Keynes' Ghost Continues to Haunt Economics

Tyler Durden's picture

Submitted by William L. Anderson via the Ludwig von Mises Institute,

When the U.S. economy dipped into an inflationary recession in 1969, Murray N. Rothbard in his introduction to the Second Edition of America’s Great Depression wrote that the Keynesian paradigm could not explain that phenomenon, but Austrian economics could explain what was happening. If Rothbard was correct — and he was — then one might believe Keynesian “economics” should have been deep-sixed permanently, given it could not explain what everyone saw happening.

Likewise, during the turbulent 1970s and 1980, the bouts of inflationary recessions grew worse and even die-hard political liberals such as ABC News’ economics correspondence, Dan Cordtz, bemoaned the fact that the “rules of economics” no longer seemed to apply. Those so-called rules were not laws of economics at all, but rather were dogma first given by John Maynard Keynes in his infamous work, The General Theory of Employment, Interest, and Money.

Joyous economists such as Arthur Laffer, who espoused a form of what he and others called “Supply Side Economics,” declared that Keynesian “economics” was discredited, perhaps for good. The advent of three more inflationary recessions, including the current downturn, should have resulted in the permanent death of Keynesianism, but, alas, it seems that the Keynesian paradigm is more influential than ever.

Exhibit A is President Barack Obama who in 2009 shortly after taking office declared that America would “spend its way out” of the current recession.


Exhibit B has been Obama’s recent announcement that he would nominate Janet Yellen to head the Federal Reserve System. Yellen, not surprisingly, is a True Believing Keynesian.


Exhibit C is the ongoing popularity of Paul Krugman, who has done more than any other person in the world to promote Keynesianism and to demand it be applied, chapter and verse, to the world economy.


Exhibit D has been the continuing Keynesian policies of the Federal Reserve and the central bank of Japan.

Academic economists who hold to the “market test” view of economics should be puzzled. Here is a paradigm that claims there cannot be an inflationary recession, yet all of the recessions that have wracked the U.S. economy in recent decades have been inflationary. Furthermore, despite the spending of more than a trillion dollars in the name of the Keynesian “stimulus,” the economy continues to founder, as unemployment rates remain stubbornly high and millions of workers either have abandoned their search for work or work in part-time jobs just to keep food on the table.

Given the fact that both the George W. Bush and Barack Obama administrations (not to mention Congress) have followed the Keynesian playbook, the sorry results should be enough to discredit Keynesianism, this time for good. Either a theory explains and predicts phenomena or it does not, and it should be clear that Keynesian theory has failed.

Alas, the academic “market test” really does not embrace the actual success or failure of a theory. It seems that many academic economists do not wish to be bothered by what happens in the real world. The vaunted “market test” is not about actual results, but is about what many economists are willing to accept as what they wish to be true and what politicians believe is good for their own electoral purposes.

The assumption that comes with attempting to apply Eugene Fama’s “Perfect Market Hypothesis” to academic economics presupposes that economists are interested only in what actually occurs. Furthermore, the belief presumes that when presented with a set of facts, academic economists will give the same analysis and not be influenced by partisan politics.

Given the interpretations that economists such as Krugman, Alan Blinder, and others have made in the aftermath of the disastrous first week of “ObamaCare,” not to mention their shilling for the Obama administration itself, the latter is clearly untrue. Furthermore, we see there are “gains from trade,” as politicians tend to flock to those economists who can offer the proverbial “quick fix” to whatever ails the economy, as being seen as doing something confers more political benefits than doing the right thing, which is to curb the power, scope, and influence of state power.

Even Krugman admits that the appearance of expertise has fueled the Keynesian bandwagon:

In the 1930s you had a catastrophe, and if you were a public official or even just a layman looking for guidance and understanding, what did you get from institutionalists? Caricaturing, but only slightly, you got long, elliptical explanations that it all had deep historical roots and clearly there was no quick fix. Meanwhile, along came the Keynesians, who were model-oriented, and who basically said “Push this button” — increase G, and all will be well. And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did.

In the past five years politicians have been pushing “button G” and all is not well. Yet, in this age of unrestrained government, the Keynesian promise of prosperity springing from massive government spending is attractive to politicians, economists, and public intellectuals. That it only makes things worse is irrelevant and beside the point. If the economy falters, politicians and academic economists blame capitalism, not Keynesianism, and they get away with it.

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RaceToTheBottom's picture

"Push this button” — increase G,"

I get it, the US is in the hospital, in a terminal state, and the button applies Morphine, and patient is just hitting away on that button.  About 85Billion worth per month..

