Business Week Tries to Resurrect the Corpse of John Maynard Keynes
Just when the current “discussion” on economics by public intellectuals like Paul Krugman hits bottom, Business Week decides to dig the hole even deeper by lionizing John Maynard Keynes. Keynes, according to BW, had the theories that can “fix” the currently moribund world economy.
There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.
The secret to understanding the vast wisdom of Keynes, writes Peter Coy, is found here:
An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment. (emphasis mine)
Yes, the economy has fallen on hard times because individual households have saved “too much” money. That the latest downturn occurred when the rate of personal savings in this country was at historical lows apparently was lost on Coy, who is too eager to promote the “your spending is my income and my spending is your income” fallacy that has been pushed very hard in recent months by Paul Krugman.
That so-called respected economists and writers can fall for this fallacy does not speak well of economic discourse these days. First, the whole argument is circular in nature, presenting a picture of an economy in which any cutback in spending by even just one person can morph into horrific consequences. (Think of the Butterfly effect, economically speaking.) This is not a description of an economy at all, but rather of a perpetual motion machine that always must stay greased with the spending of money.
The “your spending is my income” approach should be laughable on its face, for if I already have income to spend and you also have income to spend, then why do we need to engage in what Krugman essentially describes as a one-to-one swap of money? It makes no sense.
The problem is that Coy and Krugman, like Keynes before them (and Bernard Mandeville before Keynes), did not understand what constitutes an economy and how things get out of kilter. The current economic morass did not occur because people suddenly started saving “too much” money, but rather because central banks and governments were promoting unsustainable lines of production. When those lines of investment broke down, as surely they had to do, then what was needed was a liquidation of the malinvested resources and a return to sustainable lines of production.
Unfortunately, governments and central banks actively have tried to block the needed economic readjustments and they have stymied real-live market entrepreneurs at every turn through high taxes, increased and punitive regulations, and through hostile rhetoric. Hillary Clinton’s recent declaration that businesses do not “create jobs” is just another example of the political madness at hand.
Instead of real entrepreneurship in which entrepreneurs find ways to move resources from lower-valued to higher-valued uses, as determined by the choices of individual consumers, governments have created unholy partnerships with politically-connected businesses to set up huge regimes of “crony capitalism.” And despite the claims that governments have been pursuing “austerity” measures, governments have been reckless with spending and regulation and central banks have relentlessly printed money.
While BW and its amen corner want us to believe that all that the economy needs is a long burst of government spending, the truth is that governments cannot self-generate wealth through spending. Wealth needs to be created and entrepreneurs and profit-making businesses are the entities that create wealth, not the state.
Unfortunately, modern public intellectuals have confused spending with wealth creation, and as long as their ideas dominate the current discourse, along with the dangerous anti-enterprise rhetoric being uttered by politicians, we are going to have many more years of economic stagnation. It does not have to be this way, but until more people are willing to accept the Austrian ideas of entrepreneurship and the structure of production, that is what we must endure.