Milton Friedman - Labels And Philosophy

Economic Holidays! Deck the Halls with Macro Follies

Say’s Law: Supply Creates its Own Demand? Nay, Nay!

Why is it that conventional wisdom depicts classical economist John Baptiste Say and Say’s Law as “supply creates it own demand”? Is the depiction correct?

“Say’s Law is best known in the form Keynes postulated it in The General Theory: “supply creates its own demand” . Despite the apparent eloquence and simplicity contained in this definition, it obscures the genuine meaning of the concept.”

“Instead, Say’s Law can be interpreted as saying that the ability to produce generates their ability to purchase other products. One can only fully grasp Say’s Law when analyzing the nature of the division of labor in a market economy. Individuals specialize in producing a limited range of goods or services, and in return receive income that they use to buy goods and services from others. The income one receives from production is their source of demand. In other words, “all purchasers must first be producers, as only production can generate the power to purchase” . This idea is intimately linked to the Smithian idea that the division of labor is limited by the extent of the market.“

The above quotes come from a most excellent essay by Garrett Watson of St. Lawrence University.His essay is entitled Misunderstanding Say’s Law of Markets.

 

 

Limits to Monetary Policy and the Enigma of Fiscal Policy

Regarding Ben Bernanke’s testimony 06/07/2012 and the commentary in the video above, monetary policy has reached its limit. Interestingly enough F.A. Hayek, in real-time during the Great Depression (circa 1938), staked out the position that monetary policy has its limitation and made such comment during the other deep recession regarding Federal Reserve actions at the time [1930's].

Fast forward to the Great Recession and we are at the limit of monetary policy once again. It's on the fiscal side at this point and Ben Bernanke keeps stating such in his speeches. Bernanke knows he is at the limit of monetary policy, he just does not say it, likely for policy reasons, yet alludes implicitly and explicitly to fiscal policy again and again.

The problem with fiscal policy is that it's in essence, ever since Keynes advocated politicos manipulating the levers of the economy, "politico policy". Buchanan and public choice theory leads one to the conclusion that reversing or amending fiscal policy threatens political constituency building exercises through taxpayer dollars…..past, present and future. It goes back to Friedman's discussions that political self interest indeed exists. It's related to Robert Higgs "ratcheting up and never ratcheting back".

Stated alternatively, fiscal policy is many times discussed as blackboard economics [Coase] rather than the real world fiscal policy which has unfortunately become politico policy. In the blackboard economic world one merely tweaks fiscal policy to achieve desired economic outcomes. In the real world politico policy is tweaked to achieve the desired political constituency building exercises outcome through taxpayer dollars.

As with limitations of monetary policy, fiscal policy has become riddled with politico rigidities of political constituency building and ideological belief systems [nothing akin to fiscal policy blackboard economics]. Moreover, changes in fiscal policy means belief systems are threatened i.e. threaten the politicos emotional attachment to beliefs they intensely hold regardless of the economics of fiscal policy.

Fiscal policy has become a murky quagmire brought to you by one John Maynard Keynes and his benevolent dictator approach to politicos manipulating the levers of the economy in the public's supposed best interest. Fiscal policy has become politico policy. Rather than the economics of fiscal policy changing and quickly redeployed, politico policy is rigid, slow to change and deployment is delayed or not at all. Fiscal policy/politico policy has become self limiting.

May 2012 Abysmal Jobs Report: Keynesianism and How It Would be Different This Time.

Regarding the May jobs report released Friday 06/01/2012, yet another abysmal jobs report, making three straight jobs reports of subaqueous nature, the headline unemployment rate ticked up to 8.2%.

Even more ominous is the anemic 69,000 jobs created in May were mostly part-time positions. The bright spot being that the labor participation rate increased slightly as 642,000 people entered or re-entered the labor force seeking employment. (1)

Although more are seeking work there remains a vast reservoir of discouraged workers estimated at upwards of 4 million that remain outside the labor force. That is, if the labor force participation rate was at its historic average then headline unemployment would be well into double digits.

A politically framed argument coming from the Obama Administration is that the Great Recession is such a vast and deep recession that the recession in and of itself is yielding the poor jobs number. Conversely, the same administration advertises yet another argument that the jobs created or “saved” by the same administration numbers in the millions during the same vast and deep recession. Which makes one wonder which argument is one to believe as the two arguments are divergent? -Or- is neither argument valid?