Lets Buy The Dip's picture

Good call there, the market is never going down again. I hear people say LOl...but it is truth if they keep injecting BS money on the market.

I have noticed a dislocation between the RUSSELL and SPX. The RUSSELL geting smashed and the SPX holding very well. SEE HERE => Eventually you will see this stop, one of these is wrong and needs to catch up.

economics9698's picture

The mathematician JM Keynes never understood economics and his book is rubbish.  His ideas were elevated to cult status because the federal government and Federal Reserve really, really, really liked the idea that printing and spending money would save the peasants from themselves. 

Basically his ideas are an excuse to print and spend.  Real bankers and economist know his ideas are rubbish but they play the game and pretend.

The GDP equation should read Y = C + I – G + NX


Generally you lose about 55 to 57 cents on the dollar for every dollar the government spends.  The bigger the government the slower economic growth.

fnord88's picture

the genius of the Krugman position is that when it isn't working you can always just say....NOT ENOUGH. Why is Japan still fucked......NOT ENOUGH.....why is merica still fucked....NOT ENOUGH. I love the fact that he claims everyone else is always wrong, and never mans up to it, when he is the guy that said the Fed needed to create a housing bubble in 2002, and said the internet would not contribute to the economy or employment at all in 1997

CrashisOptimistic's picture

Sorry guys, I stand up and say irrelevant.

If you slash spending in this world (not environment, not era, world) people will die.  It's got nothing to do with anyone's academic economic theory.  It has to do with forces far outside the concept of money.

1) Automation has destroyed the jobs of sub 100 IQ people.  That's 1/2 the population.  1/2 have to be carried by the other half or they'll die, and it's not their fault they were born with an IQ of 90.

2) The oil joules ratio is cratering and there is no fix for it.

3) There are 7 billion people on the planet now.  They all want food.  And then they all want cars.  And only a handful can pay for it.


spine001's picture

Theories like Keyne's are only useful in as far as they help justify policies that have to be implemented to maintain power where people in power want it to remain. Nothing else matters, it's all empty rethoric to calm the masses of pseudo-intellectuals. Anybody that doesn't get this, ie. this article and its author, are ingnorant of history, you can read this in books like Conquerors, or the biographies of Theodore Roosevelt.


Lebensphilosoph's picture

1) Automation has destroyed the jobs of sub 100 IQ people.  That's 1/2 the population.  1/2 have to be carried by the other half or they'll die, and it's not their fault they were born with an IQ of 90.


Their IQ isn't my fault either.


What is their fault is their revelling in materialism and the full support they give to the values of the post-Englightenment world that made their sticky situation possible.

lotusblue's picture

Keynesians bash Austrians  --  Austrians bash Keynesians

So it goes.

We do know the Austrians are a facist loving peoples as to the British/American aristocracy

Actually both are correct but neither will prevail because of the corruption at all levels.This goes for self interest also.Only in altruisic non-existing world do either have chance.

Barring this,Glass-Steagal strong regulation and effective investigation/policing/prosecution/prison will turn the ship! Alas,utopia passes quickly in the night.

NidStyles's picture

The only issue is that altruism is a lie.


Even when you are behaving in an "altruistic" manner you are being selfish, as you are behaving in that manner to make yourself feel better. Charity was the concept behind helping the poor previously, and it was done to make you feel better about the guilt of seeing the grinding poverty all around you. 

spine001's picture

It is all a lie, if you take the time to read, really read Keynes, you will see that what they are doing today has NOTHING, but NOTHING to do with his proposals. He would have never ever recommended monetizing at a faster rate that the growth rate for any prolonged period of time. He is being used and his theories abused, just because they are convenient to justify the actions that have to be taken to preserve the status quo. Nothing else, nothing more.

The problem that the FOMC faces is that monetization without growth, will not do the trick they need done. They need to dilute the hundreds of trillions of inexistent capital, with NO collateral that currently exists in the system. Paper capital that is protected by CDO and CDAs that criscross all international institutions, tothe point that if one falls, they all fall, oh, including governments that are completely intertwined with their banking systems, like in Spain, Italy, etc.

TheReplacement's picture

So you are saying that is all bad and that the beatings will continue until morale improves?

Lebensphilosoph's picture

Oh what a load of hedonistic crap. Seriously, just how shallow a thinker does one have to be to swallow this nonsense? Is this the 3rd grade psychology class from the 18th century, in which all of peoples' actions are driven by a pleasure-principle? Get your head out your arse.

BigJim's picture

 We do know the Austrians are a facist loving peoples as to the British/American aristocracy

Have you ever considered knowing something about a topic before offering an opinion?

