Keynesianism's Long March to the Dustbin of History

We read on Wikipedia:

The phrase “ash heap of history” (or “dustbin of history”) figuratively refers to the place to where persons, events, artifacts, ideologies, etc., are relegated upon losing currency and value as history. A notable usage was that of the Russian revolutionary Leon Trotsky referring to the Mensheviks: “You are pitiful, isolated individuals! You are bankrupts. Your role is played out. Go where you belong from now on — into the dustbin of history!” in response to the Menshevik faction walking out of the All-Russian Congress of Soviets (25 October 1917) in Petrograd, which allowed the Bolshevik faction to dominate the party. In a speech to the British House of Commons (8 June 1982), U.S. President Ronald Reagan said that “freedom and democracy will leave Marxism and Leninism on the ash heap of history.”

It is now the Keynesians’ turn to join the losers of history.

They do not see it. Their critics do not see it. But it is a fact.

Allow me to shift metaphors away from the ashcan of history.

One of the most inspiring stories in the Bible is the story of the final night of the rule of the Babylonian Empire.

The Bible does not tell us what had happened. We know from secular history what happened. The general in command of the Medo-Persian forces had ordered his troops to redirect the Euphrates River to bypass the city. This left the river’s entry point into the city undefended. The Army streamed into these undefended points and conquered the city.

The rulers of the city had not seen it coming. They should have seen it, but they didn’t. They undoubtedly had reconnaissance information on the fact that the Medo-Persian army was at work up the river to redirect the river. But they did not respond fast enough. They did not see what was coming.

We may see this in retrospect as abnormal, but it is normal. Rulers at the end of the dynasty or an empire think it will go on forever. It may not last the night.

We are told that the King of Babylon invited the prophet Daniel to assess the situation. There follows one of the most famous incidents in the Bible.

At a banquet, a holy ghostly hand had written words on the wall. This terrified the king and his guests. He called in Daniel to explain. He had previously ignored Daniel.

25 And this is the writing that was written, Mene, Mene, Tekel, Upharsin.26 This is the interpretation of the thing: Mene; God hath numbered thy kingdom, and finished it.

27 Tekel; Thou art weighed in the balances, and art found wanting.

28 Peres; Thy kingdom is divided, and given to the Medes and Persians.

29 Then commanded Belshazzar, and they clothed Daniel with scarlet, and put a chain of gold about his neck, and made a proclamation concerning him, that he should be the third ruler in the kingdom.

30 In that night was Belshazzar the king of the Chaldeans slain.

31 And Darius the Median took the kingdom, being about threescore and two years old.

From this, we get the saying: “The handwriting is on the wall.”

The handwriting is on the wall for Keynesianism.

THE POWER OF COMPOUNDING

In his remarkable 2001 article, “The Law of Accelerating Returns,” Raymond Kurzweil described the decline in the cost of information, beginning in 1890, and extending to the year 2000. If he had taken it back to 1844, he could’ve made an even stronger case, but the data are less clear. He began with the census of 1890, which was the first census to use punch cards.

He said that the cost of information fell by 50% every three years from 1890 to about 1950. Then, with the development of vacuum tube technologies in computers, it fell by 50% every two years. Then, sometime around 1965, with the development of transistor technology, it began to fall by 50% every 18 months. He said in 2001 that he believed that it was falling by 50% every 12 months.

Nothing like this has ever happened in the history of man. There has been no compounding process that continued for this long a period. This process is now approaching what some people call a tipping point. Others call it an inflection point. Kurzweil called it the upward move of the exponential curve. Whatever we call it, we are now in the middle of it.

In a follow-up article in 2003, Kurzweil made a fundamental point that has not been recognized by free-market economists, Keynesians, or social theorist in general. The rate of change, meaning the compound decline in the cost of information, was in no way slowed during the Great Depression. The world economy stopped growing for a decade, but the compound decline in the cost of information continued throughout the decade. He said this also applied in both world wars.

