What are your thoughts on the sudden revival of Keynesian policy?
I will use this as an opportunity to answer him and get a blog post in.
I loathe Keynes. Actually, I should say I loathe Keynesian economics. Even though I don't think I would have liked him, I never met the guy. Economically, at least, I consider Keynes a nihilist that only cared about dealing with the present without regard to future consequences, as evidenced by his famous remark that "In the end, we are all dead." His policies set into motion a pattern of ever widening pendulum swings in the economy. On the plus side that means longer booms and fewer busts. On the flip side, empirical evidence shows that the set of Keynesian policies that were used in the Great Depression, and which are currently in revival by the current crop of policy makers, were a failure that made the bust much more dangerous and difficult to escape from.
Before the Great depression, the US economy would be in recession every 2-4 years. This seems scary, but in truth they were never particularly harmful to the general population, or posed significant risk to the wide economy. These recessions were a proper reflection of the different industries dealing with naturally changing factors such as technology, demographics, foreign competition, and so on. The feature these recessions shared is that they were mostly short in length, and action by private enterprise to liquidate bad investments and adjust costs worked to keep the economy on a long term upward trajectory. It was not until Keynesian policies were used in the late 20's and 30's that the word depression had to be created as an economic term to distinguish it from recessions, as nothing had ever approached its length or magnitude.
To illustrate in non-economic terms, critics of Keynes often compare it to curing a patient of a broken finger by cutting off the entire arm. What they mean is that an economy in recession is a reflection of errors in judgment made by business persons, and Keynesian policies make the problem worse by perpetuating further, larger errors in judgment.
In economic terms, entrepreneurs are little more than risk takers. They speculate that their products/services will be in demand, and ramp up production based on those expectations. In the process, they create jobs and bring more competitive pricing to the market. Everyone wins, unless the speculation on the entrepreneur's part was wrong, and then there is a problem of too much investment in capital goods (raw materials and business machines) and wages/jobs, and too little return on those investments to break even or make a profit. Traditionally, the business owners would liquidate these bad investments, take the financial hit, and if possible focus on remaining good investments. If the business bought those capitol goods on credit, then the bank would liquidate the assets for them if payments could not be maintained. This all changes when Keynesian politicians decides that full employment, high wages, and stable prices must be maintained, so they work to prime the pump of the economy (inflate the price level, increase tariffs, increase government spending, ease lending standards, bail out industries, etc.) giving entrepreneurs false impression that maybe their investments weren't so bad after all, and maybe they should even expand production, or on the other hand tie their hands so they cannot reduce wages or liquidate assets. The continuation of poor/risky business behavior only serves to make matters worse once the charade becomes apparent and the flow of money stops.
That is why I am scared when I hear the government plans of economic stimulus. With regards to the Great Depression, the economic recovery was only realized with World War II, and I do hope we could find a better way out this time around.
In terms of theory, I am pretty much Austrian in my views, as I think it is the most comprehensively sound theory. Maybe throw in a dash of classical Smithian economics. The biggest flaws with Austrian theory, which would apply to the other theories as well, is that it can't account for external factors, so in a globalized environment where no economy can disregard the policies and practices of other countries, concessions have to be made to the ideal to make it practically feasible. In my humble opinion, these trade offs include allowances for certain tariffs (I will get to this topic, eventually), regulations (specifically for large corporations and financial institutions, and especially in regards to environmental, worker, and consumer safety), and taxes/tolls (to capture externalities, such as business use of public infrastructure).
Austrian economics is mostly derided for being old-fashioned, cruel, or unpractical, but it mostly just inconvenient for bankers and politicians. I would personally love to see a (global) gold standard, high reserve requirements and strict limitations to the fractional reserve lending system, and ending the Fed's ability to manipulate interest rates.
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