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Time to Topple Keynesian Economics
It's too long to paste in it's entirety here, so I recommend you read the link.
When we look at profligate governments, those in debt and getting deeper into debt, like those responsible for governing the UK, the USA, Greece, Portugal, Spain, France, Ireland and others; there are presumably professional economists in the background. Over the past ten to twenty years of government overspending, some senior public servants, trained in the rigorous discipline of economics, must surely have been giving consistent and fearless advice that it would all end in tears. Or have they?
Take the massive government spending employed by most countries to combat the global financial crisis (GFC). There was no evident sign that senior public sector economists were urging some modicum of restraint. The reverse appeared to be the case. Ken Henry was certainly not urging restraint. We need a stimulus package and we need it now, summed up his position. The US Treasury Secretary, Timothy Geithner, was an enthusiastic advocate of stimulus spending and apparently remains wedded to still more, if his comments at the G20 meeting in Toronto in June are any guide.
Wherever we look, the economics profession in government service appears to have been hijacked by interventionist Keynesian economists. Politics is part of this but it is by no means the whole. Some so-called economists are left-wing ideologues. Most, however, are simply victims of someone described colourfully by Thomas Woods in Meltdown as “one of the twentieth century’s crackpots”: John Maynard Keynes.
Crackpot or not, Keynes has spawned generations of economists and politicians who think that spending money is the same thing as making money. You might recall Michael Douglas’s character in War of the Roses saying to his wife (played by Kathleen Turner): “It’s a lot easier to spend it than it is to make it, honeybun!” Well, not according Keynesian economists, it isn’t.
Keynesian economists believe in the spurious and curious notion that economies are driven by spending rather than by making. To them spending is an economy’s driving force. There are three mutually reinforcing factors at work that promote and sustain this belief. One is the way economics is taught; a second is the formation of a “conventional wisdom” around Keynesian economics; the third is the way the national accounts and macroeconomic modelling “bulletproof” this conventional wisdom against any and every experience. I will go through these factors in turn before attempting to assess whether the times make Keynesian economics ripe for toppling.
It then goes on to make it's case against those three things. Read the article for that.
It concludes:
Keynesians believe that economies are driven by demand. If private sector demand is insufficient they believe that it must be supplemented by government demand to ensure full employment. The key to undoing Keynesianism—if it is to be undone—is to hold it to account.
When resources are unemployed, Keynesians believe that government spending will always have net beneficial economic consequences. Government spending will result directly or indirectly in sufficient real economic gain to more than offset any attendant real economic costs. There may be costs. Keynes himself raised the possibility of government spending and borrowing crowding out some private sector demand. Nevertheless, any such costs are assumed to be less than the gain.
If Keynesians do not believe this; then I don’t know what they believe. I get a good sense that Paul Krugman believes it and perhaps Geithner. But what about all those governments and their economic advisers who are now preaching spending restraint when their economies are recessed; with plenty of unemployed resources ready to be put to work? Are they all Keynesians still? What do they believe now?
If Keynesianism works it works. Keynesians should explain with conviction, despite massive government debt, that it would be beneficial for European economies to stimulate more. They should explain that this would produce net economic gain and a better ability to service debt. If they were convincing enough, perhaps capital markets would be supportive. None of that will happen, of course, because most of them have lost their Keynesian faith; though they probably still cling to its trappings.
The time is right to lose the trappings too. That requires something to be put in its place. That something is an appreciation that the economy has to be seen as economists before Keynes saw it; as a whole and complex collection of many interrelated parts, not as a limited set of amorphous aggregates.
The European and United States debt crisis is a march of events to which Keynesianism has no answer. It is palpably failing and should be discarded. The times are demonstrating its poverty. It was always poverty-stricken and enervating but its deleterious impact was hidden by economists wielding meaningless and deceptive proofs of its success; by the resilience of market economies in the face of government economic mismanagement; and by the fact that even profligate governments take time to run down rich estates.
There is recognition within economics that governments provide enormous and essential assistance to economic progress by enshrining property rights within the law. Government is seen as providing a legal umbrella within which markets play out. Government economic policy should be similarly nuanced. The guiding principle should be to provide a stable, supportive and flexible environment within which market economies, and their constituent households, workers and firms, can prosper in normal times and, importantly, adjust in distressed times.
Politics and economics appear to go hand in hand these days. Economics should be objective. Economics is subjective in the hands of the Left who particularly favour the interventionist character of Keynesianism. It is then not a question of whether it is right but whether it satisfies a worldview that capitalism needed saving from itself by big government. The debt crises in Europe and in the United States make it evident that big government is the problem and that Keynesianism is part of that problem.
Economists, particular those in government service, should consign their existing macroeconomics to the dustbin and, perhaps, start reading some older texts. They certainly need to build their macroeconomics around microeconomic foundations, not as a disembodied artefact. As hard as that all is, unless it is done, toppling Keynesianism might be like toppling socialism. It will keep popping back up.
To me, I think Keynesian thought has lead to stuff like this recent funism:
http://www.youtube.com/watch?v=C5Ul9fPLzz0