Regarding the Keynesian deficit spending plan also known as “the stimulus plan”, one must keep in mind that a so called stimulus plan is designed, as Keynesians depict it, as a “jump start”. That is, the stimulus plan is not in and of itself suppose to cause a recovery in employment rather the stimulus is supposedly going to cause the private sector to begin producing and hence employing. Stated alternatively, the stimulus supposedly creates the environment for the private sector to recover and it’s the private sector recovery that then drives employment.

In Friedman and Schwartz's book the Great Contraction 1929-1933 there is a compelling if not empirical argument of the Federal Reserve being way too tight in 1929, followed by the Fed's ongoing contribution [or failure to alleviate] the massive decline in the money stock leading to fractional banking in reverse.... and these items contributed to the Great Depression as well as lengthening and deepening the depression.


Fast forward to The Great Recession. Bernanke deploys Friedman and Schwartz’s prescription and does not allow the money stock to contract. However, according to F.A. Hayek monetary policy has limitations. Hence with the money stock in a non-contraction phase and reverse fractional banking avoided, monetary policy has been deployed successfully and to count on monetary policy to do much more is pushing monetary policy limits.


Given the above, in both instances, Great Depression and Great Recession, Keynesian deficit spending plans were deployed. Keep in mind that the two items that receive the most attention regarding economic argument, debate, research, etc. regarding the Great Depression are Keynesian deficit spending and Federal Reserve policy. One must then consider the monetary policy was successfully deployed during the Great Recession via lessons learned from the Great Depression. This leaves only the other major component to discuss which is Keynesian deficit spending.

If, as the argument goes, as well as empirical evidence points to, the Great Depression was deepened and lengthened by both Federal Reserve policy AND Keynesian deficit spending plans aka stimulus.....and in the Great Recession the Federal Reserve policy was corrected via Friedman and Schwartz through Bernanke ....then the deepening and lengthening of the Great Recession only has the other policy component in common with the Great Depression: Keynesian deficit spending.

Whereas the monetary component of the Great Depression was empirically studied by Friedman and Schwartz and a policy prescription was developed and subsequently deployed during the Great Recession with resulting success, what about the deployment of Keynesian deficit spending during the Great Recession? Was Keynesian deficit spending deployed due to empirical work showing a policy prescription leading to success -or- was Keynesian deficit spending deployed based on the notional position of “it will be different this time”?

There is a mountain of empirical evidence that Keynesian deficit spending plans do not jump start anything. The track record of Keynesian deficit spending plans appear to lengthen recessions which was predicted by F.A. Hayek during the Great Depression [Hayek predicted the lengthening of the Great Depression via Keynesian deficit spending and did so in the mist of the Great Depression i.e. predicted in real time during the Great Depression].

Below are three observation regarding Keynesian deficit spending plans and Keynesianism itself that may shed some insight:

“Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”


Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country. - Milton Friedman (2)

For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, none economists. - Lucas and Sargent (3)

This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. - F.A. Hayek (4)

One must consider that Keynesian deficit spending and Keynesianism itself is more akin to a political science proposition than an economic proposition. That is, the basic premise is that politicos can manipulate an economy. That somehow politico intervention distorting market forces makes for good economics. That the proposition itself, Keynesianism, has little empirical economic basis and is more akin to political notion.

Returning to the beginning regarding the abysmal jobs reports, high persistent headline unemployment and with an army of discouraged workers, one has consider that Keynesian deficit spending plans, regarding the notional proposition “that it will be different this time”, in reality was: “that it will be the same this time” i.e. another failure of the political proposition known as Keynesian deficit spending.


Notes:


(1) America's Transition To A Part-Time Worker Society Accelerates As Part-Time Jobs Hit Record, 06/02/2012, Zero Hedge


http://www.zerohedge.com/news/americas-transition-part-time-worker-society-accelerates-part-time-jobs-hit-record


(2) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.
http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf


(3) After Keynesian Economics aka After the Phillips Curve: Persistence of High Inflation and High Unemployment, page 57, Lucas and Sargent.

http://www.bos.frb.org/economic/conf/conf19/conf19d.pdf


(4) F.A. Hayek, from the essay The Pretense of Knowledge

The Hayek Series at Duke University: "How did economists of the day think about the Great Depression -during- the Great Depression?

