A little help knocking down keynes (vanity)

free republic | November 1, 2003 | Sonny M

[Sonny M]

Long story short. I'm an MBA student in class right now. I'm about to have a teacher come in, who worships John Maynard Keynes and in his advance notes, swears that Keynes, great economist he was, solved the great depression, and gave us economic boom after boom, and his ideas can do no wrong. I am going to cite Hazlet and Friedman, but I do need some talking points on errors in Keynes, and how he is now discredited (which he is).

[I got the rope]

Don't do it. Just roll with it.

[WinOne4TheGipper]

Depends on the situation. If he can get on the prof's nerves w/o losing the grade, I suggest he should do it.

[alrea]

Dismissed by the Keynesians, economist Friedrich Hayek provided an alternative vision that has helped lead the world toward democratic capitalism. To Hayek, intellectual arrogance led the Soviet Union to serfdom.

In His best-known book, The Road to Serfdom, published in 1944, Friedrich Hayek predicted with devastating accuracy the consequences of collectivist societies, the Soviet Union being this century's most conspicuous example. Those who discover the book today, ten years after the Berlin Wall crumbled, may well ask themselves how, with such penetrating analysis available to them, most economists, political scientists, politicians and the CIA failed to see the internal contradictions that doomed the Soviet Union.

There was no shortage of distinguished economists who disagreed with Hayek's central thesis, which was that all collectivist societies-from Hitler's National Socialism to Stalin's communism-lead logically and inexorably to tyranny. As late as 1984, the Harvard economist John Kenneth Galbraith wrote approvingly in The New Yorker magazine that the Soviet economy was making great material progress. His evidence was the apparent well-being of Russians on the street, the rush-hour traffic and the spread of apartment houses. He attributed the success to the fact that, in contrast with Western economies, the Soviet system made full use of its manpower.

Galbraith was in good company. For decades, until its 11th edition, in his best-selling textbook, Economics, MIT's Nobel laureate Paul Samuelson told students that it is a "vulgar mistake to think that most people in Eastern Europe are miserable." (The 11th edition deleted the word "vulgar.") Finally, in 1985, the 12th edition omitted the sentence. In its place is the question whether the economic gains achieved under communism justified the political repression - a euphemism for the tens of millions killed, starved, randomly put in prisons for days and years of torture. Samuelson claims that this cost-benefit analysis is among the most "profound dilemmas of human society."

To Hayek such questions were morally repugnant. He wrote in The Road to Serfdom: "The principle that the end justifies the means is in individualistic ethics regarded as the denial of all morals. In collectivist ethics it becomes necessarily the supreme rule."

Full-scale collectivism did not hold sway in Western economies, but a large measure of government intervention did arrive courtesy of the disciples of John Maynard Keynes. Starting at the end of World War II, Keynesians argued that big government can and should shape policies by looking at the relationships between backward-looking, aggregate numbers such as gross national product, aggregate investments, national savings and others. Within their models, depressions are caused by "animal spirits," that is, when people's mood swings from optimism to pessimism. But-hold your breath-the wise Keynesian politicians and bureaucrats look at the numbers churned out by government bureaus of statistics and know how and when to compensate for the riffraff's mood swings.

Rubbish, said Hayek. In his essay "The Misuse of Aggregates," he showed that the Keynesians' back-ward-looking aggregate numbers like investment and price levels were misleading because business owners do not make investment decisions based on aggregates. He also noted that although individual people certainly make investment mistakes, they do not turn pessimistic or optimistic all at once. Without this pillar, the Keynesian case for Big Government's intervention collapses.

Central to Hayek's theory was his belief that there is no way a handful of bureaucrats can possibly know how to make intelligent spending and investment decisions. Why not? Bureaucracy lacks the deep knowledge that can come only from constant trial and error by millions of individuals over decades and centuries.

To Hayek, as to Adam Smith, decentralized, competitive markets were infinitely more suited to collecting and disseminating useful information than the most powerful computers could ever be. For a political party, no matter how well intentioned, to think it could order things better than the market was sheer hubris.

How can a bureaucracy know how to price chickens, wheat, highways, schools, water, bonds and anything else better than the millions of self-interested human beings who trade daily in these items? Hayek's unambiguous answer: It can't.

Could Soviet planners have created a Microsoft, Toyota or Intel, not to mention Disney's Mickey Mouse? Could anyone have planned the development of such an institution as the high-yield credit market, crucial for financing entrepreneurs and their innovations and creating jobs?

Another facet of Hayek's conclusion that spontaneous, grassroots formations are superior to central direction is now brightly visible on the Internet. The antithesis of central planning, the Net has greatly lowered the cost of creating new markets. The auctions offered by Ebay and Amazon.com, among others, illustrate Hayek's view that new knowledge and discoveries- technological in this case-are quickly dispersed and rapidly absorbed by self-interested individuals trading in the market who use the new knowledge to generate still newer knowledge.

Few things generated greater contempt in Hayek than the Keynesians' beloved Phillips Curve, which embodies the notion that too much prosperity creates inflation, while just the right amount of inflation can create lasting prosperity. Comparing inflation to drug addiction, Hayek argued that it was the great enemy of job creation. As the U.S. economy continues to create jobs and record low levels of unemployment with very low levels of inflation, there isn't much doubt that Hayek was right and the followers of Keynes wrong.

Hayek also foresaw the difficulties into which a quintessentially collectivist program like Social Security would run as it grew from a modest program designed to relieve poverty into a gargantuan Ponzi scheme for income redistribution. But far from preaching anarchism or even radical libertarianism, Hayek, who took customs and traditions seriously, thought government had a positive role to play. He never questioned the state's role in providing a social safety net (although his attackers suggested otherwise).

