August 18, 2010
The Divine Right of GovernmentBy Monty Pelerin
History is a great teacher. It often provides clues that enable us to understand the present and future.
Ancient regimes' concept of divine right of kings seems pertinent to today. Wikipedia offers as good a summary as any:
The phrase "not subject to the will of his people" is an appropriate similarity to contemporary times.
Divine right was based on a metaphysical assertion. Despite "ultimate authority," kings engaged "intellectuals" to provide supporting propaganda for the claim. Their efforts worked for a long time. As late as 1729, Thomas Paine saw fit to speak about the lingering right of heredity:
We do not believe in the divine right of elected representatives, although some of the our representatives seem to.
The interesting parallel to today is the ancient regimes' use of "intellectuals" as court propagandists. The same model exists today. The propagandists who led our country to its current dismal state, it seems to me, are economists. Today's metaphysicians are called economic advisors. The Keynesian model is their tool for increased and activist government.
To many, the Keynesian myth is every bit as metaphysical as the divine right of kings. Gary North provides an evaluation that should unnerve Keynesians: "Ever since the third quarter of 2008, the nation's nominal GDP has increased by a tiny $100 billion, but the Federal debt has increased by 25 times the GDP increase."
It has taken $25 of federal deficits to produce $1 of GDP growth. This marks a major anomaly for Keynesian economic theory. The justification for government deficits in Keynesian theory is that government spending restores economic growth. Money spent by the private sector does not increase economic growth in a recession; government spending does. This has never made any economic sense, but now the non-response of the economy is exposing this original nonsense for what it always was: nonsense.
The ineffectiveness of Keynesian policies is a surprise only to those who worship at the Keynesian Temple. Many non-Keynesians accurately predicted that recent interventions would make conditions worse.
The Faustian bargain between some in the economics profession and the political class was struck after Keynes' General Theory was published during the Great Depression. Keynes' ideas provided cover for politicians to take increasing control of the economy due to its alleged instability. Government management was deemed necessary for consistent growth and wealth creation. For politicians, that was nirvana. For economists, it provided wealth and power in the form of government service. All they had to do was please the king and his court.
The Faustian partnership is now unraveling, despite the protestations of Keynesians. Worshipers like Paul Krugman claim that the economy would be worse if the Keynesian potions had not been applied.
The sacrosanct Keynesian paradigm is never doubted by true believers. All problems are assumed solvable by injection of more poison into the patient. There is no other solution. If results are less than expected, it is always the fault of practitioners who failed to administer enough medicine in a timely manner.
As the world economy implodes, the mountebanks are increasingly seen for what they are -- descendants of the court advisors who supported the divine rights of kings. They are alchemists paid to support the divine right of government. It is their role to provide the intellectual support for the growth of government at the expense of the will of the people. These paid political hacks are little different from prostitutes or hired guns. They are the whores of the economics profession.
Let me be clear that I am not calling all Keynesians whores. Some are just plain ignorant. (Neither category is flattering.) Many are technocrats who have mastered mathematical techniques from prestigious universities. Like idiot savants, they are brilliant with models but not intelligent enough to know that aggregate models have nothing to do with individual human behavior. A wag's characterization of Paul Samuelson seems appropriate to describe these types: "He is the best physicist that the economics profession has ever produced."
Now their franchise is in danger. Their fingerprints are all over disasters like the Post Office, Amtrak, Medicare, Medicaid, Social Security, Fannie Mae, Freddie Mac, and too many others to mention. Despite their best efforts and promises, there is no recovery coming in the economy. Keynesianism is under attack around the world.
It is during times like these that paradigm shifts occur. Thomas Kuhn wrote about the difficulties of such shifts in the natural sciences. Vested interests are not easy to overcome, even with contradictory data. That does not bode well for changing the Keynesian paradigm in the social sciences, where the vested interests are more numerous and powerful.
There are reasons to be pessimistic:
First, virtually every politician and bureaucrat favors the status quo. It has produced pay, retirement benefits, power, and prestige relative to their counterparts in the private sector. There is no risk of unemployment or of your employee relocating or going out of business. It is a sheltered, overcompensated life that few would willingly change regardless of political affiliation.
Second, big media favors big government and big spending. They understand little about anything, especially economics. The Daily Bell discussed this shortcoming with respect to Time Magazine's recent article on economics and concluded:
Third, major corporations are dependent upon various corporate welfare items, contracts, and tax loopholes that they are unwilling to give up.
Fourth, 47% of individuals pay no income tax. These individuals have the incentive to vote for larger government because they are "free-riders."
Fifth, the elderly receive Medicare and Social Security. Presumably, they paid into these systems during their earning years. When someone talks about government reform, they see their primary source of income threatened: "They are trying to take away my benefits. How will I live?"
Sixth, the balance of the population is generally unable to determine whether they are winners or losers from government. There are too many programs and regulations to make such a calculation. Many deem a particular program or regulation good because they do not know its costs. Even if proper cost determinations could be made, the calculation is terribly biased because of deficit spending. Deficit spending is close to 50% of total spending. If people compare what they pay in taxes as the costs of these programs, they fool themselves by being biased toward government spending.
Seventh, intellectual arguments cannot overthrow the Keynesian paradigm. Unlike the natural sciences, replicated laboratory tests of a hypothesis are not possible. Proof in the social sciences is never as definitive as in the physical sciences.
Vested interests are much greater than what Kuhn described in the natural sciences. No constituent group supports a move toward smaller government. Eventually the truth outs, at least in the natural sciences. Will that happen in the social sciences? Will we overthrow the false paradigm of Keynesian economics? Will big government be able to be rolled back? These are questions the answers to which only the passage of time will reveal.
The Keynesian paradigm has gone on too long. It is likely that it cannot continue much longer. Rational evaluation will not kill it. It will die from self-immolation. It will perish in the flames that consume our economy. Consensus that it is dead will probably come only when the economy has reached a similarly terminal condition.
One hopes that this tragedy unfolds fast enough that our freedom still remains. If so, we will rise from the ashes painfully but quickly. If not, the world may enter an Economic Dark Age.
Monty Pelerin blogs at www.economicnoise.com.