The 04/09/2012 installment of The Hayek Series at Duke University consisted of visiting professors Lawrence H. White of George Mason University and Douglas A. Irwin, Dartmouth College. Dr. Caldwell of Duke University, the organizer of the Hayek Series, announced at the onset the narrowing of the subject to: "how did economists of the day think about the Great Depression during the Great Depression". Stated alternatively, what were economists real time impressions and real time solutions when they were actually experiencing the Great Depression.

F.A. Hayek made this observation during the Great Depression (circa 1938) [paraphrasing]: monetary policy manipulation can certainly create a boom, however monetary policy alone can’t sustain a boom and it always ends up a bust. His basic point being that monetary policy has limitations and if one is not careful you create a boom/bust cycle through monetary manipulation.

Notes taken during the lecture indicated that between White and Irwin they stated:

(1) Keynes thought monetary policy would not help and advocated fiscal policy intervention,

(2) that Hayek advocated allowing the recession/depression cycle to run its course,

(3) that between the two choices the public sided with "doing something" aka intervention.


Keeping the above lecture points in mind; consider the Friday 04/06/2012 jobs report. Further, consider aggregating every jobs report from 06/2009 [official end of the recession] right up to the 04/06/2012 jobs report. If we aggregate the jobs reports we find 140 million employed 06/2009 and 140 million employed today. That is, the aggregation over three years of every jobs report places us in the same exact square that we started from three years ago: 140 million employed.

One might say that monetary policy has done what it can do. That is, its reached Hayek’s “limitation”. Keynes, as well, did not think monetary policy would help.

Returning to the Hayek Series at Duke, Hayek’s recommendation in the Great Depression was to let the recessionary cycle run its course. That is, market intervention merely prolongs the cycle. Keynes on the other hand wanted intervention (fiscal policy) as the implicit and explicit assumption is that we cannot merely do nothing (which, by-the-way, may very well be the forerunner of today’s politico needing to show voters they are “doing something”).

Taking Hayek’s position and fast forwarding to 04/2012 one sees a world of monetary limitations [monetary policy has reach its limitations] with market intervention fiscal policy prolonging the recessionary cycle.

Let us leave the lecture for a moment and travel back to 1923.

Consider Frank Knight’s book Risk, Uncertainty and Profit. Paul Krugman aside, Frank Knight produced a most excellent argument that most certainly risk exists, but uncertainty exists as a separate phenomena.

One should consider spontaneous order/emergent uncertainty vs. purposefully created uncertainty or purposeful policy creating uncertainty as a byproduct. One might say the rule of law has become uncertain, regulation (property rights) has become uncertain and taxes of all sorts and sizes have become uncertain. That is, we are experiencing man-made created uncertainty beyond any emergent uncertainty.

Hence we arrive at the junction of: limitations, prolonging and uncertainty. Rod Serling would be proud!

Returning to Hayek’s “let it run its course” vs. “we cannot merely do nothing”, it’s likely a combination of doing what we know we can do, not doing what we don’t know how to do, stop creating manmade obstacles and leaving the remainder to market forces.

People have become accustomed to the idea that you must intervene. However, intervention means you actually know what you are doing. Maybe, just maybe we don’t know what we are doing.

The Purposely Politico-Designed Rent Seeker Extravaganza

How did it come to the point that federal, state and local government systems are perceived as rent seeking opportunities? Moreover, do such systems then lend to a notion that rent seeking is a natural, acceptable and everyday way of doing business?

Beyond Buchanan and Tullock and all the other public choice theory leaders from the school of thought known as the Virginia School of Political Economy, one of the best quotes that sums up the current atmosphere for rent seeking was made long ago:

 "The state is the great fiction by which everybody seeks to live at the expense of everybody else." - Frederic Bastiat, French economist, 1850

 Hence what you are watching, observing and playing out is the end product of Bastiat’s observation in which people manipulate a system and those same people think it's perfectly fine, natural and required to play the game of rent seeking as it’s at someone else’s expense.

How did Bastiat’s observation come to be present reality? The present U.S. state, local and federal environment for rent seeking [beyond the mechanics explained in public choice theory which is an explanation of how it all works after the environment is created] goes back to the 1930's:

 “Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country."

- Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.

http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf

 The concept of politicos manipulating the levers is an important Keynesian axiom that is missed by many as they want to concentrate on spending, debt, tax, Keynesian economic models, etc.

