By Professor Doom
In public school, I was trained to think fiat currency, creating money out of slips of paper, was an excellent thing. I was trained to think that “a little” inflation was actually good for the economy. I was trained to think great quantities of money printing was a great thing, since everyone got a share of the money.
“There is no god but fiat, and Keynes is its prophet.”
--I joke, it’s not taught that blatantly in school.
The branch of economics that preaches this stuff is Keynesianism; when Nixon severed the dollar from gold in 1971, making it explicitly a fiat currency, he said “I am now a Keynesian in economics.”
Keynesianism was the only form of economics I was ever told about in school and it was presented as the best thing ever, without flaw. It wasn’t until I developed the initiative to study on my own that I learned that there are, in fact, several economic schools of thought. While many believe that economics is comparable to mathematics in rigor, it is not, not even remotely. It really is just a collection of theories representing a certain point of view.
It’s very insidious to only teach one form of economics in school, because it prevents people from even thinking about the possibility that there may be another way…I can’t help but compare this to NewSpeak from 1984, a language developed to keep people from even expressing the concept of freedom, the better to keep them under control.
There are other forms of economics, and, of course, none represent the absolute truth. While all versions have weaknesses, one can still judge them by comparing how well they predict outcomes from economic behavior. My personal favorite school of economic thought is Austrian. Unlike Keynesianism, it doesn’t promise utopia from centrally planned economies…while it takes courage to accept that utopia is impossible, I like Austrian economics because it just seems to do better with predictions.
These predictions are borne out through empirical observation. On the other hand, Keynesianism seems to ignore empirical evidence and push on regardless of what people endure from it.
“As late as 1989, in the 13th edition of his best-selling college textbook "Economics," Paul Samuelson wrote, "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."
--note the USSR totally collapsed in 1991, revealing an infrastructure that in many cases had not been upgraded since the communists took over in 1917, despite over 70 years of textbooks saying how economically great communism was, and implying that the US would likewise be better off economically with socialist policies and centrally planned economies.
While Keynesianism, for example, predicted incredible economic power from USSR’s centrally planned economy right up until the point the USSR collapsed, Austrian economics from the get-go said the USSR was economically doomed…and it never shifted this prediction, even when bogus reports claimed the USSR was really, really, economically powerful, year after year. Good predictions, and courage of its convictions…I like that. Despite this, Keynesian fiat systems and centrally planned economies still devastate much of the world.
What has Austrian economics done lately? Well, nothing, since no government, certainly not the U.S., practices Austrian economics. Instead, despite the many colossal failures of Keynesianism, our government practices Keynesianism. A few recent charts really hit home how well Keynesian predictions work, as opposed to Austrian.
First, Keynesianism predicts that money printing will help everyone, while Austrian economics says the money printing really only helps the people at the top, with first access to the new money. Money printing has been outright furious the last few years, making it a bit easier to claim that what we’re seeing in the economy the last few years is being influenced by the extreme creation of currency.
Let’s see how that’s working out in real estate:
Housing sales in general have been falling, except in one category. Hmm, the high end houses, the ones the people at the top can buy with their hot money, are appreciating in value. The low end houses are dropping. Basically all schools of economics agree that increased prices generally come from increased demand…the people at the top are getting the new money to buy houses, causing those prices to rise. The people at the bottom? Not so much.
Ok, well, that’s just housing. Keynesianism predicts that massive currency creation will really help the economy, and that help lifts all boats. Again, Austrian economics says the “growth” is really just part of boom/bust cycles created by fiat money, and doesn’t really help most people anyway. Let’s see what happens:
Hmm, again. Sure looks like the folks that don't get the hot money first really don’t benefit much. Since the last few years have been the worst in US history for GDP growth despite the Keynesian prediction of great growth from printing, we once again are seeing a wealth transfer from the poorest to the richest. Note how things started to even out as soon as Nixon went full fiat, and now we’re having a total blowout, with everything going to the top. Way to go, fiat currency!
Let’s tie things back to education. Austrian economics predicts that pouring government money into higher education will do little for education…it’ll just raise the price of education. We all know tuition has risen dramatically in the last few decades. Keynesianism, of course, preaches that all government spending is good. Heck, Paul Krugman (chief spokesmodel for Keynesianism) even advocated government spending on space defenses against a space alien invasion that might never come, since he thinks it would be great for the economy. Anyway, Let’s see how government spending on higher education is working out for the students:
Hmm, the students are getting deeper and deeper into debt, and aren’t making any more money at all. I know what I’m showing here won’t be universally accepted, there are lots and lots of fans of Keynesianism…it could hardly be otherwise, since that’s the religion taught in schools. Nevertheless it’s tough to look at chart after chart and still keep that faith.