Variance Doc's picture

Idiot, he was NOT an mathematician.  He was an eCONomist.  Mathematics != economics.


He did write a book on philosophy of probability; his viewpoint has largly been discredited.  This again, does not make him a mathematician.

spine001's picture

The problem you face (me too) is that most people don't have a clue what a true mathematician actually is. Funny, but true. Worse still is that most economists don't have a clue about complex non-linear system dynamics, fractal behaviour, attractors, chaos, bifurcations, feedbak theory, control theory, system control, system stability, psychology, mathematics in its true sense, anthropology (for instance, congintive biases vary depending on the structure of the society they get tested, but they use cognitive biases developed from MIT and Harvard student tests). Despite this incredible lack of formation and ignorance of basic components of the system they are trying to control and how it interacts together, they have the arrogance of trying experimental policies that they CAN NOT have a clue how they are going to end. And they do that without informed consent from the people that are being experimented upon, us. This is the worst possible example of HUBRIS that humanity has seen up to date, and that is how history will record it, if we survive their Dr. Mengele's hands and remain civilized.

This reminds me of the time I found out that geneticists and molecular biologists didn't have information theory in their curriculums in the Universities. I couldn't believe it. They were dealing with the most complex information system of all time, the human body and its molecular machine and they didn't even have a basic grasp of a key theory constructed to be able to understand much, much simpler problems. Lackily we were able to influence key players and now they have it as a key area in their curriculum. But economists still have no clue, they don't even know what they don't know.

For instance the models they use in the FEd to understand system behavior are like an abbacus compared with a super-computer with 64K parallel processors, when you compare them with the models that are used to design electronic semiconductors.

BigJim's picture

No, Keynes' training was chiefly in mathematics. He had little or no formal training in economics at all... and it shows.

icanhasbailout's picture

Keynesians have an automatic answer to being confronted about its failures - they always didn't borrow and spend nearly enough to do it right. It's a religious belief not a scientific one - Keynesianism is a literal monetary death cult. Perhaps we should use the purple Reebok as its symbol from now on?

RaceToTheBottom's picture

Maybe the spaghetti colander hat

joego1's picture

I happened to be tuned into PBS and there was a bunch of fucktards parroting the same bullshit.

PubliusTacitus's picture

Modern vulgar Keynesianism (which Keynes likely wouldn’t recognize as his own theory) like most fallacies of (primarily) the left, is based on non-falsifiable principle, including “we didn’t stimulate enough.” 


See also global warming (global warming causes temp. increases, temp. decreases, acne, sea level rises, sea level fall, no change, etc.)

Dewey Cheatum Howe's picture

YeP hence Abenomics 2.0 since 1.0 didn't work do it again and pump moar money into the sinkhole this time hoping for a different result.

OwnSilverPlayMusic's picture

Fuck Keynes and fuck his dirty whore of a mother

yogibear's picture

Nice face for a dart ring bullseye.

devo's picture

worst. dandy. economist. ever.


Keynes and Malthus had a bet for "one dollar" who could starve the whole planet to death first.

justsayin2u's picture

Just because it doesn't work it doen't mean you quit trying!!!  And no, that's not insane either.  Just stop following me.

kchrisc's picture

Keynes was nothing more than a paid apologist stooge for what the thieves of government and the establishment were already doing. That he died before a guillotine could catch up with him is a shame. Krugman on the other hand...

PubliusTacitus's picture

In this age of unrestricted and ever-expanding government, the only thing we’ve managed to accomplish is overinflate G at the expense of everything else, and give it irrevocable totalitarian surveillance and politico-economic power.


Keynesianism is an excuse for political power-grab, not an economic theory.

mark mchugh's picture

I don't think it can be said any better than that, PT.

nmewn's picture

"the theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire."

And our best & brightest authoritarian economists have never seemed to have a problem with this foreword in the German edition of his magnus opus.

I know, small wonder ;-)

BitingTruth's picture

Seriously? Because that "overinflated G" has served labor and workers so well in the last 50 years?  Big G is for Big $...the best paid "yes men" that Big $ can buy.

BitingTruth's picture

Seriously? Because that "overinflated G" has served labor and workers so well in the last 50 years?  Big G is for Big $...the best paid "yes men" that Big $ can buy.

mijev's picture

"Either a theory explains and predicts phenomena or it does not, and it should be clear that Keynesian theory has failed, but, alas, it seems that the Keynesian paradigm is more influential than ever. " Now substitute Keynesian with global warming.

bugs_'s picture

Interestingly you CAN see economic WAMPIRES in the rear-view mirror but they cast no reflection otherwise.


