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.

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Sudden Debt's picture

If you talk history to somebody they look at you like:

I don't know that so it didn't happen because else I would know that....

try arguing with that...

EnslavethechildrenforBen's picture

It's "we the people against the Federal Reserve". The sooner we start printing greenbacks, the sooner we can buy back all the wealth they stole from us.

Once we get back all our wealth, and they are holding the bag (of worthless paper) then we can start talking about the Gold Standard.

Sudden Debt's picture

we the people against the fed?

don't think so buddy.
the people pray to the golden calf called the FED.

it's "they he people" against anybody with a brain, common sense and logic.

EnslavethechildrenforBen's picture

Sorry if my comment went over your head. Keep folowing Zerohedge and you'll figure out whats up soon enough

Sudden Debt's picture

you should read mine 10 times and figure out why you talk about it.
Than you'll figure out that your mainstream quote sounds pretty stupid.

So you say :

We the people against the fed....

where did you ever read we the people against the fed?
where did you see the people going against the fed?

unless you think that a small group is "we the people"

when you say we the people, you talk about the mayority.

and dude, you're not.

But you do like to throw a insult to protect yourself because you didn't figure it out yet.
Keep reading up kid, one day you'll figure it out.
That's going to be your wakeup call.

economics9698's picture

Why bother printing greenbacks?  Do a FDR and steal all the wealth bankers have.

smlbizman's picture

i picked the second bubble in the cartoon...

August's picture

The second bubble is good. 

In coming years I may pick up a little earned income in overseas venues, but I will not be lifting a finger in gainful employment in the USA.  Why should a blackguard like me be permitted to further exploit America's 47%?

11b40's picture

Wish I had picked # 2 four or five years ago. What do you do when in your early 60's and things start falling apart? Decisions are easy in hindsight; not so much in real time. Most small business owners ride out many storms over their careers, but this time, it really has been different.

Keegan11's picture

Lighten up Sudden Debt. And maybe stop drinking and typing - Doosh

economics9698's picture

Drinking and typing, what a combo.

cranky-old-geezer's picture



Economies are LOOTED from the top down.

If people don't see that by now, they're beyond hope.

Sean7k's picture


Why don't you punch up sudden's time at zh?


cosmyccowboy's picture

no need to buy back anything, we can just seize it from them... right after we seperate their heads from their bodies! the color of God's money is silver and gold so let's skip the greenback and go straight to it!

Ghordius's picture

Or "it wasn't me!". Or "nobody asked me!"

BTW, Keynes advocated budget surpluses during good times

It's NeoKeynesians that think "budget deficits don't matter, period"

Sudden Debt's picture

you don't need to classify them into groups with difficult names.

They're morons discussing with morons and both groups are... morons.

We should be!!!


We all should....


only communists and socialists talk as we. All they rest say: "I'm going to...."

To bad there's not a lot of people who say that anymore. Unless it's "I'm going to do the original thing and vote for Obama because.... because I'm not a racist!"

Ghordius's picture

Ok, then "I'm going to..."
... relocate to Belgium, by Teutates! ;-)

Sudden Debt's picture

I still wonder why people do that...

all those rich people moving to Belgium...


and it rains 367 days a year....

Ghordius's picture

it's the Belgian girls and waffles, of course

Sudden Debt's picture

Well.. if the Belgium woman look better than those in your country...

I pitty your country...

Why else do you think we drink all those strong beers?

bank guy in Brussels's picture

Belgium really is a cool place actually

We are getting invaded on both sides, French from the south and Dutch from the north, both speaking the native languages of Belgium and quickly loving their 2nd home

There are not only some tax advantages for certain kinds of business and family structuring

But beyond that there is a bit of a somewhat anarchist, free-wheeling state of mind ... it is a very relaxed kind of place, a bit hard to explain ...

Sometimes late in the evening on the tram there are ten people drinking out of half-litre 'tall boy' cans of beer, in the rolling light-rail 'café' ... a bit of the rule-breaking naughty Belgianism that somewhat symbolises the attitude here

In fact, 'It's Great to Be a Belgian' - hit song from the 90s - nearly all in English, quite funny - sung by a Brit from Liverpool, 'Mister John' Makin who happily lived the last several decades of his life here

« As I walk along the street
With my mayonnaise and frites
You can tell I'm as happy as can be

With my beer glass in my hand
Then you must understand
I'm a Belgian, so nothing worries me! ... »

Sudden Debt's picture

after reading your text...

I get that patriotic feeling again :)

I almost got a tear in my eye... :)

Salon's picture

They still kinda like the USA too.

They remember the liberation.

We love you waffle heads

Ghordius's picture

nearly everybody likes the USA and it's people, here in europe

now the current US policies, that is perhaps a different matter

Sudden Debt's picture



That moron was singing the Marseillaise... the French national anthem...

