Thursday, May 16, 2013

Brothers Under the Skin

Republican or Democrat, all four of these Keynesians differ only in degree. For example, liberal Keynesians think saving is ridiculous, and want government to discourage it, whereas Boskin thinks that some saving is OK.

There are as many varieties of Keynesian economics as there are economists in Washington, D.C. Its doctrines are muddy and open to different interpretations, which is one reason it’s so popular: it can be used to justify any interventionist policy, Republican or Democrat.

The Keynesian answer to every economic ill is government stimulation of total demand to increase consumption, investment, and prices. How is this “aggregate demand” to be stimulated? Through government spending and deficits, funded by taxation during booms and inflation during busts.
Before Keynes, most non-socialist economists held to some sort of sound economics. There were no models pretending that the whole of the economy, with millions of individuals and billions of decisions, could be crammed into a group of equations. Economic laws and the logic of human action governed economists’ thinking, so most economists advocated a free market.

That ended with the “Keynesian revolution,” which gave the first intellectual justification to what politicians wanted to do anyway. All of a sudden, economists—who used to criticize inflation, deficits, and high spending—were applauding these policies.

Not surprisingly, Keynesians of one stripe or another have filled prominent posts in every administration since Herbert Hoover (and his advisors were proto-Keynesians). FDR took all of Keynes’s propositions seriously, and sought to centralize investment decisions in Washington and drive prices up through the destruction of wealth (burning crops, killing animals, inflating the money supply, and raising taxes). He also hired the unemployed for unwanted and unnecessary tasks, and cartelized business and banking in the name of promoting a higher level of coordination.

FDR-style Keynesianism is rare today. But the basic themes of Keynesian economics still constitute the mainstream: that countercyclical fiscal policy is necessary to compensate for the free market; that investment and consumption are in lock-step, and when one is primed, the other booms; that there is a necessary trade-off between inflation and unemployment; that interest rates are properly manipulated by the central bank, as is the supply of money; that this monetary manipulation can successfully redirect investment; that inflation promotes growth; that consumption is economically superior to savings; and that the free market cannot properly allocate resources. All are exactly wrong, but no one—aside from the Austrian school—has ever challenged the fundamental Keynesian assumptions.

Today, most prominent economists reflect the theory’s bad policy implications to one degree or another. And that is true of these four economists, who although they may be competitors, are Keynesian brothers under the skin. They also share an ambition to use their undoubted intellectual powers to serve big government and thus advance their careers. As Joseph A. Pechman of the liberal Brookings Institution says: All are “made from the same cloth” (NYT, 6/5/88).

Ludwig von Mises discussed such men in Human Action (1966 [1949], p. 869):
The early economists devoted themselves to the study of the problems of economics. . . . They never conceived of economics as a profession. The development of a profession of economists is an offshoot of interventionism [with] the specialist who is instrumental in designing various measures of government interference. . . . He is an expert . . . at hindering the operation of the market economy.

There are thousands and thousands of such professional experts busy in the bureaus of the governments and of the various political parties and pressure groups . . . and pressure-group periodicals. . . . The eminent role they play is one of the most characteristic features of our age of interventionism.
There can be no doubt that [this] class of men . . . includes extremely talented individuals. . . . But the philosophy that guides their activities narrows their horizon. By virtue of their connection with definite parties and pressure groups, eager to acquire special privileges, they become one-sided. They shut their eyes to the remoter consequences of the policies they are advocating. With them nothing counts but the short-run concerns of the group they are serving. The ultimate aim of their efforts is to make their clients prosper at the expense of other people.

From examining these four men, we can know that big government and its associated special interests cannot lose in 1988. Yes, the subsidies may go to one interest group rather than another, but both sides agree on political control of our economic lives, and on higher taxes and more state planning. No matter who is elected, Keynesianism will be in control.

For that, we need economists who share the vision of Ludwig von Mises, and instead of promoting the interests of big government, oppose any interference with the peaceful prosperity of the free market.
Robert Reich

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