Right wing Chicago Keynesians

Re Cochrane, John H. 2014. “An Autopsy for the Keynesians.” December 22;
http://www.wsj.com/articles/john-h-cochrane-an-autopsy-for-the-keynesians-1419205362

An open letter to John Cochrane
By Walter E. Block
Dear Professor Cochrane:
Your recent critique of the Keynesians was nothing short of magnificent. As an Austrian economist, I praise you to the skies. Your litany of their many and serious failures was superb. I especially appreciated these valuable nuggets:
“Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.”

And this one too: “In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume.”

Nor can I pass up this splendid gem: “Keynesians tell us that ‘sticky wages’ are the big underlying economic problem. But why do they just repeat this story to justify inflation and stimulus? Why do they not advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier?”

Rather than repeat your insightful essay in its entirety, which I am very much tempted to do, let me offer you a bit of gentle criticism. I spy a bit of a problem for you, since you are not a member of the Austrian school, but, rather, a different type of, wait for it: Keynesian! That is, in my view, there are the fiscal Keynesians, and the monetarist Keynesians. Both adhere to the doctrines of aggregate supply and aggregate demand. Both are guilty of supporting the false doctrine that the free market is inherently unstable, liable to veer off, at any time, into inflation or depression. They differ on one thing and one thing only: the left wing Keynesians centered at Harvard and MIT believe the way to handle these supposed market imperfections is through fiscal policy, while the right wing Keynesians such as yourself, and others preeminently from the University of Chicago, support monetary policy. It was not for nothing that Milton Friedman said, “We are all Keynesians now.”

Here is the context of that quote:

“This slide from Keynesian theory to particular policies was well illustrated in his seventh edition (1967), when Samuelson cited a statement by Milton Friedman, “We are all Keynesians now.” However, at the end of chapter 11, Samuelson (7:210) then referenced the full quotation from a 1966 interview of Friedman in Time magazine: “As best I can recall it, the context was: ‘In one sense, we are all Keynesians now; in another nobody is any longer a Keynesian.’” Friedman (1968, p. 15) would later put it this way: “We all use the Keynesian language and apparatus, none of us any longer accepts the initial Keynesian conclusions.’”

Sources: Skousen, Mark. 2001. “The Perseverance of Paul Samuelson’s Economics.” Forecasts & Strategies. February 1; http://www.rosreferat.ru/economy/348.htm;
http://www.mskousen.com/Books/Articles/perserverance.html;

The Perseverance of Paul Samuelson’s “Economics”

Samuelson, Paul A. 1967. Economics. New York: McGraw-Hill

The point is that in labeling someone a Keynesian or not, it is surely “the apparatus” of economic analysis that is more important than mere public policy recommendations, for, at least in the view of mainstream economists of whatever variety, the latter are based on the former. Thus you stand intellectually condemned in your otherwise very valuable criticisms of Keynesianism: they apply to you as well.

But “monetary policy” constitutes just as much central planning as fiscal policy. Central banking, the federal reserve system, fractional reserve banking, quantitative easing, fiat currency, are merely different tools in the arsenal of the socialists. The alternative, suggested by those in the Austro-libertarian community of scholars, is a 100% gold-backed currency, no central bank, no government monopoly of the mint, etc. This policy, and only this policy, is compatible with laissez faire capitalism and a truly free market economy.

Here is a minor criticism of, as I say, your otherwise very excellent critique of left wing fiscal Keynesianism. You refer to “regulations that make wages stickier.” But your use of the word “stickier” implies that without these unwise and improper governmental interferences, wages would still be “sticky.” Less, so, but they would still suffer from this malady. The minimum wage and other labor laws you quite correctly criticize merely take an inefficient market phenomenon (sticky wages) and worsen the situation. However, you offer no evidence or reason to believe that wages under laissez faire capitalism would be “sticky” at all. To be sure, they would not change instantaneously in response to exogenous shocks, or changes, but, then, neither would prices, interest rates or any other such economic variable act in that way in the real world. Surely, not everything in the free economy is “sticky.” If that is your position, why not say, instead, along with the Austrians, that human action is discrete, not infinitely divisible as required by calculus, and operates through time, not instantaneously?

I say to you in conclusion, throw away your Keynesianism in its entirety, not merely the left wing variety thereof. Embrace Austrianism, the only principled opposition to Keynesianism in all of its varieties.

The Best of Walter E. Block