The economic crisis has provided much fodder for the Keynesians' cannon. They hope it will usher in some sort of revival of their absurd ideas, even though they never really went away in the first place. We are told that the Fed-induced credit and housing bubbles were what happens under a "free market." After they burst, pundits and politicians went running for cover under Lord Keynes's cloak.
And the media followed them. The New Yorker, in its quest to make the world safe for social democracy, never passes up an opportunity to bash the free market, even when none exists. You can find the latest pro-state piece in the January 11, 2010, edition, in which John Cassidy writes about Richard Posner's recent conversion from the "laissez-faire" economics of the Chicago School to Keynesianism, which, according to Posner, "seems to have more of a grasp of what is going on in the economy."
Let's take a step back. Posner, first of all, is not an economist. He is a law professor, judge, and jurist known for applying economic concepts to the study of law. For years he aligned himself with the Chicago School, and his work focused on economic efficiency in terms of legal concepts. He is known for the sort of hard-nosed pragmatism embedded in the Chicago School from its dean, Milton Friedman. (To those ignorant of the Austrian School, the Friedmanites are as close as it gets to Wild West capitalism.) Posner, in addition to dealing with the economic crisis, is also grappling with a crisis of faith. Enter Keynes.
Cassidy's piece contains some hilarious, if unintended, punchlines. The best part was a quote from Posner's September 23, 2009, essay in The New Republic, in which he declared his love for Keynes. Among the good judge's reasons: he believes Keynes's General Theory is "the best guide we have to the crisis."
This is funny for many reasons, not all of which I am able to list. First of all, it's not readily apparent how the General Theory could be a guide to anything – except perhaps intellectual masturbation, which is how most academics get tenure. It's an abstruse book, largely incoherent, full of illogic and aphoristic arrogance. Few people read it anymore, and those who do (none of them Keynesians) are seeking either a good laugh or a chance to sample some quaint British literature.
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The point is that, since the Great Depression, liberal economic theory has strayed from the General Theory and has undergone significant transformation. One wonders, then, why Posner has gravitated toward a book that even Keynesians have repudiated or revised to varying degrees. In fact, why trust the Keynesians at all? Posner's logic is fuzzy: "We have learned since September that the present generation of economists has not figured out how the economy works," Posner has written. "The vast majority of them were blindsided by the housing bubble and the ensuing banking crisis; and misjudged the gravity of the economic downturn that resulted…."
This is indeed a baffling statement, since the "present generation of economists" of whom Posner speaks includes Keynesians. In fact, they were among the most clueless of the bunch when it came to the whole debacle. But ignorance should be expected from mainstream types. According to left-liberal economic history, Keynesianism died sometime in the seventies, alongside the Phillips Curve. Since then, it has lain dormant while we've been ruled by three decades of "unfettered" laissez-faire, courtesy of the Friedmanites. Now, since the Chicago School has been discredited, this means we should return to Keynesianism, right?
Actually, this means something else: They're both wrong. Both the Keynesians and the Chicagoans have failed. They don't understand money, inflation, and, most important, business cycles. Friedman's monetarism was crackpottery of the same mold as Keynes's "animal spirits." Ought we to continue see-sawing between two failed schools of economic theory? No way. It's a false choice. Both the public and the media need to learn economics.
And Cassidy's article proves this because, like most pieces of mainstream journalism, it is ignorant of the Austrian School. Unlike Keynesians and Friedmanites, Austrians saw the collapse coming and have been able to give a play-by-play explanation of the carnage. Peter Schiff, for instance, mops the floor with the financial pundits he debates, and other Austrian-minded economic commentators – Ron Paul, Jim Rogers, Marc Faber – continue to explain things cogently even as Beltway types spout the same nonsense.
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When it comes to economics, The New Yorker is to the right of The Nation and perhaps a bit to the left of The New Republic – you know, those "liberal" magazines. Cassidy, for his part, practices solid journalism: he interviews several Friedmanites, all of whom come off as bumbling hacks. In one instance, Eugene Fama, a "finance specialist" at the University of Chicago Booth School of Business, declares he doesn't know what a bubble is: "I don't know what a credit bubble means," he said. "I don't know what a bubble means. These words have become popular. I don't think they have any meaning." Cassidy writes that this man wasn't kidding.
A Chicago Schooler who's ignorant of the boom-bust cycle? Is this any surprise? For the past few decades, the Chicago School has done as much to damage free-market economics as Keynesianism. Sailing under the fraudulent flag of laissez-faire, they have pushed Fed-based monetary policy and given socialists everywhere the ammo needed to deride the market when it inevitably fails.
I really don't want to knock the legacy of Milton Friedman. His shortcomings aside (advocating a negative income tax), he was an amazing spokesman for liberty. Now that he is dead, leftists delight in painting him as the Satanic Machiavellian behind Reaganomics and the Pinochet junta. Naomi Klein likes to think he was probably the one driving the tanks through Tiananmen Square – or at least controlling them by remote from the University of Chicago. Were he still alive, Friedman would dispatch these lunatics with his wide grin and rapier debate skills.
I will, however, gladly knock John Maynard Keynes. He was a fraud through and through, an academic huckster, the economic equivalent of a phrenologist. The policy prescriptions gleaned from his quackery have destroyed untold amounts of Western wealth and robbed millions of their savings through debt, taxes, and inflation. This is not a legacy we need to revive. It is one that we must bury.
Posner, in the meantime, should stick to law and leave economics to the Austrians.
February 4, 2010
Robert Wargas [write him mail] is a writer who lives on Long Island, New York.