By Reuven Brenner (Forbes, 1999.05.31)

[logician2u]

Find a copy (at the library if they have it, order it from Amazon if they don't) of Jim Powell's just-out book, FDR's Follies.

It demolishes nearly every myth the Keynesians like to tell about how Roosevelt "saved capitalism" during the Great Depression.

Hayek is good, too, but I've a hunch your prof will grade you down if you cite him in a paper. He is unlikely to know who Jim Powell is, however.

Best of luck. (Been there, done that - and glad it's over.)

[LS]

If you want a quick and dirty deconstruction of Keynes' theories in the U.S., my "Entrepreneurial Adventure" chapter on the Great Depression shows how Keynes was wrong and how Keynesian policies followed by FDR acutally prolonged the Depression.

Look at my endnotes: you'll see the most recent studies that refute the notion that the stock market was all "speculation;" that there were wide disparities in wealth; that FDR's banking policies saved the banks (with the exception of taking the U.S. off the gold standard, which did); that his employment policies actually increased employement---quite the contrary, they killed a recovery.

[Wayne07]

Check out some of the economic articles on the great Australian site:

http://www.brookesnews.com

They are very much of the Austrian school - the antithesis of Keynes.

[sourcery]

• Does a Falling Money Stock Cause Economic Depression?
• Forecasting Crashes and Recessions: What Macroeconomists Don't Know
• Great Myths of the Great Depression
• America's Great Depression
• How FDR Made the Depression Worse
• Hazlitt and the Great Depression
• The von Mises Institute

[Jack Black]

Excellent posting/response. Let me second Hyack's The Road to Serfdom" . There is a also a new book about how FDR extended the depression with his economic policies, I'm sorry I can't remember the name (it's in this months Liberty Books catalog?).

[KC Burke]

Post #4 is a good start but for the total destruction you need only get the three part video series, companion book and followup on the web to the PBS series Commanding Heights which shows how the Hayek school was right and Keynes was wrong. As a followup, I would wsuggest de Soto's The Mytery of Capitalism which explains why a simplistic application of Free Markets alone, without American-British style Rule of Law and Property Rights, won't bring automatic economic success.

[Maceman]

Do a Googel search on +Carter +stagflation +Keynes to find some good stuff on the collapse of Keynesian theory in the 1970s. Here's one interesting article that I found here.

[KC Burke]

...additionally the authors have the site Commanding Heights which gives an overview of the series as well.

[KC Burke]

I beleive that the whole series is also available by broadband on-line from PBS

[L_Von_Mises]

Contra Keynes and Cambridge
The Collected Works of Friedrich Hayek

This is the collection of essays that formed the debate between Keynes and Hayek. While The Road To Serfdom is a must read it is not so much about Keynes but about Socialism and the slippery slope. Conta Keynes and Cambridge is focused entirely on Keynes's ideas.

It might be a better tactic to do a paper on the differences between the two schools of thought and how Hayek's eventually were accepted and proven to be correct. I have found that you can win more debates with subtle arguments than trying to beat them over the head and ending up exaggerating an already winning postion.

The Gathering Storm, which ironically was a PBS documentary, pretty much does that. I believe that you can view the entire series on the web (at least you could at one time).

Good luck LVM

[KC Burke]

Your assistance would be useful with a list of pointers for this thread.

[L_Von_Mises]

Some additional thoughts. Read the chapter on the great Depression in Milton Friedman's History of Monetary Policy for some additional insight. I had a far left professor in one of my econ classes and did a paper on the Depression. I was able to find notes on the Federal Reserve meeetings during that period combined with a lot of insight from Hayek, Friedman, etc. as well as good history books and was able to show that it was pretty much bad Fed policy along with other factors that prolonged it and a change in policy is pretty much what allowed the economy to recover.

Keynes was a very intelligent man and his book regarding the reparations following WWI was spot on. He was also a very good investor. If you read his book that is the foundation of modern Keynesian theory you will see that he never advocated the types of policies that were implemented in his name. His ideas were molded by politicians to fit a preconceived agenda.

You could even research what HIS ideas were and show how they differed from what is commonly referred to as Keynesian Economic Theory.

[L_Von_Mises]

Oops - NOT Gathering Storm but Commanding Heights which was pointed out by others on this thread. Sorry for any confusion.

[Incorrigible]

Since there seems to be a few book recommendations here, let me recommend this one:

The Worldly Philosophers : The Lives, Times And Ideas Of The Great Economic Thinkers

You can thank me later!

With respect to Keyes, he was a highly intelligent economist and one who was interested in the betterment of society.  He was also an elitist and didn’t care much for the messiness of the market.  Well, at least not at the commoners level.

His recommendations during the period of the Great Depression where correct and exogenous government spending led by FDR (plus the war of course) put the US on a path of prosperity the likes of which had never been seen before.  The New Deal also ushered in a host of socialistic government programs which have grown increasingly onerous over time.  However, it’s not exactly fair to blame Keynes for that.  Though he offered a simple solution any power hungry politician would love, he himself, after much of his theory was put into practice in the post war years said, “I am not a Keynesian”.

President Bush is implementing classic Keynes policies today.  Allowing the government to go into deficit spending during a war and economic malaise is exactly what John Maynard would have suggested.  And despite my claim as an amateur economist of the Austrian School, I would conclude that Keyes had the better answer during these times than Hayek.  However, if the government would only follow Hayek’s advice in the first place, we would have so many economic issues that need to be addressed by the government in the first place!

[Sonny M]

Thanks guys, I really appreciate it.