Ghordius's picture

That's understandable, you Belgians sometimes even forget to have a government

btw, you don't have a prez, you have a King. something you forget often, too

cynicalskeptic's picture

The one really positive thing about the place - NO government for how long?  and yet the place manages to survive....

Maybe the US should try it.  Couldn't be any worse than what we've got or what we've had.  NOBODY is preferable to the two party charade we have now.

RebelDevil's picture

So anarchy is good!? bahaha that's just as bad as saying Facism was awesome.
The only real solution here is to reform government to be compassionate towards the people.
And to do that, you need to destroy the power of all the elite scum who rig the system in their favor!

Bear's picture

Aren't we all one big country now ... National Anthem, what's that?

SpicyTuna's picture

"BTW, Keynes advocated budget surpluses during good times."


Ah yes, the 'no true scotsman' fallacy, a popular defence/rationalisation about the failures of keynesians, anarchists, communists, feminists, various forms of cultural marxism and other inpractical utopian idealogies.


Oh it wasn't 'real keynesianism', they didn't actually follow what Keynes advocated, you say. No shit, thats precisely the point! What Keynes advocated could never be made to work!


It is precisely Keynesian monetary policy that enables the so-called 'un-keynesian' fiscal policy! The monetary system Keynes fought for, freed the State from any fiscal discipline whatsoever.


This horseshit excuse 'that's not what Keynes advocated', which is pretty much the same excuse for disattributing Karl Marx from the USSR and Red China. Both authors wrote of an impossible utopian dream, with no way on how to get there, or how it could ever be sustained. Sure they can't be blamed for human nature and our proclivity to war and aggression, but they sure as hell don't get a 'free pass' from the attrocities and coercion committed in their name, their ideas.



grid-b-gone's picture

Historically, intellectuals rarely are able to change the direction of events about to unfold, but they know better than most when to flee.

SpicyTuna's picture

This is true, they don't change events per se, but they do lend legitmacy to the power brokerers or would be usurpers.


They are the modern voodoo priests. Every regime needs a propagandist class.

RebelDevil's picture

...and intellectuals in secret societies do create change.  

ball-and-chain's picture

I don't argue with people.

I can't be bothered.

I don't have the energy.

Dr. Sandi's picture


If you talk history to somebody they look at you like:

I don't know that so it didn't happen because else I would know that....

try arguing with that...


That's when I always say, "Hey, how about those Mariners." Or this time of year, "Hey, how about those Seahawks."

This steers the conversation in a direction that the other person can be comfortable with.

And yes, I really do that.

There's no point trying to teach a dog algebra, no matter whether the dog is willing or not.

Joebloinvestor's picture

"This time it will be different".

Salon's picture

Keynesianism and neokrugmanism works great with government debt to gdp less than 100 percent.

The problem is that by turning on the money spigot for every minor contraction we have saved ourselves small, but immediate sacrifices but exchanged them for a 50 year supercycle that looks great on the upside, but will be pretty painful on the downside.

But in the long term people alive now are all dead. They dont give a fuck about the future and are giving their grandkids the big middle finger

UnpatrioticHoarder's picture

Keynes merely advocated Government spending on worthwhile projects during downturns.

Salon's picture

Not exactly.

He also advocated inflation as a way to reliquify labor markets because people are fooled by nominal changes and can be made to work for less value if the number of units of value are larger.

That was where he said "not one in a million" could figure it out.

We all agree "worthwhile" projects are worth "investing" in. The problem is that politics always results in misallocation and inefficient use of resources.

Communism sounds nice in theory too

SpicyTuna's picture

The full quote is:


"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."


Now its pretty clear from this quote that Keynes precisely understood that inflation is destructive and avaricious. That he later recanted all he said from this quote, in the entire school/discipline of economic thought he constructed, indicates to me that he had ulterior motives.


This man cannot plead ignorance for his actions.

Chuck Walla's picture

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.”


~ Vladimir Lenin


Clowns on Acid's picture

"Merely", "worthwhile", "projects" - those are the merely words that Obama and the fascists use, supported ad nauseum by the MSM to get elected and continue deficit spending. 

buzzsaw99's picture

short, pointless, lacking substance, or evidence, or, well, anything other than conjecture

Water Is Wet's picture

In other words,


buzzsaw99's picture

doubtless this post will be linked to as supportive scientific evidence that austrian economic theory works flawlessly, painlessly, and should be instituted immediately worldwide to hasten utopia for all

Salon's picture

Austrian economics limits the fallout and imposes some discipline because fragile things are allowed to break early rather than allow fragility to build on fragility through government manipulation and bailouts

Now we have a fragile system too big to fail and too big to bail.

You are in favor of central planning I take it.