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    « Romney’s Sounds of Silence: Anatomy of a Failing Strategy | Main | The Party of Purge »
    Monday
    Sep102012

    Keynes, Hayek and the Terrible, Horrible, No Good, Very Bad Economy

     

    [Note from the author.  I am not an economist.  If you are, then please be kind—I’ve tried to do my homework, but in writing this essay my purpose is to promote (and provoke) conversation, not provide an Econ 101 lecture. My basic premise—that neither the Keynesians nor the Hayekians have provided truly workable solutions—is one I stand by, though, regardless of the details.  Caveat Lector.]

    Adam Smith, in several of his writings (including the oft-quoted The Wealth of Nations), describes for us an invisible hand, a term now used by economists to describe the self-regulating nature of the marketplace. What Smith fails to tell us, however, is this: Just because the hand is invisible doesn’t mean you can’t feel it when it body-slams you to the ground. 

    As we slowly arise—very, very slowly, according to recent job and GDP stats—we continue the search for the best way to handle the hand. But given the American modus operandi where any issue is allowed only two sides (each with overly simplified arguments), we have reduced the possible solutions to a polarized pair, interventionism vs. free markets.  On the left we have J. M. Keynes and on the right a newly risen F. A. Hayek (supported strongly by his first cousin, M. Friedman, one of the attendees at Hayek’s first Mont Pelerin Society meeting, held in 1947). 

    Keynesians believe that government spending fueled by borrowing is the best way out of bad times because  putting that money into circulation lets people get back to work and then spend the money they’ve earned, leading to more people working to make the things people want to buy, leading to more people working, leading to… you get the picture.

    Hayekians believe that there is no level of government planning that can truly control the economy; the forces are just too vast. In particular, they argue, such borrowing will eventually foster inflation.  And not just a little bit.  A lot. In fact, they say, Keynesians are just playing with fire, and it shouldn’t be long now before the whole thing is ablaze. Far better to let the market do what the market will do; eventually it will find its own best resting place.

    So who’s right and who’s wrong?  Which system—when put to the test—has panned out over the years? 

    Turns out we have no idea.  No friggin’ clue.  And do you know why?  It’s because here in the U.S. neither model has ever been tried.  Ever. Oh, both sides have pretended.  They’ve even come close now and again.  But not close enough.

    Let’s start with the politicians who lean Keynesian.  They love the whole borrow-and-spend story as a way to goose the economy.  (Can you say “stimulus?”) However, there’s a key point in Keynes that they always—and I mean ALWAYS—seem to forget: Once you’ve dug your way out of the bad times, you need to pay back the money you borrowed in the first place.   Our leaders, though, are too cowardly to seriously deal with the debt. As Nicholas Wapshott writes in Keynes Hayek: The Clash that Defined Modern Economics, “success at the ballot box comes from managing the economy to bring the business cycle into line with the four-year electoral cycle. Those who dared to ‘do the right thing’ by the budget deficit would be doomed.”  The result is a $16 trillion debt with little more than pocket lint left to pay the bills.

    And the Hayekians?  Well, they, too, have missed a key point in their guru’s teachings: the economy is wonderfully, cleverly, consistently, and blatantly amoral.  It doesn’t care about homelessness or starvation or unemployment.  It doesn’t care if there’s enough money to even wonder why Johnny can’t read. We, however, do care (at least for the most part), and so even the most hardened Hayekians (with the obvious exception of Ron and Rand) transform into lightweight Keynesians when it comes time to face the prospects of a truly tanking economy, reluctantly extending unemployment benefits one more time, or offering a one-time (okay… two times) cash-for-clunkers boondoggle…etc. etc. etc.  To misquote an oft-used phrase, there are no Hayekians in foxholes.    

    So let’s just admit that neither of these theories can possibly work because we have neither the courage nor the heartlessness to follow the theories as laid out.  It’s time to look for another way. 

