There was a time, some 50—60 years ago, that many people thought smoking was good for you. Today we know that this was just an excuse we liked because it provided cover for what we wanted to do: smoke. Today, people smoke anyway even though we know for sure that it is not good for us. At least the illusions are gone.
Keynesianism is both similar and different. Sixty years ago, governments attempted macroeconomic stimulation through spending, debt accumulation, and eventual inflation and taxation. They thought it was good for us. It turns out that it wasn’t good. Nothing has failed so often and in some many places and under as many unique situations as Keynesianism.
Why did governments continue to do it, and why do they do it today? Because they want to, and for the same reason that people smoke. The subjective pleasure it provides the institution exceeds the serious health risks. The heck of it is that they still claim, despite all evidence, that it is good for us too.
Listening to Obama (and Bush before) tout these “stimulus packages” is not that different from hearing cigarette ads from the 1930s—50s.
To understand more deeply, the analogy with smoking breaks down. Governments do like Keynesianism because it is good for them, but the rest of us pay the price. Keynesianism brings in massive new revenue to spend on projects important to the government and the politicians in power.
Visit Washington as I did last week and you will see something amazing. It is a boom town, and as never before. Construction hasn’t slowed, the stores are packed with inventory, there are no liquidations, the office market is holding up, vacancies are down not up, and even the high-end stores are packed with people spending like it’s 2007.
That is not surprising after several rounds of stimulus in which trillions have been sucked out of the private economy of the rest of the country. The Imperial City is booming even as the rest of the country is suffering. Keynesian is certainly good for them, but it is not for us.
Hence it is not completely crazy that a discredited economic doctrine — failures piled upon failures — could have such a sway over existing economic policy. Listening to the blather from the beltway, you would think that John Maynard Keynes had all the answers. It’s very foolish to believe it.
The Keynesian Episode is W.H. Hutt’s outstanding defense of Say’s Law — which proved the stability of the macroeconomy under market conditions — against its Keynesian detractors. Hutt shows that the market-based macroeconomy needs no correcting from Washington in the form of fiscal stimulus or anything else. Keynes had merely asserted that Say was wrong but never proved a thing. His 450-page book is an evisceration of Lord Keynes’s central ideas.
What does this suggest about our current moment? The government caused the problem in the first place. Only the market can correct the problem now. Any attempts at stimulus only delay the necessary correction. The right response to the downturn is to let the market work, which means that the government needs to pack its bags and go home, wherever that is.
It wasn’t long after the Keynesian Revolution that V. Orval Watts warned his fellow economists that Keynesian really meant the death of liberty itself. What Watts offers in Away From Freedom is a freshness that comes with seeing his colleagues abandon the old liberal creed — the very mark of the old economics profession — in favor of a new planning mindset that followed the New Deal and World War II.
What’s more, he shows that Keynesianism isn’t really new but is merely a restatement of old fallacies that were long ago refuted. “Keynes did little if anything more than use new terms for old ideas,” he writes. Watts zeros in on core errors. This book had a powerful impact on a generation — a kind of primer on Keynesian fallacies that still pervade the profession if not by that name.
Meanwhile, Henry Hazlitt in The Failure of the New Economics did the seemingly impossible, something that was and is a magnificent service to all people everywhere. He wrote a line-by-line commentary and refutation of one of the most destructive, fallacious, and convoluted books of the century. The target here is John Maynard Keynes’s General Theory, the book that appeared in 1936 and swept all before it.
In economic science, Keynes supposedly demonstrated that prices don’t work, that private investment is unstable, that sound money is intolerable, and that government was needed to shore up the system and save it. By the 1950s, almost everyone was Keynesian.
But Hazlitt, the nation’s economics teacher, would have none of it. And he did the hard work of actually going through the book to evaluate its logic according to Austrian-style logical reasoning. The result: a 500-page masterpiece of exposition. It stands alone as the only attempt, and the attempt was so successful that it is not likely to be attempted again.
Every bad idea has its forerunner. His ideas were around in the 1920s as well but under different names. One adherent was the German banker L. Albert Hahn. But he saw the light. And when Keynes came out with his book, he zeroed in on the errors with incredible precision. He too wrote an unforgettable book in 1949 that should have settled the matter forever. It is called The Economics of Illusion. Mises himself thought very highly of this work.
There is nothing you or I can do about the way in which the Washington propagandists continue to claim that Keynesianism is good for us. They want us to buy the product — or rather to be sanguine as they loot us to pay for the product that they consume. But you can do the most important thing: educated yourself and others in the truth.