August 31, 2010
Keynes as 'Useful Idiot'By Monty Pelerin
The mother's milk of American politics may be money, but the fuel for American socialism is Keynesian economics. Keynesianism's inherent bias toward bigger government has made it the indispensable tool for statists around the globe.
Politicians' natural wont to spend and control benefited immensely when John Maynard Keynes published The General Theory in 1936. His work initially provided a rationale for the ad hoc efforts to fight the Great Depression. Subsequently, it provided support for growth in government.
The "Keynesian Revolution" represented a massive paradigm shift. Paradigm shifts in scientific fields were dealt with by Thomas Kuhn in his famous book, The Structure of Scientific Revolution. The change process is generally characterized by an older paradigm being discarded after a newer one demonstrates its superiority. That is the evolutionary process of progress.
Kuhn dealt only with the natural sciences, although the same process applies elsewhere. Greater verification problems, vested personal interests, and political considerations ensure that the process will be less smooth in the social sciences. The adoption of Keynesian economics provides an excellent example.
Classical economics, the prior paradigm, developed over centuries. Its body of knowledge evolved as a result of trial and error, itself a form of the Kuhnian evolutionary process. Classical economics argued for a limited role for government. This constraint was an impediment to politicians' natural desires to increase power.
Keynesian theory never "earned" the right, at least in a Kuhnian sense, to replace its predecessor. It did not demonstrate relative superiority. It was simply ordained by the ruling political class. Politicians saw in it the opportunity to manage the economy. That was all that was necessary to abandon the previous paradigm, at least for them. It was adopted via a form of political fiat.
Politicians decades ago were little different from today. They believed themselves to be smarter than the rest of us. Their hubris assured them they could manage an economy better than the "chaos" of free markets. These were the grounds on which Keynesianism was adopted. Its adoption was political rather than economic. On such grounds began the economic profession's version of "hope and change." On such grounds began the decline of the U.S. economy and society.
While it was clear why politicians embraced Keynesian economics, it was less obvious why economists did. Actually, most did not, at least initially. Eminent economists of the time were quite skeptical. Contemporaneous criticisms by a few famous names, including Mises, Hayek, Knight, Modigliani, Viner, Hazlitt, Garrett, Burns, and Hahn, can be seen in a collection of essays entitled The Critics of Keynesian Economics (1st edition, 1960).
Shortly after WWII, the economics profession began to turn toward Keynesianism. From the early 1960s, economists who espoused Keynes' views were eligible for new powerful, prestigious government jobs. Those who did not were increasingly ignored and eventually marginalized. Economists, qua people, are not saints. Many were corrupted by government largesse. President Eisenhower warned about this possibility in his Farewell Address:
After decades of Keynesian folly, the country now teeters on the brink of another Great Depression. Both the economy and its guiding theoretical construct are in crisis. Referring to the recent spate of downside "surprises," Kevin Hassett commented in Bloomberg, "The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust."
Despite increasing evidence to the contrary, most economists and politicians continue to defend Keynesian theory. Self-interest and ideology are strong motivators because if Keynesianism economics falls, so does big government.
Ironically, the vagaries of history have set up a political nightmare. Expiration of the Bush tax cuts at the end of this year is the event. Mr. Hassett explains the leftist conundrum:
Keynes favored spending over tax cuts in normal times. He was, after all, a big government advocate. His theory, however, never supported tax increases during economic downturns. The expiration of tax cuts is a tax increase. As such, it goes against his theory. Statist ideology, however, always favors tax increases because they expand the size of government.
This tax issue represents a major conflict for big-government politicians. Leftist ideology conflicts with its primary tool -- Keynesian economics. If, indeed, politicians believe in Keynesian economics, they should vote to extend the Bush tax cuts. If they don't, they have no economic basis for their vote. A vote against Keynesian economics on this particular issue is an unadulterated vote to grow government. It can be based on no principle other than that more power is better than less.
The Obama administration has already shown its hand. They want the tax cuts to expire. They have unequivocally revealed that Keynesianism was merely a convenient tool to advance their goals. Now, when it stands in the way, it becomes just as expendable as Reverend Wright.
Rarely have politicians been so neatly cornered. That Democrats procrastinate instead of making a simple decision is an indication how strong their statist orientation is. Given the upcoming elections, many may break ranks and support extending the Bush tax cuts.
Politicians will likely make their typical non-decision decision. The meme is apt to be that the "rich" deserve to pay their "fair share," while others deserve the tax break. Political hedging and doublespeak aside, that position represents a tax increase. It will be harmful to the economy regardless of how it is spun.
A decision to raise taxes represents more than the abandonment of Keynesian economics. Arguably, that should have happened decades ago. Allowing taxes to increase represents a vote to abandon reason. No economic school supports a tax increase now. No one concerned with the well-being of the citizenry and the country would, either. By advocating for a tax increase, this administration has revealed its truly ugly, unvarnished lust for power. You and I don't matter. Only the acquisition of more power does. Statists are so wedded to ideology that they appear to be willing to risk an economic collapse of the country.
Regardless of the outcome of this particular issue, Keynesian advocates and practitioners need not worry. Keynesianism will not be abandoned. Its usefulness still exists. If it were abandoned, then real economics would replace it. That outcome would end the statist march.
Economics is not driving economic decisions. Statist ideology and the desire for power are. Pseudo-economics has been the means to hide this reality since the 1930s. Keynesianism was the convenient tool. In Lenin's terms, Keynesianism was and still is a "useful idiot." Its political value was too important for its validity to be subjected to a Kuhnian process. Only its prestige mattered, and the government bought that. Support for Keynesian theory was never tested or earned. It was bought!
As a result of the extensive use of Keynesian economics, government now runs the country instead of citizens running the government. Americans have become mere tokens in a power struggle. The founders provided a Constitution designed to preclude this outcome. Over time, protections were vitiated and violated to where citizens matter only for their political utility -- votes and taxes.
If votes can be obtained via harmful policies, the elite will oblige. If damage is incurred to the country or the economy, so be it. After all, as Stalin supposedly said, you can't make an omelet without breaking eggs. We are all merely expendable eggs.
The enemies of freedom are in both parties. November is a first message, but not a sufficient one. Many, many more must follow.
No more omelets!
Monty Pelerin blogs at at www.economicnoise.com.