Monday, December 1, 2008

The Legacy of Lord Keynes (amv)

by Peter Boettke:

Greg Mankiw argues in the NYT that John Maynard Keynes is the most important "defunct economist" to learn from for 2008. Tyler Cowen proposes to do a book club reading on his blog for Keynes's General Theory. In the comments section Barkley Rosser predictably (irony intended) suggests that chapter 12 is the key to unlocking the mystery of our current mess. On could just as easily point to Keynes's 1937 article summarizing his core ideas on our being "engulfed in the dark forces of time and ignorance."

Now I am all for reading and debating economics, and so I don't have an objection to another public forum discussing Keynes's contribution. But I also think that the emphasis on Keynes demonstrates a collective delusion among economists. Even Milton Friedman can be quoted as emphasizing Keynes's brilliance.

But what of Knight's judgment that "what is new isn't true, and what is true isn't new", or of Hayek's judgment that Keynes's idle resources argument assumes a post-scarcity world, or of Mises's judgment that Keynesian economic policy assumes the miracle that stones can be turned into bread?

The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations. We have Keynesian theory, the development of Keynesian inspired data collection, the "testing" of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy. This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy. All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.

Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one) Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt's The Failure of the "New Economics", graduate to W. H. Hutt's The Keynesian Episode, and then read closely Buchanan and Wagner's Democracy in Deficit and then Higgs's Crisis and Leviathan and War, Depression, and Cold War.

Sincerely, you want to know what is going on in 2008 --- it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940. We are living through the consequences of Keynes's ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.

Hayek warned us about the "tiger by the tail" problem of inflation and Buchanan warned us about the destruction of the "old-time fiscal religion" due to Keynesianism. Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for "growth accounting" in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through. I am sure stating this sentiment this way will qualify me as a "wing-nut" in Brad De Long's classifications, but instead of admitting my "wing-nutness" I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt. Somehow I doubt that will take place in our current intellectual and policy context.

So by all means join Tyler in his book club and re-read The General Theory, it is a very important book to read thoroughly and critically understand. But I would suggest that you read Keynes alongside the books I suggested above and with the Hayekian and Buchananite perspective on the legacy of Lord Keynes with respect to monetary and fiscal policy.

Keynes isn't the intellectual solution to our current woes, his ideas are one of the primary reason we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036. Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place. Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.