The Free Market 17, no. 9 (September 1999)
Keynesian economics continues to infect much public debate, despite being debunked for decades by Austrian economists, some mainstream economists, and reality itself.
Consider the standard public debate over the question: Is the economy growing too fast? The leading answers offered in the debate always are: (a) Yes, the Fed must tighten to prevent inflation; (b) No, the economy still has room to grow before there’s inflation; and (c) Yes, but reducing inflation is not worth the price of high unemployment.
That this public debate takes place is proof that many practical men remain the slaves of the defunct economist, John Maynard Keynes. (One’s words sometimes come back to haunt, don’t they?) The premise of the entire debate is the Keynesian notion that government planners can engineer increases in production to reduce unemployment but at a cost of higher inflation; and they can engineer decreases in production to reduce inflation, but only at a cost of higher unemployment.
The premise is bogus. There is no such relationship between production, inflation and unemployment. The only thing that government planners can engineer is chaos. Production depends on labor, capital, knowledge and, most importantly, on liberty. Employment depends on a host of institutional factors, including government policies that interfere with labor markets.
Inflation is the consequence of loose monetary policy. And government intervention distorts market calculation, hampering the coordination of economic activity.
Keynesian economics is just plain wrong. Why, then, do the ideas of Keynes continue to figure so strongly in public debate?
Suppose you are a typical politician, government administrator, policy wonk or just a proud member of the politically correct. You believe in government planning on principle. You do not believe that a good society will result when people have the liberty to go about their business.
You believe that government power is a vehicle for social progress, and you believe there is nothing wrong with wielding government power to achieve your vision of what society ought to be. Or perhaps you advocate government planning to disguise a raw desire for power.
Now, what macroeconomics are you going to embrace: Keynesian, monetarist or Austrian? It’s unlikely to be monetarist, and as sure as summers are warm in Auburn, it ain’t gonna be Austrian.
The macroeconomics of the government planning class will be Keynesian economics. It doesn’t matter that Keynesian economics is wrong. Planners will embrace Keynesian economics because it remains the only macroeconomics available that affirms their larger vision of the world.
Not only does Keynesian economics buttress the planners’ vision, it also buttresses their careers. Imagine a high-ranking official at the Fed or a top administrator at the Department of Labor or a policy wonk at the Kennedy School of Government proclaiming: “You know, the Austrians are right. The world would do better if we went away.” A duck would sooner lobby to extend the hunting season.
Just as R.J. Reynolds peddles Camels, government planners peddle government plans. Extolling the spontaneous order of the market is no way to sell government plans, but espousing Keynesian economics is. Keynesian economics may not be the government planners’ Joe Camel—income inequality is the planners’ Joe Camel—but it is no doubt the most effective way for government planners to hawk macroeconomic planning. A government planning enthusiast would counter that this is nonsense.
People don’t become enthusiasts of planning first and then conjure up ideas that justify planning in order to gain favor with the planning class. To the contrary, people come to advocate government planning after carefully reflecting on reality.
Really? What kind of reflection leads to the notion that by causing inflation, by confounding the absolutely vital information that prices provide, government planners can increase production and reduce unemployment? What kind of reflection leads to the belief that a handful of politicians and policy wonks can steer an economy of 100 million households, 140 million workers and 20 million businesses in any direction they choose?
And how about this careful reflection from that pillar of Keynesian careful reflectors, John Kenneth Galbraith. In an October 12, 1998 New York Times op-ed piece, Galbraith lamented that the power in Washington was doing nothing about the Asian financial mess, making the same mistake it made in the days of Coolidge and Hoover when a comparable crisis loomed.
Galbraith scolded that figuring out “the ways to minimize suffering for the innocent and for maintaining the flow of consumer and investment demand should be the subject of the most intense discussion in Washington” because what is “very much needed” is “political concern and action.”
That kind of talk does not qualify as careful reflection. A now massive amount of truly careful reflection shows that it was political concern and action that triggered the boom of the 1920s and exacerbated the bust of the 1930s, just as it was political concern and action that caused the Asian boom-bust mess.
Then there’s this from Galbraith. In the same piece, in a brief paragraph about economic troubles around the world, Galbraith wrote: “It took the Russian experience of capitalism to make Soviet Communism look good.” I wonder if the millions of Soviet citizens slaughtered by the political concern and action of their own government would describe that thought as a careful reflection on reality.
The title of Galbraith’s article, by the way, is (get ready for this) “Evading the Obvious.” Careful reflection on reality? Keynesians have more important things to do. And these examples are anything but unique. As Thomas Sowell illustrates in The Vision of the Anointed, denying reality is a crucial part of the methodology of the government planning class.
The planning class is not about to discard Keynesian economics for the mundane reason that it’s wrong. Keynesian economics will evolve—just as Marxism has evolved into political correctness and welfare state socialism is evolving into “the third way”—but it won’t die. The cause of expanding government power is too important for the planning class to let Keynesian economics die. So Keynes lives.
Don Mathews teaches economics at Coastal Georgia Community College.
