The Curse of Keynes

Lew, those people at Faux News pretty much are repeating the Keynesian canard of spend, spend, spend. No “prominent” economist ever has publicly trashed the “circular flow” analysis that dominates the college textbooks.

First, most of the “good” economists call themselves “microeconomists” and pretty much will say, “I don’t know anything about macro.” I have heard that statement more times than I can count. Second, in their ignorance of macroeconomics, they have defaulted to the Keynesian position, so even the free market texts like Gwartney-Stroup and Ekelund-Tollison have the standard Keynesian arguments in their macro sections, complete with the “circular flow” and “aggregate demand/aggregate supply” explanations.

(If you want to see the “circular flow” model debunked, read this account by Bob Murphy. This is a model that literally depends upon circular logic.)The underlying problem is that most economists have no decent training in the study of money. None. Almost all of them see money as something that is created by the state — and they agree that such a state of affairs is proper — and they hold to a quantity view of money and price levels. (There is nothing wrong with the quantity view of money in the abstract, but such analysis misses the real workings of money in the economy and almost no economist whom I know — except the Austrians — understand how changes in the supply of money affect relative prices.)

It almost is impossible for any other view of money to break into the academic scene, unless a teacher does something outside the text. I have to teach such viewpoints in a way that are not compatible with the arguments that the typical textbook is making, so students often are confused. The Austrian position is said to be “discredited,” not because its arguments are false, but because economists don’t put this position in their texts, or if they do, they insert a caricature of the theory, not the real theory itself.

(The Chicago School economists declare that the Austrian position has “failed the market test.” Why has it “failed” such a “test”? Because it is not in the textbooks, which means that economists don’t think it is relevant. The Chicago argument NEVER addresses the actual content of Austrian Economics. It just says that because economists think that the caricature of Austrian Economics is bad, it must be bad because economists think it is bad.)

Because economists are not well-trained in the area of money, it is almost impossible for them to understand business cycles. Thus, they really believe that the source of business cycles is found in that nonsensical term, “aggregate demand.” If business is slow, it is because aggregate demand is down, and so on.

Thus, we have the sorry scene of a recent Nobel Prize winner, Paul Krugman, endorsing absolutely irresponsible behavior by the government to borrow and spend and to destroy savings by individuals. Yet, if you want to see how the Keynesian and Austrian theories play out side-by-side, watch some Youtube presentations of Peter Schiff and other economists such as Arthur Laffer (who, despite his “supply-side” credentials, really relies on the Keynesian analysis) and others. Peter explains — and predicts — what has been happening, while the others fall on their faces.

We finally see the Keynesian end game, and it is not pretty to watch.

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6:34 am on November 27, 2008