Via Monty Pelerin's World blog [7],
The plague of our time is Keynesian economics. It has destroyed the economics profession and enabled the political class to obtain powers never intended.
Keynesian economics provided the intellectual cover for the criminal class we politely call “government” to plunder its citizenry. In the beginning, clear-thinking, independent economists (not dependent on government [8] largess) expressed objections to this “new economics.” There was little new in Keynes’ work and many errors that had been debunked decades before Keynes was even born. Bastiat’s parable of the “broken window” in 1850 is probably the best-known refutation, although similar arguments preceded Bastiat by a century or more.
In the 1930s leaders were desperate and willing to try anything. Keynes General Theory was published in 1936, during the middle of the greatest depression the world had ever experienced. Politicians, more so than economists [8], welcomed his ideas as a new approach.
The Austrian economists represented by Mises and Hayek saw the fallacies in this new approach immediately. Some of the Chicago School (Knight, Simons, Viner) did also. Ludwig von Mises, never one to mince words, described Keynesian economics in the following manner:
What he really did was to write an apology for the prevailing policies of governments.
Mises likely was one of the few who saw the full ramifications of what Keynesian economics would provide for government. Most early criticisms were in terms of the economic [8] unsoundness of the theory.
To contrast the blatant differences between proper economics and Keynesian prescriptions, the following two prescriptions were offered early in this century:
[9]
It was proper that one of these men should have won the Nobel Prize in economics. It just happened to be the wrong one.
[10]James Buchanan, Nobel Laureate
In 1977 James M. Buchanan and Richard E. Wagner wrote “Democracy In Deficit — The Political Legacy of Lord Keynes” (available online [11]). It was the first comprehensive attempt to apply public-choice theory to macroeconomic theory and policy. According to Robert D. Tollison:
The central purpose of the book was to examine the simple precepts of Keynesian economics through the lens of public-choice theory. The basic discovery was that Keynesian economics had a bias toward deficits in terms of political self-interest.
From Buchanan and Wagner came this judgment regarding Keynesian economics:
The message of Keynesianism might be summarized as: What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation. (p. 3)
This fundamental confusion was responsible for the political acceptance of Keynesian economics. Politicians saw the potential for themselves in this new doctrine which advocated central control of the economy and fiscal [8] irresponsibility as a necessary and patriotic thing. Giving them this gift was like providing matches and gasoline to an arsonist. (“I don’t want to spend money, but I have to otherwise the economy [8] will tank.”)
Once government took control of the economy, they needed economists to provide the analysis and justifications for their new policies. Many in the economics profession were procured in similar fashion used with prostitutes. Money and power were heady incentives for a profession that had rightly been consigned to a section in their own ivory tower.
Justifying what government wanted to do and was doing was the only requisite. But, in order to qualify, it became necessary to convert to Keynesianism. Other branches of economics condemned government policies, at least on economic grounds.
Economists more than most understand incentives. When the payoffs increase, some men in any profession find it easy to modify ethics and integrity.
Buchanan and Wagner knew the damage that Keynesian economics had already inflicted and knew its potential was much greater. Thirty-seven years ago they commented:
What happened? Why does Camelot lay in ruin? Viet Nam and Watergate cannot explain everything forever. Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists. (p. 4)
They answered their own question:
The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose, it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax. “Democracy in deficit” is descriptive, both of our economic plight and of the subject matter for this book. (p.4)
Now, thirty-five plus years later, one may judge the merit in this book. Prescience, while not limited to them alone, was amazing.
One must also marvel at the continuation and acceleration of the ruinous policies. Whether Buchanan and Wagner imagined things could go on for so long and to such an extent is not known. However, to appreciate these changes, this graph from Zerohedg [12]e shows the effects of Keynesianism and what it has done to governments around the world:
[13]
The deterioration in fiscal discipline was astounding and in line what they predicted.
As this false economic theology known as Keynesianism runs its course, the following conclusions are probable:
- Regardless of whether this generation escapes or not, we have impoverished our children and grandchildren.
- Politicians now control most of the economy, including what passes for acceptable economics.
- No honest economist can work for government; nor would one want to.
- The tipping point for reversing this condition has long past.
- Politicians have no incentive to stop the process underway.
- Markets (and perhaps societies and governments) will eventually collapse, ending this terrible period of economic madness.
When this flawed paradigm is finally exhausted, the world may enter a better place in terms of economics and limited government. Without this shift, poverty and misery will grow along with wars used as political diversions.
One can only hope that the world avoids an Economic Dark Age when the collapse occurs.