 The achievement of desirable ends is another item much overlooked. That "outcomes" can somehow be managed in a complex society through political planning. That is an erroneous assumption and one can merely point to the results as evidence. However, consider this observation:

 "This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims." - F.A. Hayek, from the essay The Pretense of Knowledge

 The next proposition one should consider is the size and scope of government. That the mere "size" creates the environment for shenanigans. From $800 defence department toilet seats, to recent GSA parties, to our subject at hand of rent seeking are all magnified by such size and scope. That is, if government was limited in size and scope then shenanigans, would too, in the main, be limited in size and scope.

 What has been purposely-political developed is a giant hulking money trap run by politicos and the manipulation thereof by politicos creates an environment of rent seeking purposely promoted by the system itself [a politically driven economy directed by politicos through the mechanaism of government rather than an economic driven economy directed by free people in free markets, with government also based on economics rather than pure politics] as well as the size of the system itself [the sheer size makes it out of control at the margins].

F.A. Hayek made an observation many years ago that identifies the above problems as well as offers a solution. It’s a solution not a panacea. Hayek observed that if the greater public wants collective action to address a need or desire [defence, education, fire protection, welfare, social security, etc., etc.] then government through collective action can tax to create funds to address such items.

Keep this in mind: a tax created to fund. One then must examine a fork in the road. How does one then go from the "fund created" to implementation of the "action" that the fund is intends to do??

Hayek argued two choices exist for the created fund leading to the action phase: act through the private sector or deliver through a created public sector. That is, if you now want the "action" to occur, the delivery method appears as the next step and two distinct choices appear: private or public.

The politico opts for public means as political power is gained in a much greater magnitude than opting for private delivery of the action. The political power leads to dependent political constituency building of the public sector workers themselves and others that now supply items to the now public and politico directed delivery system.

 Therefore, in the main, what you see, experience, and lament as "government" is not an economic organization, it’s a pure political machine of the nth degree by, for, and designed by politicos. The rent seeking pattern is promoted by the purposely built political system. Further, rent seeking is welcomed by the same politicos running the system as the rent seeking activity further dependent political constituency exercises that politicos depend upon.

April 15, 1913 and April 15, 1936 and First Degree Political Dupery: Great Politico Counterfactual Arguments

What about those politically driven counterfactual arguments that make the assertion that without government intervention all would have been lost?

If Markets fail, then governments fail too. However, politicos enjoy framing positive externalities of government intervention without ever mentioning the negative externalities of government intervention [also known as cascading unintended consequences]. The politico argument is based on the “counterfactual”. That is, the politico frames the abstract and unknown outcomes that surely included dire consequences vs. politicos stepping into the breach via intervention and creating wonderful outcomes. Stated alternatively, the politico compares the first stages of intervention outcomes with the unknown non-intervention outcome –or- politically framed opinion based reality is compared with politically framed opinion of non-reality.

Since politicos enjoy comparing their supposed grand accomplishments [positive externalities only] with non-reality, what if one went one step further and out counterfactual-ed the politico? That is, what if one went back to April 15^th 1912 and wiped the slate clean of income tax, the Federal Reserve and the 1930’s proposition of politicos manipulating economic levers to achieve supposed outcomes?

In 1913, the 16th Amendment to the Constitution made the income tax a permanent in the U.S. tax system. Prior to the 16^th Amendment the U.S. tax system was basically a tariff on imported goods [tariffs not being a wonderful world in and of itself]. The tariff tax revenue funded a government of very limited size and scope. (1)

Also during 1913 The Federal Reserve Act was passed. (2)

“In one respect the System [the Fed] has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.” - Milton and Rose Friedman (3)

During The Great Depression John Maynard Keynes advocated intervention into the economy by politicos. That is, that politicos should manipulate the economic levels and intervene into the free market to create outcomes:

“Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country.” - Milton Friedman (4) (5)

Hence one can surely go back to 1912 and create the ultimate counterfactual world of no income tax, free banking, and an economy based on economics rather than politics. What is to say this counterfactual world is not much more free and prosperous than the reality of politically driven taxation, politically driven banking, and politically driven economy?

The point being that politically framed counterfactual arguments that without government intervention outcomes would have been world-ending is political dupery of the first degree. Any counter-factual argument can be created to support or deny the outcomes.

