So, you want to understand what happened to the economy in 2008? I have an answer. It's a poem.
Why a poem? Because people can follow a poem, if it's not too poetic, better than they can follow detailed chains of economic reasoning.
Poems can have great influence. It is safe to say that the most influential poem in the history of the West is the 23rd Psalm. It has shaped how we look at personal cause and effect in history. I argue that the second most influential poem has been "The Grumbling Hive," better known as the "Fable of the Bees." The original was published in 1705. The update, published in 1714, was accompanied by two fat volumes of social theory based on the poem. The book is still in print.
The author, Bernard Mandeville, was a dentist in England who had immigrated from the Netherlands. His poem was meant to shock, and it did. Its subtitle was "Knaves Turned Honest." It is the story of society. Society is filled with knaves in every field. He begins, appropriately, with lawyers. Then he goes to physicians, then priests, then soldiers, then advisers to kings. They cheat. They lie. They grow rich. And they spend.
That is the key. They spend. If they ever stop spending, the economy will collapse. They buy luxuries and vices. These create employment. The wheels of commerce, he was saying, are lubricated by knavery.
The poem created a scandal. So did the book that followed. F. A. Hayek wrote that by 1720, every intellectual in Europe had read it. It was widely condemned as an attack on morality. Adam Smith's teacher, Francis Hutchison railed against it constantly half a century later. Smith also takes a shot at it in his The Theory of Moral Sentiments (1759).
Yet the heart of the poem was its theory of economic causation. Mandeville tied the economy to individual decisions. These shape the economy, not social planning. This was a radical concept, and Smith adopted it in The Wealth of Nations, even though he attacked the poem in The Theory of Moral Sentiments.
The poem was the first grand presentation of Keynesianism. It says that spending, as spending, is the source of wealth. It rests on the fallacy identified by Frédéric Bastiat in the mid-19th century, what we now call the fallacy of the broken window. It is the fallacy of the thing not seen. Break a window. The owner must now spend money to get it fixed. This creates demand.
This is the heart of Keynesianism. The governments' solution to the Great Depression, 1931—36, was deficit spending. Keynes saw this, changed his economic views (again), and wrote a convoluted defense of this: The General Theory of Employment, Interest, and Money (1936). It made him famous. The missing discussion was this: "Where did the government get the money to spend?" He failed to trace back the origin of wealth. So did Mandeville.
With the vast deficit spending and central bank inflation in 2008, wavering economists returned to the Keynesian fold after three decades in the free market wilderness. Just as deficits and central bank inflation persuaded Keynes to abandon his somewhat free market views, so did government policies persuade non-Keynesians to capitulate in the name of pragmatism in 2008.
I offer this poem as a way for you to understand Keynesianism better. You can follow my poem. You cannot follow the text of The General Theory. If you think I'm wrong, give it a try.
As the author, I authorize you to reprint it, post it, mail it, or do whatever you want with it without permission or payment of royalties. Poems deserve to be read. Maybe someone will make a rap song out of it.
A hive of bees is in a field,
Within a climate sunny.
It will survive to multiply
If work supplies the honey.
The queen supplies a stream of eggs
Which soon turn into workers.
Except for one dependent class
Who live full-time as shirkers.
These are the drones, and every hive
Supplies them with a living.
They dance and sing and whoop it up,
Consuming, but not giving.
The drones spend days and nights enthralled
By pleasures of a season.
Convinced that life is far too short
To waste on prayer or reason.
They are supported by the queen,
The mistress of seduction.
She has a plan to make them wish
They'd labored in production.
But that comes later, this is now.
Each drone, content, relaxes.
So, worker bees work extra hard
And grumble at the taxes.
And so, drones while away their time
In games and food and squander.
That is her plan, because she knows
That drones are prone to wander.
The drones play on and on for weeks,
Oblivious to hunches
That there might come a time to pay,
For hives have no free lunches.
To serve the drones, some other bees
Supply a range of vices
That only queens can subsidize
So high are vices' prices.
But where, you ask, does cunning queen
Accumulate the treasure
That celebrating hordes of drones
Can waste in weeks of pleasure?
The hive itself, without a plan,
Produces streams of honey.
The system runs on payments made
In liquid golden money.
The queen has passed a law of iron
That drones must gain a portion
Of honey gold, which they will spend,
Which workers think extortion.
So, in the hive two classes form
Which scheme like rival brothers
To profit from the hive's output
Without the claims from others.
One class grows rich by selling goods
To drones, who live by spending.
The other class works day and night,
In labor never-ending.
The drones grow fat, and specialize
In ever-greater pleasures.
While worker bees begin to plan
A host of counter-measures.
The workers come before the queen
Ten thousand wings a-humming.
She says to bide their time instead;
Payday is surely coming.
They are not sure she speaks the truth,
But great is their devotion.
They give her time to prove her case,
Suppressing dark emotion.
The merchants of the drones grow rich.
For honey flows like water.
The hive's economy hums on,
And drones foresee no slaughter.
The drones resent worker bees
Who grouse about the favors
Displayed to drones, who spend the wealth
Produced by others' labors.
