Let's Meet the Keynesians


December 8, 2011

(This item originally appeared at Forbes.com on December 8, 2011.)


We often refer to the “Keynesians.” What does this mean?

It is not so fashionable to call yourself a “Keynesian” today. It’s a little like saying you are in favor of the New Deal. So, the Keynesian academics like to rebrand themselves using various buzzwords, even ones that sound very un-Keynesian, like “neo-classical.”  These buzzwords, and the tiny differences in doctrine they represent, are only interesting to other Keynesians, just as non-Christians can’t tell the difference between a Methodist and an Episcopalian.

The distinguishing characteristics of a Keynesian are easy to identify. In response to a recession, they recommend expanded government spending – they usually boast outright that it doesn’t matter what the money is spent on, even egregious waste — and some sort of “easy money” policy. The various justifications for this may change. In the past, people talked about the “multiplier effect.” Today, they might talk about “nominal GDP targeting.” These are just a bunch of sales pitches for the same policies, government spending and “easy money.”

Keynesians generally don’t have any ideas except for these. None at all. They might make some halfhearted pitch for “education” or “innovation,” and even, if they are hard-pressed, express their support for Mom and apple pie. But these are usually just cocktail chatter. They rarely have any extensive research or meaningful policy proposals.

I was having a conversation with a professor of economic history, who saw the rise of Keynesianism as a reflection, not only of the economic struggles of the 1930s, but also of the rise of the professional economist. In the 19th century, economics was a pastime of inquisitive gentlemen, a branch of philosophy.

Once people decided that they wanted to make a living from giving economic advice, they needed customers. The government was the obvious target. The new class of professional economists said that politicians could spend the taxpayer’s money willy-nilly, even on total waste. And, that all their remaining economic problems could be solved, without cost or effort, by monetary manipulation, in time for the next election. This proved to be a big seller, and it remains so today.

“Keynesianism” itself is really just an updating, with a lot of irrelevant math, of some very, very old ideas, known as Mercantilism, which were just as flawed then as they are today. Not much has really changed.

“But as this Addition to the Money, will employ the People are now Idle, and these now employ’d to more Advantage: So the Product will be encreas’d, and Manufacture advanc’d. If the Consumption of the Nation continue as now, the Export will be greater, and a Ballance due to us …”

Sound familiar? It was written in 1705, by John Law.

Here’s another one:

“The greater quantity … of money … the more commodity they sell, that is, the greater is their trade. For whatsoever is taken amongst men … though it were ten times more than now it is, yet if it be one way or other laid out by each man, as fast as he receives it … it doth occasion a quickness in the revolution of commodity from hand to hand … much more than proportional to such increase of money.”

This was written in 1650, by William Potter.

The problem with Keynesianism is that their solutions are inherently destructive. They might enjoy some apparent short-term improvement, although even that is rarer than the Keynesians like to admit. However, when these policies are pursued at length, they inevitably result in disaster.

Government spending is not necessarily bad. The government provides many important goods and services. However, spending on waste is, obviously, wasteful. Nothing of value is created. Worse than that: this government waste consumes capital, that small portion of the country’s productivity that is supposed to be devoted to increasing future productivity. Destroying capital impairs economic growth and prosperity and, over time, leads to unemployment and underemployment.

As Adam Smith noted centuries ago, chronic deficit spending eventually results in government default. It is resulting in government default today, in Europe. When faced with default, governments often take all sorts of economically destructive steps, typically raising taxes by large amounts, confiscating property, imposing trade and capital controls, and all the rest. It can take decades for a country to recover from this combination of mistakes.

All of these “easy money” techniques result in eventual currency decline, which in turn causes impoverishment. “You can’t devalue yourself to prosperity,” it is said, and that is true. How could any group of people become wealthy just by jiggering the unit of account? Whatever short-term benefit may arise is offset by these longer-term consequences, and chronic reliance upon “easy money” strategies results in secular decline. The most successful countries have always been those with strong, stable currencies.

Today, Keynesianism is in its era of final absurdity. With governments now running into their borrowing limits across the globe, the idea of deficit-spending your way to prosperity is mostly off the table. The Keynesians have only one card left to play, their “easy money” card, and they are playing it to a degree never before seen.

This is why they are so rabidly opposed to a gold standard system. It is not because a gold standard system doesn’t work. The United States used a gold standard system for 182 years, 1789-1971, and became the wealthiest country in human history.

Rather, a gold standard system makes the Keynesians’ “easy money” manipulations impossible. It puts the Keynesians out of a job. They have nothing left to offer.

Probably, we will have to endure the spectacle of seeing the Keynesians blow themselves up with government spending (already there) and “easy money” (on the near horizon) before we will get a broad rejection of Keynesianism throughout the populace and political spectrum.

We will then have a chance to return to classical economic principles. Unlike Keynesian principles, which are inherently destructive, classical principles improve the inherent health of the economy.

One principle is to have a stable unit of account – in other words, stable money. Another principle is to have an efficient tax system, which raises the desired revenue while causing the least amount of economic damage. A third principle is that government activity should be limited to providing, in an economical fashion, those services that people deem necessary and important. A fourth principle is the Rule of Law, rather than the sort of criminality and favoritism that characterizes the present time.

When you understand Keynesianism, you will eventually see it as a shallow trick. No country accomplished anything with a strategy of government waste and currency molestation.

At that point, a gold standard system will seem straightforward and inevitable. Once you decide that you want Stable Money, instead of Ben Bernanke’s funny money fiesta, the solution is obvious.