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Keynesianism is rubbish

Paul Marks points out that John Maynard Keynes’ theories are not just wrong but are complete nonsense.

Libertarians tend to reject the economic doctrines of J.M. Keynes. Some people may argue (as Lady Thatcher once did) that Lord Keynes’ thought was distorted by his followers, but most people (or most libertarians anyway) would accept that Lord Keynes and/or his follows were in error in regard to the understanding of political economy.

The trouble is that most libertarians think that showing the errors of Keynesianism is very complicated and that one needs a detailed knowledge of Austrian School economics to show these errors – this is not so.

Lord Keynes’ 1936 book (“The General Theory of Employment, Interest and Money”) implies that one can increase the money supply up to the “full employment level” without a trend of rising prices (as long as the new money is spent on such things as public works – rather than being hoarded or spent on imports). However, it does not matter if one interprets the “General Theory” to hold that Keynes accepted that his policy of money supply expansion would lead to a trend of rising prices (rather than, say, just restoring the prices of goods to the level they were at before some fall in prices).

It does not matter because there is no long term trade off between unemployment and rising prices. In the 1950’s and after Keynesians played with such concepts as the “Phillips Curve” to claim that there was such a trade off – but eventually no amount of moving the curve (to fit the fact that the unemployment and inflation numbers did not fit the curve) could hide the fact that such concepts would not save Keynesianism. The final effort to save something from the “insights” of Lord Keynes was the claim that at least inflation and unemployment would not both rapidly rise at the same time. This effort broke down in the 1970’s when in such nations as the United Kingdom inflation and unemployment both greatly increased.

Look at the world today. In Venezuela unemployment is increasing, output is falling and price inflation (the rate at which prices in the shops are going up) is rising. In Argentina unemployment is increasing, output is falling and price inflation is rising. As for those people who hold that the oil market is of magical importance and overrides all other matters – well Venezuela is a major oil exporter and Argentina is not.

Clearly the economic doctrines known as Keynesianism are rubbish – and we have not had to use any thinking from the Austrian School to show this.

So why is the economic language and concepts of Keynesianism still taught as basic economics in almost every University in the world? Well I choose to be blunt in reply to this question – either academic economists do not know that Keynesianism is rubbish (in which case they are fools), or they do not care (in which case they are knaves).

Those people interested in a page by page refutation of Keynes could do worse than read Henry Hazlitt’s The Failure of the New Economics (1958). However, I hope I have shown that ignorance of Austrian School economic works is no excuse for believing in Keynesianism.

Keynesianism is rubbish – it really is as simple as that.

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24 comments to Keynesianism is rubbish

  • Ok then, care to explain how the US pulled itself out of the Great Depression? This is afterall THE definitive example of Keynesian economics success. Any good criticism of Keynesian economics ought to have an explanation for this pivotal event in the history of political economy…

  • max

    paul marks is simply ill-informed as to what is taught in any half-decent university level econ. course.

    Pick up mankiw’s intermediate macro text & take a look.

  • max

    The GT predicts counter-cyclical real wages. Empirically, the real wage appears mildly procyclical. Modern academic macroeconomists are well aware of this. Paul M ought to read up on some of this stuff before sounding off.

    Also, is Paul not aware of any of the excellent criticisms of the Austrian cycle theory (eg – Tyler Cowen’s Risk & Business Cycles). For a starter, the Austrian theory cannot generate co-movement. Emprically, however, co-movement is precisely what we see (sectors expanding or contracting at the same time).

  • max

    so, in light of the above, is paul a “fool” or a “knave”

    🙂

    ps – samizdata is great. i love brian’s posts.

  • Non-Sequitur Monger

    I don’t believe that werewolves enjoy eating bananas.

  • max

    but paul will no doubt claim that keynes was a banana-loving werewolf

  • Whilst noting that a cynic might think that Bush’s “War on Terror” and huge hike in defence spending is one Keynesian counter-cyclical exercise which I haven’t seen PM criticise, it falls to me to acknowledge that, in all fairness, Keynes’ insights were not “simple rubbish”, he had a lot of insights that were/are valid.

    Keynes’ view of the “animal spirits” of capitalism is something to consider:

    “There is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.

    “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

    One has to laugh at free market messiahs who think that all economic decisions are rational – and I don’t think a good Austrian School-er should believe market outcomes to be necessarily optimal. Market outcomes tend over time and in aggregate to be optimal.

    Don’t forget that Mr Marks.

  • I have always seen Keynsian theory in its context of the Great Depression. His prescription for curing that — print money — was surely effective.
    It is using Keynes to justify irresponsible fiscal policy in relatively prosperous times that is dishonest.

    John Ray

  • James Taylor

    Good article!

    The most depressing thing about US economic policy in the 1990s was its Keynesian bias, both monetary (in the Clinton years) and fiscal and monetary (in the Bush years).

    As you said Keynes’ economic theories were rubbish, and by citing two killer examples you show why.

  • Paul Marks

    So I have not read any mainstream economic text books? Sorry I have – they tend to use absurd Keynesian concepts (such as the “multiplyer” – which purports to show that increasing government spending is good for the economy). True J.M. Keynes may have not invented the multiplyer (he had the good grace to mention Major D. and some of the others), but that does not alter the absurdity of such ideas – as pointed out in Bastiat’s “Fallacy of the broken window”.

    I have been present at university economics classes? Sorry, that is not true either – I have been present at many lectures by academic economists (both inside universities and outside of them).

    As for the United States. Actually the “New Deal” meant that there was no rapid recovery from the depression (unlike every other slump in the history of the United States). Real output (with inflation taken out of the numbers) was almost as high in 1938 as in 1932) and unemployment was almost as high as it had been. Compare this to what occured in after the slump of 1921 – the government did not increase spending (in fact President Harding cut spending) and the economy quickly recovered.