We don’t absolutely know what the future will bring, and if you look at the models, they’re absolutely linear. We don’t take into account this law of accelerating returns, which is absolutely a factor.If you look at the economy as a whole, either per capita or just the total economy, it is growing exponentially. But the various recessions, even the Great Depression, are relatively minor features that you really see in this chart that is a big exponential. And what’s interesting is that when the recession is over, including the Great Depression, it starts back to where it would have been had that never occurred in the first place. It does not represent even a permanent slowing down or delay in the underlying exponential.

The really pervasive phenomena is the exponential growth. We have exponential growth in productivity. Even that is understated because we’re measuring the value in dollars of what can be accomplished. But what can be accomplished for a dollar today is far greater than what could be accomplished for a dollar 10 years ago.

Computation is not the only technology that is growing exponentially. Communications, bandwidth, speed and price performance–both wireless and wired–are also doubling every year. Biological technologies, the price performance of base pair scanning, for example, have doubled every year.

George Orwell was correct: we find it difficult to see what is under our noses. let me briefly mention what has been under my nose ever since I read this article over a decade ago. It means that, with respect to the most important transformation of modern times, the exponential declining cost of digital technologies, Keynesianism has not been able to deflect the spread of these technologies.

Keynesianism can affect which special-interest groups benefit and lose as a result of these technologies because Keynesianism can control the allocation of physical resources. But Keynesianism cannot control the spread of information itself. This means that, at the core of the economic system, Keynesianism is impotent.

As bad as Keynesianism is, and as bad as regulation is, it can only marginally affect the transformations that are taking place today. These regulations can have major affect when they apply to individuals who are caught in the web of regulation. These regulations can affect the supply and quality of goods that are produced through large-scale physical production systems. The regulators can squeeze large companies. They can put small companies out of business. But what they cannot do is in any way retard the compound growth effects of information technology.

So, it really does not matter for the long run that the Keynesians are in charge. They can stretch out their control with respect to certain kinds of physical production. They can stretch it out with respect to certain kinds of licensing and regulation. But the steady compounding effects of the decline in the cost of information are going to overwhelm all attempts by all governments to keep social and economic change on government approved pathways. There really is no way for governments to do anything, including fighting a war, to stop the progress of digital technologies.

Regulatory actions can and do affect the kinds of innovations that take place. It especially can affect the kinds of applications of new digital technologies. These statist interventions are almost always negative. They protect some special-interest group. But, in the long run, meaning over the next 40 years, the whole Keynesian regulatory structure is going to collapse. Why? Because we are reaching an inflection point. We are reaching the point at which the exponential curve turns sharply upward. There is no way for the regulatory agencies to keep up with what is now taking place under their noses.

I see this as good news. It is good news for liberty, and it is bad news for the arrogant theorists of Keynesian central planning, the arrogant tenured bureaucrats of central banks, and the protected employees of virtually every other government-regulated industry or profession. These people are going to be replaced, and they are going to be replaced within three decades, or four at the most. They are presiding over the final stages of the illusion of central planning.

It has already happened to the socialists. History tossed them into the dustbin when the Soviet Union went belly-up in 1991. It was all over but the shouting at that point. Almost nobody defends socialism as an ideology these days. Nobody gets a hearing. They want to call themselves liberals. They want to call themselves Progressives.

The central planners cannot stop the arrival of the exponential curve of liberty and voluntarism. Maybe they can slow it down at the margin, but I doubt it. If the Great Depression did not slow it down, Janet Yellen cannot slow it down. Janet Yellen and her crew of bureaucrats are the only ones in a position to slow it down. The politicians can barely affect the process.

This should be under your nose. Think through your own profession, your own career prospects, and the legacy you expect to leave behind. Think it through in terms of an increase in the rate of technological change, and a decrease in the products of all digital technologies.

The days of wine and roses are coming to an end for the Keynesians. The ashcan of history awaits them. I will do what I can to speed up the process, but I don’t think I can speed up the process. I can only prepare you and other readers by pointing out what should be obvious.

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