They set aside some honey sweet
To purchase a solution:
A group of masters of the arts
Of specious elocution.
These hired experts write reports
That show that flowing honey
Can only be preserved intact
If drones are spending money.
They say that worker bees do not
Perceive what makes hives wealthy.
To stop the flow of funds to drones
Is fiscally unhealthy.
You see, they say, the flow of funds
Must without drones be severed.
Without our drones, the stimulus
Can't save the banks, full-levered.
Without the banks, which serve the drones,
As well as worker legions,
The wealth of all will disappear
Into the nether regions.
So, we must save the hive without
The envy-driven blaming
Of useful drones who make us rich
By partying and gaming.
The worker bees do not perceive
How this concatenation
Of arguments implausible,
is valid explanation.
But these are experts with degrees
From famous institutions,
Which get their funding from the queen
And rich bees' contributions.
Therefore, the worker bees begin
To doubt their own suspicions
That drones are liabilities
Not worthy of provisions.
The hired experts collect their pay
For having duped the masses.
Then chortle in contempt of those
Whom they regard as asses.
They take their graphs and charts and chalk
And go back to their places
Of tenured and secure success
With academic graces.
And so the drones indulge themselves,
Which they find stimulating.
For that's what stimuli are for:
"Let's not be hesitating!"
Whenever their accounts run low,
And bankers grow suspicious,
The queen expands the flow of funds,
Which bankers find delicious.
And so the lending class gets rich,
For drones have endless shop lists.
To lend to them is safe, they think,
The queen will never stop this.
The lending class then borrows short
To lend long-term to spenders,
Short rates are low, long rates are high:
The system has defenders.
The experts back on campus see
The many permutations.
They think that they may strike it rich:
And so the tenured quants come forth
To serve the lending classes.
Who borrow even more from fools
Who wear rose-colored glasses.
And so the permutations spread
Throughout the hive's insiders
Complexity now reigns supreme,
With kooks the sole deriders.
And then, one summer's day, the queen
Calls forth her close attendants.
She lays the eggs that will decide
The future of descendants.
Each egg is fed, at her expense,
To test the heirs' survival.
One will emerge first and impose
A death sting on each rival.
Then up she flies, drones in pursuit
In hope of one last action.
A few achieve what all would like:
Their last full satisfaction.
"Payday has come," the queen declares.
"Free lunches now have ended."
The worker bees blockade the hive,
The golden fund defended.
The drones, now spent in every sense,
Beg for continued feeding,
But worker bees ignore their pleas:
The new hive needs no breeding.
Word spreads among the lending class:
The formulas so splendid
Have crashed the flow of funds outright:
And then the sellers who rode high
On drones' relentless spending
Discover they must switch careers:
Their sector is descending.
The money that the drones had spent
Will now be spent by others.
The queen cuts taxes and declares:
"You now can have your druthers."
The flow of funds continues on,
Though drones are not surviving.
The experts with their charts and graphs
Were wrong: the hive is thriving.
The lending class must now survey
The shape of new conditions
Without the hope of queen-backed funds
To guarantee ambitions.
The tenured experts, still employed,
Release a memorandum.
They all insist that these events
Were all black swans and random.
And so we see that scarcity
Asserts its jurisdiction.
There's greater wealth for workers now,
Due to the drones' eviction.
The worker bees survey the scene
Of greater wealth for labors.
There's always more down at the store
When drones are not your neighbors.
One worker bee begins to think
About the drones' defenders.
The tenured masters of the charts
Who justified the spenders.
"It seems to me," declares the bee,
"That other drones are living
High on the hog, beyond the rules:
They're taking without giving."
Considering consumption by
Those bees in tenured splendor,
The other bees begin to doubt
Their claims to legal tender.
Why should these experts with their charts
And graphs and dense equations
Be paid by all to generate
What is the use of expertise
When experts tell you little
Of what will happen next, and why?
They're always noncommittal.
And so a wave of terror spreads
In tenured education.
To meet a market on your own:
A frightening innovation.
They live secure from having to
Explain their public errors.
Without the queen's own guarantees,
The world is filled with terrors.
And so they send a delegate,
A master of compliance,
To once again persuade the queen
Against their self-reliance.
She welcomes him into her court,
And smiles at his submission.
She loves to see her experts squirm
When facing competition.
"My queen," he says, "you must beware
Of worker bees' complaining.
You still get value for your grant
Of pay for all our training."
"We serve the court, and serve it well,
Delaying that dark day.
When worker bees at last decide
It's time to disobey."
"I see your point, and see it clear,"
She says to feckless minion.
"You serve me as the shapers of
The climate of opinion."
"And so I'll still extend your pay,
To guarantee the ridding
Of competition's terrors,
But you all will do my bidding."
"We've always understood the deal,"
Is his firm declaration.
"When it comes time to praise the court,
Expect no hesitation."
And so the minion brings the news
For academe's elation.
Between the market and the school:
A wall of separation.
So now I end my poem short
On hival operations,
On politics and pay and deals,
And queenly expectations.
But this one fact I hope prevails
From the incidents you've seen.
There's always value rendered sure
For benefits from the queen.
July 17, 2010
Copyright © 2010 Gary North