    Here are three simple suggestions that I think reasonable as places to start a new conversation:

    • For those times we may need a Keynesian boost, let’s create legislative mechanisms which guarantee that any additional borrowed money will be paid back.  Maybe we can’t make real dents in the $16T we already owe, but we can draw a line in the sand that makes everyone accountable for the future.  If we borrow, we pay it back out of surplus (which means we balance the budget, or better) within some given period of time.  And if we don’t or can’t, then perhaps preset tax increases (or budget cuts) automatically go into effect.  My bet is that the public will demand fiscal responsibility if the alternative is a bigger dip into our own wallets.
    • Create a real and viable safety net with a reasonable definition of the poverty line, decent health care, and some level of housing assistance.  Make sure that people everywhere know that sometimes things will get painful—perhaps very painful—but that they’ll never have to worry about what Jessica English, host of The Bottom Line, refers to as “the insecurities.” Many of us would be far more willing to share some sacrifice if we knew that we weren’t walking a hair-thin tightrope without a net beneath us.
    • Define the free market as a fair market (i.e., one in which the rules are the same for everyone, even if some regulation is required to balance the see-saw). Once defined, let the market be as free and fair for everything that goes on above the safety net. Get the government out of the subsidy business, this picking of winners and losers. Let innovation and entrepreneurship and small business thrive so that they can again become the fundamental engine of our economy. 

    (By the way, the really interesting thing about the latter two suggestions is one that the right has either forgotten, refuses to admit, or never knew: they are both Hayek’s ideas.  His difficult and largely unread The Constitution of Liberty advocates a limited welfare state, with health care and basic housing for everyone.  The book also discusses the need for a free market to operate within a rule of law, or, as we might term it, regulation. And, in a final display of irony, the book includes a postscript with the unlikely title, “Why I Am Not a Conservative,” in which Hayek writes, rather scathingly, that conservatives are actually more like socialists. “Like the socialist,” Hayek writes, the conservative “is less concerned with the problem of how the powers of government should be limited than with that of who wields them; and, like the socialist, he regards himself as entitled to force the value he holds on other people.”)

    Oh, and one more thing, everybody.  Stop the futile arguing and stop pretending that these economists were infallible gods.  If you read some of the history you’ll find that economists have egos, too, just like the rest of us.  Half the time they didn’t argue because they thought they were right, but because they were busy defending themselves against counter-punches and believed that they had either a) no choice or b) a responsibility to their adherents to fight the good fight.  Both Keynes and Hayek (and some of their surrogates like Sraffa and Robbins) read their adversary’s works with their criticisms largely predetermined.  They were no more objective than we are. So why keep up the self-righteous pretense? It’s all just theory anyway.  Perhaps we should start dealing practically with this, our real world. Let’s discuss alternatives. Then we can give ourselves a hand.

     

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    Reader Comments (3)

    I agree simple pragmatism will be more productive than ideological frameworks. Economic forces are not too complicated to understand when individuals are effectively dealing with their own portion of it. I have addressed my thoughts on our economic evolution in this essay. A Theory of Wealth http://www.elmwoodil.org/SEDrambles/SchockRespf.html

    September 10, 2012 | Unregistered CommenterShireSteve

    I admire your attempt to dive into this complicated mess, but I have to point out that Keynes was writing at a time when currency was commodity-based, and the inflation/payback argument is also obsolete. The whole range of possibilities and consequences is completely rewritten with fiat currency, as the US system has. Warren Mosler explains in all the detail anyone needs...
    http://www.moslereconomics.com/mandatory-readings/soft-currency-economics/
    Here's another explanation:
    http://www.gurufocus.com/news/147269/the-problem-with-the-deficit-its-not-big-enough

    September 10, 2012 | Unregistered CommenterTubino

    Define the free market as a fair market (i.e., one in which the rules are the same for everyone, even if some regulation is required to balance the see-saw). Once defined, let the market be as free and fair for everything that goes on above the safety net. Get the government out of the subsidy business, this picking of winners and losers. Let innovation and entrepreneurship and small business thrive so that they can again become the fundamental engine of our economy.

    Sadly, this option is on the table now, as the Farm Bill is about to expire, and Congressional inaction would strip many subsidies from the agricultural market. We could accomplish this without an election or any vote, for that matter. But Monsanto and ADM won't allow that to happen, I fear, the savings to the treasury not withstanding.

    September 10, 2012 | Unregistered CommenterPhilip H.

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