Keynesianism, when you absolutely , positively have to explode an entire economy.

drbill's picture

Still waiting for a T-shirt with photos of Stalin, Mao, and Keynes side by side with the question below the figures, "Who is responsible for the most human misery?"

BitingTruth's picture

Get a fucking grip....  Amerikkka's hands are by far the bloodiest....and there is much more to come, thanks to all of you blindly supporting supply-side money gabbing as if it were "economics" and not artful ciminal theft....  The worst crime is that any "art" in method is wasted on the increasingly uneducated that were created by this "Laugh"-er system".

BitingTruth's picture

Get a fucking grip....  Amerikkka's hands are by far the bloodiest....and there is much more to come, thanks to all of you blindly supporting supply-side money gabbing as if it were "economics" and not artful ciminal theft....  The worst crime is that any "art" in method is wasted on the increasingly uneducated that were created by this "Laugh"-er system".

drbill's picture

A: Keynes in a landslide.

new game's picture

B: ponzi

all these systems in place have one goal-take from unsuspecting. all the word and definitions are in place to keep some kind of a red-blue debate while the masters of deception harvest by growth one more forced into the system to be harvested human.

harvested as in labor/time til death. if you are one of the fortunate humans to truely like what you do for money than you have truely beat the system...

or you gained eneough early in life and can live well within your means and understand moar IS NOT moar and DON'T have to work, but have a seMblence of life that keeps you happy and busy enuf - hedge horse and cog dis come(s) to mind...



you have choices and each individual choice adds up to whether you are harvested or NOT!

Long Sticks and Stones's picture

Get ready for the New Deal II but not before mass starvation and chaos. It's right there on the dollar bill, and the new hundred has the bell a ringin.
It is time. Good luck everybody and be kinder than necessary.

Dr. Bonzo's picture

It's not that it fails or not, but it's the only statist-friendly methodology that allows dyed-in-the-wools proteofascist / communists the pretense of being "pro market," the same way Neocons pretend to be conservatives, but aren't; or that Neoliberals pretend to be liberals, and aren't. Who's going to come out of the statist closet and admit they have wet dreams about running the North Korean economy from Kim Il Sung University? And when's the last time a North Korean won anything for that matter? Now they can be aspiring North Korean nitwits and receive Nobel Prizes... drone chocolate people till the end of times and receive peace prizes.... how enabling of us to tolerate them in our midst.

Overfed's picture

Keynes had a penchant for pubescent little boys. Tells ya' what ya' need to know right there.

BitingTruth's picture

More status-quo bullshit!  Quoting Authur Laugher...the "Voodoo economics" wizard?  There is bu one "rule" to economics..."all thing being equal"...but they aren't nearly "equal", are they?  Not only does "economics" not account for all labor contibution to "production" (domestic, automation, computing, cash markets), but there are no "economists" squawking about black markets, including the biggest one supplying the MIC with Afghan heroin money.  If Keynes were applied to an "equal" accounted-for economy, it would work fine.  "Supply-side", where the 1% accumulates all wealth and stops the engine...would not.  It does not.  It has not.  Duh. Move on Obiwan, these are the fucking droids I am looking for.

NidStyles's picture

You're missing the point of the criticism.


Keynes should have known better than to give those prick statists that have been around for at least 1000 years now any damn leeway after it took nearly 600 years to finally tone them down and limit their power. Keynes essentially erased 200 years of work with one book. He knew how dangerous some of the stuff he was saying was. Even us Austrians know that in a perfect world with perfect humans it would work, but we don't have either of those and that is why the classical and Austrian schools were both against his work.

You should read about the conversations between Keynes and Hayek.


Reaper's picture

Einstein's rule applied in economics, "Insanity is printing or electronically creating currency excessively and expecting different results." Politicians pay the economists which paint the nicest pictures. Krugman's paintings are best described as cheap knockoffs of poorly executed earlier works by Keynes. A modern reissue of The Scream would be most descriptive economic destiny.

are we there yet's picture

The percentage of each past president's cabinet who had worked in the private business sector prior to their appointment to the cabinet.....

Hint: Eisenhower was highest at   57%, and Obama was lowest at an miniscule 8%   


               T. Roosevelt................... 38%


               Wilson ........................... 52%

               Harding.......................... 49%

               Coolidge........................ 48%

               Hoover ...........................42%

               F. Roosevelt................... 50%


               Eisenhower.................... 57%

               Kennedy......................... 30%






               GH Bush.........................51%

               Clinton ..........................39%

               GW Bush........................55%

               Obama....... 8%

Prairie Dog's picture

George W. Bush was among the highest. He must have been a great president.

highwaytoserfdom's picture

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.

Marcus Aurelius