THE GHOST OF KEYNES: PART I

William L. Anderson

The Issue at Hand

Since the financial meltdown on Wall Street five years ago, economies throughout the world have been in crisis. Central banks – and especially the U.S. Federal Reserve System –have poured trillions of dollars into keeping banks, businesses, and governments “liquid.”

Yet, the crises continue. Why? What can be done? What should be done?

The Keynesian “Solution”

Governments and central banks have followed the original financial crisis with Keynesian “solutions,” beginning with the massive bailouts of banks and other entities in 2008 and 2009.

Yet, with the economic gloom that continues, has the Keynesian Kool-Aide energized world economies, saving them from a worse fate, or is Keynesianism the problem?

Is this a Keynesian Crisis?

Keynesian economics is touted as an antidote to crises created by capitalism, with an all-wise government led by “Progressive” and educated people cleaning up the messes left by the “animal spirits” of the capitalists.

Yet, we ask this simple question: Is the present crisis being solved by Keynesian actions, or is Keynesian economics the reason that the crisis occurred in the first place, and do the Keynesian “solutions” make things worse?

Our Position: Keynes is the Problem

Over the next six weeks, we will take a hard look at Keynesianism from the viewpoint of Austrian Economics. We will deal with the following points, using Where Keynes Went Wrong by Hunter Lewis as our chief guide.

In the next 10 slides, we lay out what we will do in this course, doing so by asking questions that I will answer through the course.

1. Who Was John Marynard Keynes?

The life of John Maynard Keynes gives us a window into his economic thinking, which is described as follows by Henry Hazlitt: What is true is not original, and what is original is not true.

We take a look at the intellectual climate of Great Britain during the time when Keynes ruled economic thinking and tie that climate to the Keynesian conclusions.

2. What Did Keynes Really Say?

Is “Keynesian” economics even from Keynes, or is it a product of the man’s followers?

We answer that question and clear up any confusion between real Keynesian thinking and what might be urban legend.

3. Can We Separate Keynes the Man from Keynes the Economist?

Murray Rothbard did not think so. In this course, we look at how Keynes lived to see if his personal outlooks and lifestyle might have affected his approach to economic thinking.

4. What are the “fundamentals” of Keynesian Economics?

What is the Keynesian paradigm and how do we explain it? What are its weaknesses and why is it so immensely popular, especially right now?

5. Are Keynesian “solutions” actual solutions, or do they create more problems?

What happens when we apply Keynesian economics? What are the results, and what are the consequences?

In this course, we take a hard look at what is done in the name of Keynes and how it effects the economy.

6. Why did the 2008 Crash Occur?

I contend that the 2008 crash happened becausethe government and Federal Reserve System had helped created a huge financial boom that led to an inevitable bubble, and the policies that led to the crisis were expressly Keynesian.

Far from “solving” the problem allegedly created by free markets, Keynesian economics was at the heart of the crisis.

7. What Were the Keynesian Policies that created the crisis?

We look at what actions the government and the Federal Reserve System took in order to create this set of crises in the first place.

8. What do Austrians Have Against Keynesian Economics?

Austrians are among the fiercest critics of the Keynesian paradigm, and we look at a number of Austrian writers who are highly critical of this type of economic thinking.

Critics include Ludwig von Mises, Henry Hazlitt, Murray Rothbard, and others.

9. Is the Keynesian Challenge Intellectual or Political?

The ghost of John Maynard Keynes lingers for a reason. Why do politicians and intellectuals tend to gravitate toward Keynesian thinking? It is because, as Paul Krugman claims, it accurately predicts and explains the economy, or is it because Keynesian economics offers political “solutions.”

Krugman himself will give a surprising answer.

10. Why Hunter Lewis?

Hunter Lewis has written an easy-to-read critique of Keynes and his system. While Henry Hazlitt wrote a detailed critique of Keynes and his work, The General Theory, in the late 1950s, Where Keynes Went Wrong is ideal for a class like this.

Lewis brings a perspective that depends heavily upon Austrian thinking, so the book essentially is an Austrian critique. And it is clear and easy-to-read.

The Path this Course Takes

I will follow the general path that Lewis lays out in Where Keynes Went Wrong. The sections include:

1. Introduction

2. What Keynes Really Said

3. Why Keynes was Wrong

4. More on Keynes

5. Conclusion

6. Envoi: Saying Goodbye to Keynes

Common Sense Economics

Once upon a time, economists had a rather simple view of the economy. An economy was an entity in which people produced and exchanged goods. Money was a good that facilitated exchange.

Capital goods came about because people saved and invested, and as long as entrepreneurs followed the path to profit, an economy could sustain itself.

Problems in Common Sense Land

But what happened when things ran aground? Economists then usually blamedgovernment entities like central banks for creating conditions that rewarded reckless risk-taking and for creating situations in which economic excess was obvious.

The “solution” was for government to pull back, allow the markets to readjust, and then permit the markets to work again.

Keynes to the Rescue?

During the Great Depression, however, Keynes gave different counsel. Thrift was not the solution; thrift was the problem.

Allowing markets to adjust only would hasten a downward spiral in which an economy would be stuck in a miserable “equilibrium” in which unemployment would be high and economic opportunity a thing of the past.

Keynes and His “Solution”

Instead of allowing markets to readjust, Keynes argued that governments needed to intervene, and intervene often. The problem was not intervention; the problem was that free markets were irrational, operating on “animal spirits” that led investors and capitalists down a path of destruction.

Instead, “Progressive” intellectuals and administrators should take over and guide the economy over a better path.

What Was Keynes’ Method?

That is the question we will answer next week.