Notes:

(1)    History of the Income Tax in the United States

http://www.infoplease.com/ipa/A0005921.html

(2)    Federal Reserve Act

http://en.wikipedia.org/wiki/Federal_Reserve_Act

(3) Free to Choose, Milton and Rose Friedman

(4) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 spring 1997.

http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf

(5) The General Theory of Employment, Interest and Money

http://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money

Macro Santa And The Austerity Grinch - Forbes 12/22/2011

“The year is nearly over. The holidays have arrived. The news media is stirring with visions of holiday consumer spending sugar plums, terrifying debt crisis, and depression. ‘Tis the season for John Maynard Keynes! That’s right, there’s no better time to reflect on the maestro of modern macro and more importantly his many modern followers. Each year the public enjoys a sleigh full of Keynesianism shoved down our collective chimneys by a media obsessed with Christmas consumer spending because “we have a consumer economy”, or so we’re told. Nothing gets that so-called “marginal propensity to consume” into high gear like the holidays!

Indeed, Lord Keynes is our modern Macro Santa.

Like Santa’s busy elves, today’s Keynesian economists believe that when we’re in an economic rut, government spending transforms into a magical debt-financed multiplier sack, able to create a limitless bounty of goodies. Meanwhile, they warn that our current woes are because the “austerity” Grinch has stolen Christmas! The only way for us to get the recovery bell to ring is to close our eyes and believe in the magic of Macro Santa“.

　

“American pundits and macro partisans love the stimulus. As for the actual Japanese citizens subjected to it? Not so much. As nobel-prize winning economist James Buchanan cataloged in “Democracy in Deficit: The Political Legacy of Lord Keynes”, Macro Santa’s magical sack provides a pseudo-scientific justification for pandering politicians to pilfer from the future, buying votes and building bigger government in the name of stimulating the economy“. - John Papola

Link to the entire article appears below:

http://www.forbes.com/sites/beltway/2011/12/22/macro-santa-and-the-austerity-grinch/

　

Keynesianism: economic arguments or political arguments?

Maybe, just maybe Keynes merely had an opinion regarding economics aka The General Theory. Maybe, just maybe Keynesianism is the opinion turned into a branch of politics. Maybe, just maybe the politician has become dependent upon Keynesianism and Keynesianism dependent upon politician. Maybe, just maybe Keynesianism is a perpetuated phenomena that empowers the politico and has nothing to do with economics.

Consider media reports describing Keynesian arguments. Are the reports more descriptive of economic arguments or are the reports describing a politician or political arguments?

The following may be enlightening:

(A) “Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country“. (1)

(B) "The fundamental principle of socialism is that its is appropriate to use force to organize society, to take from some and give to others. The government has nothing to give. The government is simply a mechanism which has the power to take from some to give to others. It is a way in which some people can spend other peoples' money for the benefit of a third party - and not so incidentally themselves". (2)

(C)  For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non economists. (3)

Notes:
　

　

　
(1) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.

http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf

(2) The Invisible Hand in Economics and Politics, Milton Friedman, Institute of Southeast Asian Studies, 1981, p11.

(3) After Keynesian Economics aka After the Phillips Curve: Persistence of High Inflation and High Unemployment, page 57, Lucas and Sargent.

Tinkering Through Spending by Some People

Consider this observation by Milton Friedman regarding Keynes and the advent of Keynesianism:

“Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country“. (1)

　

Special attention needs paid to this passage: “…improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends…”. Keynes basically created a free pass for politicos through the mechanism of government to “tinker”. Keynesianism has institutionalized “tinkering”.

Going one more step and combining two Milton Friedman observations, take the above observation and the above highlighted passage and consider the following:

"The fundamental principle of socialism is that its is appropriate to use force to organize society, to take from some and give to others. The government has nothing to give. The government is simply a mechanism which has the power to take from some to give to others. It is a way in which some people can spend other peoples' money for the benefit of a third party - and not so incidentally themselves". (2)

Considering the two observations together, it strikes one that the only item of consequence of The General Theory for the politico is deficit spending or “spending”. Keynes and Keynesianism political-economy appears to boil down to an attempt to legitimize tinkering by “some people” i.e. politicos.

Tinkering through spending by some people is not an empirical proposition. Stated alternatively, tinkering through spending by some people is merely a notional proposition, a vision, or quite frankly no more than an opinion. It would logically follow that if we have a notional proposition, vision, and opinion…. then tinkering through spending by some people would be/will be supported and perpetuated by arguments that are notional propositions, vision oriented, and opinion based.

Step back for a moment, keeping in mind tinkering through spending by some people is supported and perpetuated by arguments that are notional propositions, vision oriented, and opinion based; exactly what kind-type arguments have been put forward in the last eighty years regarding government intervention into the economy? The track record of these notionally based intentions vs. the actual results? Tinkering through spending by some people, the summation there of, has produced exactly what? What grand cumulative positive result can one point to?