    Real wages did not adujst themselves to changing conditions in the United States in the post 1929 slump (I admit that President Hoover was at least as much to blame for this as F.D.R. was). However, eventually the system of the 1930’s broke down and real wages did adjust to changing conditions (I admit that W.W.II may have had a lot to do with the brakedown of the 1930’s system – but not as it is normally presented).

    As for other nations – poor old Britian (which did not follow Lord Keynes ideas at first) did rather better than the United States in the 1930’s. Gemany did not match Britain in real output per head of population (it was at about half British levels). Germany did very well in terms of unemployment – but that was more to do with cuts in real wages than increases in government spending.

    I was unable to reply directly to the people who choose to attack what I had written – if they wish to write to me directly I would be happy to reply.

    Paul Marks.

  • max

    you have not read any recent mainstream texts paul. you a big phoney who pretends to knowledge you don’t have. the multiplier is totally old hat. Go & look at mankiw, Barro, etc. True they provide it, but then they explain why it is silly. You are phoney who does not understand modern economics. You hardly understand Austrian economics. Did York ever give you your phd (or it that, as I have heard rumored, fake too?)

    BTW: Richard Kahn gave JMK the multiplier.

  • max

    My u-grad macro teachers were New Classical & New Keynesian in outlook. The multiplier was ridiculed by both. The ISLM model was viewed in the same way one would view a somewhat crazy old uncle.

    When did you last attend a macro class? In the early 70’s?

  • max

    You might also care to look at the empirical macro literature on the Great Depression (Bernanke, etc) & other related issues before you sound off.

    The GT predicts counter-cyclical real wages. Modern macro guys are well aware that real wages are mildly pro-cyclical. Do you know what Real Business Cycle Theory is BTW? It began in 1983.

  • max

    For anyone who wants to ‘piss’ on Mises: turn to p.365 of Human Action – The paragraph: “Let us illustrate ….. [thru to] …. production of p from b to a quantity slightly smaller than a”.

    Draw the graph (as if in an intermediate international trade textbook or price theory text) & see that Mises is incorrect. Wicked people I know have speculated that HA might be chock-full of such errors.

    I understand that the attention of certain Austrians has been drawn to this error. But of course, the error must be with the “mathematical & graphical fetishism” of modern [intermediate] price theory rather than with Mises …..

    Do these people not realize that Mises is correct with apodictic certainty? (Of course, I’d never dare to make light of Misesianism in earshot of a genius like Hans Hermann Hoppe!)

  • max

    paul writes: “It does not matter because there is no long term trade off between unemployment and rising prices. In the 1950’s and after Keynesians played with such concepts as the “Phillips Curve” to claim that there was such a trade off – but eventually no amount of moving the curve (to fit the fact that the unemployment and inflation numbers did not fit the curve) could hide the fact that such concepts would not save Keynesianism”

    All mainstream texts accept this Paul. Go & look & see.

  • Max,

    If you wish to retain the ability to leave comments on Samizdata.net, refrain from derogatory remarks such as calling Paul a ‘phoney’. Feel free to challenge Paul’s (or anyone else’s) ideas here but if you cannot do so in a civil manner, then you will no longer be welcome.

    Samizdata Admin

  • max

    Many apologies. I have emailed paul privately. Would calling him a coxcomb prove more appropriate?

    His claims about modern macroeconomics are are tissue of lies though.

    I enjoy the blogsite very much 7&would hate to miss my daily does of brian.

  • max

    paul writes: “either academic economists do not know that Keynesianism is rubbish (in which case they are fools), or they do not care (in which case they are knaves).”

    So is it ok to make derogatory comments about modern mainstream macroeconomists (they are certainly not fools; they may welll be knaves, but not for the reasons suggested by paul) who Paul has not taken the trouble to read?

    If libertarianism is meant to attract people who are not already true believers then misrepresenting the views of non-austrian economists is unlikely to do much for the cause.

    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.

    I knew Paul when I was a u-grad at York University in the early 90’s. He liked to intimidate u-grads who were not hardcore libertarians by intimating that he read so much more than they. At the time, I had not studied enough economics to see that he was “having us on”. Now I know better. Brian can confirm what was going on at York at that period.

    Anyway, the site is great.

  • max

    I wholly stand by my earlier claim (& will put money on it):

    paul marks is simply ill-informed as to what is taught in any half-decent university level econ. course.

    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].

  • George

    Suggesting that Keynesian spending ended the US depression of the 30’s fails to comport with the facts. The US economy rose from the 31-32 bottom only to fall back down again in 36-37. What ended the depression in the US was WWII, starting with the demands of the 39-40 hostilities in Europe.

    The study of Keynes came in liberal doses (no pun intended) with my Econ degree and it took a long time to replace its many conceptual errors in my (then) youthfully trusting mind. Keynes was unquestionably brilliant, but history suggests he was all to frequently wrong about important things. And those who have built political castles on his sandbar of mistaken ideas have made it ever so much more difficult for the developed world to eventually get it right.

    In contrast, 226 years later the gentleman from Scotland still reads like rational truth, fully reflective of not just human nature but the natural world itself.

  • Larry Kummer

    Very unenlightening discussion, not up to usual standards of Samizdata. Lot’s of ad hominum attacks and appeals to authority. Little specific analysis or rebuttals to Mark’s comments. Posts read like an attack on their religion.

  • max

    surely larry means ad hominem

  • Larry

    Whoops! Larry not good typist.
    Good catch, Max!

    Larry

  • Larry

    Whoops! Larry not good typist.
    Good catch, Max!

    Larry