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Keynesian nonsense – an update

Paul Marks holds the line in his worthy ongoing mission to rubbish Keynesianism

Some time ago I sent in a blog claiming two things – first that many of the doctrines of Keynesianism were nonsense, and secondly that one did not need to be an Austrian economics person to see this.

I have had some replies to what I wrote. No one has claimed that one needs to be an Austrian school person to see there is something very wrong with Keynesianism (that no one claimed this surprised me – but then I am an Austrian school person myself).

Some people opposed my opinion that Keynesianism is nonsense (and opposed my strong language with strong language of their own). However, no one has produced any evidence in favour of Keynesianism – either directly or via the books they have suggested I read.

Such concepts as the ‘multiplier’ (presented in almost all basic economics text books) remain without argument in their defence. The idea that government can help the economy by (for example) issuing money and using this money to buy sand and hire people to shovel this sand into the sea, is absurd. To teach such doctrines someone must either be a knave (someone who teaches something he does not believe), or a fool (someone who believes nonsense).

Of course even if one insisted that government ‘investment’ actually be about buying capital goods (rather than ‘investment’ simply being another word for government spending) the idea would still make no sense – investment must be based on real saving (not credit money games).

It is tragic that fallacies refuted by such men as Bastiat almost two centuries ago (such as the fallacy of the broken window) are treated as ‘scientific’ by the vast majority of basic economics text books (often with lots of formulas and pseudo scientific language shoved in to try and hide the basic absurdities).

Even as I type this many nations in the world are undergoing rapidly rising prices (and prices rising at an increasing rate) whilst at the same time these nations have falling output and rising unemployment. If Keynesianism means anything the above should not be possible.

An Austrian economics person does not rely on empirical examples, but such examples are noteworthy. When one sees the rising inflation, falling output and rising unemployment of such nations as Venezuela and Argentina the concepts of Keynesianism fall apart. As some of these nations export oil and some import oil the idea that ‘oil shocks’ are a magic way out for the Keynesianism falls apart also.

When I see that most undergraduate textbooks that do not have concepts such as the various ‘multiplier’ in them (or treat such concepts with the contempt they deserve) then I will apologise for being too hard on the economics profession. I would apologise if even ONE textbook recommended at a British state university exposed such concepts as nonsense.

As far as I am aware no apology is in order at this time.

Paul Marks

8 comments to Keynesian nonsense – an update

  • max

    hi paul:

    you write – I would apologise if even ONE textbook recommended at a British state university exposed such concepts as nonsense.

    I have no idea if Barro’s macro book (laughts at Keynesianism) is used anywhere in Britain, but its use is common in the states (ie – Barro’s macro u-grad class at harvard).

    regards

  • max

    paul – i’ve lost your email. Please resend. I’m still looking into the parallel standards case.

    You write: However, no one has produced any evidence in favour of Keynesianism – either directly or via the books they have suggested I read.

    - Presumably you mean me – they are attacks on Keynesianism (Barro). Shleifer is public choice micro. You did track those texts down right?

  • max

    paul – found your mail – will be in touch. cheers

    BTW – I wrote:

    Andrei Shleifer is at harvard (the mainstream of the mainstream) and is doing far more for free market idea in academic economics than Mises or Rothbard ever did. Try his book “The Grabbing Hand: Pathologies of Government Failure” (something like that) & see. Or try Robert Barro’s book “Getting it Right: Policy for a Free Society”. Barro – like AS – is a mainstream economist. Is he a “fool or a knave”? I rather doubt it. He began as a standard lefty-liberal in the early 70′s & was persuaded of the virtues of markets by Becker, Lucas & Friedman.

    Also see Barro’s u-grad macro text.

    Hardly my offering ‘evidence’ for keynesianism eh?

    I also wrote: “Pick up mankiw’s intermediate macro text & take a look. [He knows the Philllips Curve is vertical in the long-run & in SR if you posit rational expectations, he is fully aware of time consistency problems, etc etc]. ”

    Did you check Mankiw out? He has the multiplier in the “this was dinosaur Keynesianism’ chapter & then shows in the grown-ups chapter why old style Keynesianism was silly.

    cheers

  • max

    “Such concepts as the ‘multiplier’ (presented in almost all basic economics text books) remain without argument in their defence. The idea that government can help the economy by (for example) issuing money and using this money to buy sand and hire people to shovel this sand into the sea, is absurd.”

    But what is the crucial assumption of the basic ISLM models in which the multiplier story is invoked?

    Everyone knows that assumption is crazy (read further than the multiplier chapter & see).

    Do you know what that assumption is?

  • Yes, be careful to not confuse Keynesianism (which are the basic principles laid out by Keynes, some of which have been empirically refuted particularly since the stagflation of the 70′s) and New Keynesianism, which recognizes some of the overly simplistic and out-of-date nature of those principles. These models present more sophisticated views of, for example, wage & price stickiness and other market disequilibria. You’ll have to forgive me, because it’s been awhile since my studies, so I don’t have the resources at my disposal right this second, but I think New Classical and New Keynesian economics aren’t quite so dichotonous as they once were.

  • kb

    Do you mean a constant price level, Max? If so, please then explain what in GOD’S HOLY NAME this has to do with your point?

    I’ve used the Barro text in my course; I currently use Mankiw (both the principles and intermediate). So I suppose that disqualifies me as an Austrian, though I read a good deal of it. Mankiw does not spend much time on the simple multiplier even in the principles (third-to-last chapter, about six pages and see-you-later). However, there is ample IS-LM discussion that suggests scope for fiscal policy, which Paul sees as nonsense.

    Whether or not it is nonsense depends on any number of things, not least of which is the nature of price flexibility. No good Austrian believes in perfect price flexibility — they leave that to the rat-ex types, and not even THEY believe that any more — and so you get some ability for fiscal policy effects in the short run.

    No, what I think Paul is referring to is that fiscal policies effects are completely deleterious. They, like monetary policy, encourage malinvestment, through their effects on interest rates. These are not captured by either the multiplier or IS-LM, with or without fixed prices. Roger Garrison’s new book, Time and Money, does a nice job explaining this. If you could manage to get off your high horse and crusade against Paul, Max, you might do well to read it.

  • max

    paul refers to printing money – hardly “fiscal policy’ is it. Actually paul & i are chums so there is no crusade here. What do you make of Cowen’s attack on Austrian cycle theory?

  • max

    paul claims that modern macro is dinosaur keynesianism – will kb care to name one major macro player who thinks that printing money is a wise policy choice?