Hence we have no positive result. We have the constant and relentless continuation of notional propositions, vision oriented, and opinion based arguments regardless of the non-positive result. Which basically accumulates into the concept of “judge us by our intentions and not our results“. Which would lead one to surmise that tinkering through spending by some people is not a public policy concept but rather a political power concept. That Keynesianism is merely an institutionalized support argument for political power or the power of the state. Which circles one back to this statement by Friedman:

“The government has nothing to give. The government is simply a mechanism which has the power to take from some to give to others. It is a way in which some people can spend other peoples' money for the benefit of a third party - and not so incidentally themselves.”

　

　
Notes:
　

　

　

(1) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.
http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf

(2) The Invisible Hand in Economics and Politics, Milton Friedman, Institute of Southeast Asian Studies, 1981, p11.

　

　

Keynesian Twilight Zone

Why Does Keynesianism Drag On as a Zombie Branch of Economics?

Here is a question: why did Keynesianism not die in the late 1970’s? Stated alternatively, why does Keynesianism drag on as a zombie branch of economics?

Its likely important to point out that Keynes wrote the General Theory as merely his answer to the economic problems of the day. One might say the General Theory is not good or bad, its merely one man’s educated opinion.

Consider the following regarding “why” Keynesianism will not die and has become the zombie that roams the earth during full moons.

Many have pointed out the flaws in the General Theory e.g. Lucas and Sargent , After Keynesian Economics.(1) Many others have empirically pointed out the flaws. Hence the theory is flawed. Moreover, the results of applying the theory are flawed. That is,  results speak for themselves. However Keynesianism lives on in a persistent zombie like fashion.

Maybe the “why” regarding Keynesianism roaming the earth as zombie economics exists in the 1988 Milton Friedman essay entitled John Maynard Keynes. The essay was republished in the 1997 spring edition of the Richmond Federal Reserve Economic Quarterly. (2) The following appears in the essay on pages 20 and 21. Friedman wrote:

“Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

Keynes believed that economists (and others) could best contribute to the
improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country.

From an alternative point of view, economists (and others) can best contribute to the improvement of society by investigating the framework of political institutions that will best assure that an individual government employee or elected official who, in Adam Smith’s words, “intends only his own gain . . .is . . . led by an invisible hand to promote an end that was no part of his intention,” and then persuading the voters that it is in their self-interest to adopt such a framework. The task, that is, is to do for the political market what Adam Smith so largely did for the economic market.

Keynes’s view has been enormously influential—if only by strongly reinforcing a pre-existing attitude. Many economists have devoted their efforts to social engineering of precisely the kind that Keynes engaged in and advised others to engage in. And it is far from clear that they have been wrong to do so. We must act within the system as it is. We may regret that government has the powers it does; we may try our best as citizens to persuade our fellow citizens to eliminate many of those powers; but so long as they exist, it is often, though by no means always, better that they be exercised efficiently than inefficiently. Moreover, given that the system is what it is, it is entirely proper for individuals to conform and promote their interests within it. An approach that takes for granted that government employees and officials are acting as benevolent dictators to promote in a disinterested way what they regard as the public’s conception of the “general interest” is bound to contribute to an expansion in governmental intervention in the economy—regardless of the economic theory employed. A monetarist no less than a Keynesian interpretation of economic fluctuations can lead to a fine-tuning approach to economic policy.”

The above statement reveals the social engineering aspect, the politico being engaged in manipulation of the economy for supposed beneficial ends, and even includes a role for the bureaucrat. Hence in the grand scheme of things, those that advocate social engineering [central planning to achieve specific results based on their particular vision], the politico who craves power, and the bureaucrat that craves security find Keynesianism a political perpetuation of their view, power, and security. That is to say, Keynesianism is no longer an economic concept it’s a pure political perpetuation vehicle.

Hence Keynesianism, in the long run, did in fact die, it merely roams the earth as a political zombie.


Notes:

(1)A paper presented at a June 1978 conference sponsored by the Federal Reserve Bank of Boston and published in its After Keynesian Economics aka After the Phillips Curve: Persistence of High Inflation and high Unemployment. Conference Series No. 19.

http://www.bostonfed.org/economic/conf/conf19/conf19d.pdf


(2) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.
http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf

Russ Roberts hits another home run: Keynes vs Hayek part two