Criticising Keynes

People worry about many aspects of the economy, and about their future security and income, but there is hardly enough worrying going on specifically about Keynesian economics, today’s mainstream version of what used to be the theory of the cycle. Keynesian theory has done an immense amount to undermine our potential for growth, and has made billions of people around the world insecure about the future, ironically based on the promise of higher incomes and greater security if one merely follows the prescriptions laid out by “Keynes”. The number of versions of “Keynes” there are is, of course, approximately equal to the number of Keynesians there are, but that’s another matter.

As it happens, I am at the final turn in producing what will be a two-volume, 1600-page collection on the critics of Keynes. The collection is complete, in that I am unlikely to add any additional articles. There is therefore only the introduction to write, which I have set aside the next three months to complete. Sometime thereafter, in 2015, the two volumes will be published. I cannot guess how many people will seek to read it, but the one criterion I laid down was that each article had to be accessible. The number of books on how wonderful Keynesian theory is remains amazing to me, and they keep pouring off the shelves. Even this year, there have been yet more of the same, when you would have thought Keynesian economics would be in deep retreat. It is a phenomenon.

My latest venture into dealing with Keynesian economics came from this query by Andysaurus: “This article which argues that governments have bottomless purses seems unlikely to me. Do you have anything with which I may refute it please? Thanks.”

The article was at The Conversation, and although my first instincts was merely to reply in-house, having written what I did I sent it off to The Conversation, which from the note I received, is apparently closed to new articles on economics until January 5 next year. So I sent it off to Quadrant Online instead, where it is now posted under the title, Seduced by Keynes’ Sweet ‘Nothings’. Why “sweet ‘nothings'” you may ask? Here is what I think of as the central para in the article I was replying to:

“Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.” (author’s emphasis)

It sounds too good to be true because it is. Here is part of the answer I wrote but I know that for a Keynesian this is the kind of thing that just pings off their armour, an attitude reinforced with virtually every macro text published today.

The belief that a government has any idea where value-adding activities can be found is one of the dopiest notions ever concocted. Governments can certainly spend the money they create, and some of what they do is value adding, but hardly everything. To believe that what governments produce automatically has greater value than the resources they use up is so nonsensical it is hard to believe any economist would ever peddle such a notion.

Take our own Rudd-Gillard stimulus. The two major projects were pink batts and school halls. Ask me if we are better off with more and better insulated houses and a better school infrastucture, I am happy to say that, all things being equal, we are. But if you ask me whether we have seen a return of more than $43 billion on our outlay – the approximate price tag of this spending – then the answer is that we have not had anything like that amount of benefit.

You may delude yourself from now until the end of time that these benefits were provided “for nothing”, but have you not seen our own reality: the dollar is falling, our standard of living is being dragged down, unemployment is on the rise. Ah, but where is that inflation? For most, real incomes are not rising, so however small the official inflation rate may be, it is plenty high enough to erode our ability to demand. Have you tried to buy a house lately, to cite but one example?

Keynesian economics has a lot to answer for. When I think of how sensationally prosperous we could all be, each and every one of us, had governments not seen it as their role to divert trillions into useless projects of their own choosing, it does make me despair. Not all government spending is useless, of course, but there are only so many roads and schools you can build, and almost every government project comes in over-budget and under-delivered. Anyway, the next three months will be devoted to thinking these issues through as my own small contribution to a better world.

Let me therefore end with a quote from Henry Hazlitt, my predecessor in putting together a collection of criticisms of Keynesian economics back in 1960. The following was written in 1984 when he was over ninety:

At this point I hear someone say: “Why are you still whipping a dead horse? The criticism of the last quarter-century has done its work. Keynesianism has already been discredited in the minds of economists.”

Of most professional economists, perhaps. But it is still the prescription of the great majority of politicians, and is at least still acquiesced in by the majority of voters. The undiminished prevalence of punitive graduated income taxes, the steady increase of other redistributive measures, the persistence of government monetary authorities in trying to hold down interest rates, and the endless and mounting budget deficits of the last half-century–these are Keynesianism rampant.

Keynesian economics is more rampant than ever, in spite of everything that has happened since.

OTHER LISTS: This is a list on critics of Keynes put together by Tom Woods that has been forwarded to me. If you see how thin this list is, you can see more clearly how hard such books and papers are to find.

Critiques of Keynes: Here’s a List

5th March 2012Tom Woods14 COMMENTS

A reader wrote to ask what he could read that challenged Keynes and his system. On a popular level, there’s Hunter Lewis’ book Where Keynes Went Wrong. Henry Hazlitt’s book The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies goes through and critiques the General Theory line by line. It’s a valuable book and a great achievement, but my own opinion is that it gets so caught up in line-by-line minutiae that the reader never really gets the big-picture critique. Mark Skousen edited a good collection of essays called Dissent on Keynes: A Critical Appraisal of Keynesian Economics, which you can read for free online.

Murray Rothbard wrote the lengthy memo “Spotlight on Keynesian Economics” when he was only 21. Also worth reading are Robert P. Murphy’s “The Critical Flaw in Keynes’s System” and George Reisman’s “Standing Keynesianism on Its Head.”

The only one on the list that I think of serious use was Mark Skousen’s Dissent on Keynes. I may have gone through a thousand articles and book on the way to my PhD but that was far and away my favourite. It exactly captured what I thought myself and I kept his book on hand and out of the library for a year after the thesis was done, with the intention of writing to him to tell him how much I admired what he had written. In the end, I just couldn’t bring myself to do it, so I gave the book back to the library. And on the very next morning, there were, like an apparition, two emails to me from Mark Skousen, who was then writing his history of economic text and had run across my Say’s Law and the Keynesian Revolution, the title I gave my thesis when it was published by Elgar. Mark had read it, and wrote to me to say what I had wanted to say to him. It remains the single most mystical experience of my life.