Guest Post: The Keynesian Legacy Unravels

Tyler Durden's picture

Originally posted at Monty Pelerin's World,

“Those who cannot remember the past, are condemned to repeat it.” George Santayana

Ideology is powerful, capable of masking unpleasant facts. Whether we recognize it or not, we are all slaves to ideology.

Economists are no different in that regard than other people. They hold preconceived ideas which affect the interpretation of data and facts. In the extreme, ideology is capable of blocking the recognition of contradictory information, effectively blinding a person to valuable evidence.

Keynesian economists believe, regardless of logic and data, that economies can be managed from the top down. In their world, economies are little different than machines. Change some inputs here, speed them up over there, add some lubrication, etc. and the machine will respond in the fashion desired. Output can be “managed” to whatever level needed purely by adjusting the parts of the machine.

Austrian economists on the other hand do not see a machine. They see millions of individuals all making decisions to improve their own lives. The price system provides the coordination among these separate pieces, performing a function no human, supercomputer or government could ever accomplish. For Austrians, economics is a bottom up approach. To effect change, you must change the incentives and disincentives that individual decision makers are afforded.

The following graphic, which I have highlighted before, provides a wonderful comparison between the two approaches:


No matter how good someone in Washington believes his grand plan is, it comes down to how individuals perceive it. While this graphic refers to ObamaCare, it could just as easily refer to any other grandiose (or not so grandiose) scheme dreamed up by central planners. Quite simply, if government were to offer constructive ideas and options, there would be no need for coercion and violence on its part to force people into behavior they are uninterested in.

Likewise, if government would leave the economy alone rather than continue to intervene to prevent necessary corrections, the economy would recover rather quickly and return to its normal growth path. But that is not what activist government does and it is the reason why this Great Recession drags on and on. In 2004, before the Great Recession hit, two economists discussed the Great Depression and why it lasted so long. Not surprisingly, they concluded that government had made matters worse:

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.


After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

[To continue reading]

These findings would not surprise anyone of the Austrian persuasion. Nor would they register with anyone of the Keynesian persuasion which includes most Washington policy makers. As a result these (and many other findings with similar conclusions) were ignored by policymakers and we are repeating the mistakes of the Great Depression.
The reasons we are still in this deep recession are the same ones that accounted for the Great Depression lasting as long. If we continue on the same intervention/stimulus path, economic conditions will only deteriorate from here. Japan has been in their economic malaise for more than two decades. The US cannot last that long before falling into what history will call The Greater Decession.
Aside to John Maynard Keynes: Your series of short-run “solutions” is killing the long run. When we finally succumb to Depression it will be with a much more dysfunctional and hollowed out economy than the one you experienced in the 1930s. Thanks for bring us to this point.