putting all of our eggs in one basket. Individual decisions in the market won’t be mistake-free, but each individual mistake will be smaller and will correct more quickly. The unusually slow and painful recovery that we have seen in this recession surely points to problems with the “government should do something” view.

“Who in his right mind would suggest, ‘do nothing’?”… hhmm…

 

oftwominds-Charles Hugh Smith: Rising Inequality and Poverty: Can They Be Fixed?

oftwominds-Charles Hugh Smith: Rising Inequality and Poverty: Can They Be Fixed?.

 

Why Things Will Get Worse — Much Worse | Monty Pelerin’s World

Why Things Will Get Worse — Much Worse | Monty Pelerin’s World.

 

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