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)
Jefferson is much maligned nowadays (“he owned slaves!”), but it doesn’t take much to see that the fiat currency system is closing in on the end game Jefferson foresaw. Our fiat system has plundered all the wealth from the current lower and middle classes, and is now transferring wealth from the future lower and middle classes via student loans. Our children are starting out life so deep in debt that they’ll never be able to purchase homes, or even pay off their debts. They will, as Jefferson says, one day wake up homeless…but still in debt, since student loans can not be removed even via bankruptcy. People with gray hair are finding their social security checks being garnished to pay student loans now…that’s very scary.
I prefer empirical results for making my decisions…mathematical training is like that. So, I have to reject Keynesianism, and favor Austrian thought, until something better presents itself. I know I’m mostly just preaching to the choir here, nothing I’ve said above will shake the faith of true believers in Keynesianism, but if the simple charts and brief discussion above can in but one mind plant a seed of doubt about the wisdom of using a fiat currency system, I’ll call this post a success.
Blog posts are cheap, after all.
It might help if you learnt what Keynesianism is and isn't. It died around 1970 at around the same that Nixon was claiming "we are all Keynesians now." Printing fiat money and distributing it to the big banks is not Keynesianism. I've nothing good to say about Keynes' ideas and they were only in vogue in the 1945-1970 era. Their purpose was to give Western capitalism a new lease of life by ironing out the boom-and-bust cycles.ReplyDelete
Eh, I know the "true theory" is different from what is directly observed, but I view it the same way as communism. People say the USSR doesn't count as a disaster for communism, since it wasn't "really" communism...in much the same way, I prefer to look at what really happens, as opposed to some utopian ideal for Keynesianism.Delete
You may wish to read what Krugman has to say on money printing...he's also under the impression it's Keynesian. Is he wrong, too? I'm no fan of Krugman, but I reckon the Nobel prize winner at least sort-of knows the meanings of the words he's using.Delete
Krugman is a donkey for whom I have nothing but withering contempt.Delete
With regard to the "centrally planned economy," you have to keep in mind that the US economy has also been centrally managed -- albeit not as overtly as the now-dead Soviet system. And this impetus came from the business camp itself, not from a bunch of pinkos and Keynesians. You might like to take a look at Michael Perelman's "Railroading Economics" to understand how this thinking (the need for centralised planning and regulation) grew among US businessmen in the late 19th century and found full expression in the 20th.
Keynesianism (RIP) died around 1970. By the late '60s it was becoming clear that it wasn't working effectively anymore (i.e., each attempt to revive flagging economies was leading to weaker recoveries and higher unemployment rates). The new paradigm of neoliberalism only started emerging tentatively around the mid-'70s and came to bloom only with Thatcher and Reagan around 1980 or so (see Harvey's "A Brief History of Neoliberalism" for more). Inter alia, this has meant an every-greater role for the financial sector, which has become the lynchpin for today's deindustrialised economies. Hence the politically influential "too-big-too fail" banks, which are given as much fiat money as they want.
I'm no fan of Krugman either (c'mon, space aliens?), but he says he's a Keynesian...he's pretty much the spokesmodel for those theories. And he didn't die 40 years ago, so I'm really hard pressed to see your point of view that everyone is wrong about Keynesianism not being used since 1970.Delete
I grant that some policies are more Monetarism than Keynesianism...but this is hair splitting, and it's tough to argue Monetarism would exist without Keynes' "work".
A prime example of Keynesianism would be Roosevelt's WPA in the the '30s ("avant la lettre"). The key impulse behind Keynesianism is full employment, with the state stepping in if employment falters. Now printing fiat money and making it available to the large banks does no such thing -- it's a pretty weak and pathetic excuse to label it "Keynesianism." As you say, true unemployment is hovering at around or over 20%. Keynesianism served as one method of tinkering with and fine-tuning otherwise healthy economies. This started to unravel from the mid-'60s onwards as the postwar recovery of Japan and Europe led to global overcapacity, a squeeze on profits, and by implication, a slow but inexorable rise in unemployment. The squeeze on profits led to the loss of acquiescence by the business sector on an accord with labor, and opposition to the idea of full employment at the expense of squeezed profits. This led to the slow adoption of the neoliberal paradigm, one of whose foundations was the fiat dollar (i.e., going off the gold standard in the early '70s). It is the fiat dollar which allows for massive deficit financing, for operating the printing presses around the clock, and for ZIRP -- all of which is paradoxically being called "Keynesianism."Delete
Krugman is a deeply confused man and his name should not be mentioned in polite society.
I don't see my comments presented so I'll resubmit them in a different way. Professor Doom... Thank you again for presenting difficult concepts in a very readable and logical manner. Most economic papers I've read obviously use terms and language that make understanding of their theories very difficult.... perhaps that is the intention??? Again, thanks!ReplyDelete
Keynes wasn't all that bad of a guy as a lot of austrian's believe he was all about government subsidies and consumption but really that's not all he was about. The fact is we do not have a true free market and will never have with government intervention which is what makes Keynes detestable. It's his philosophies that lead to QE infinity and the more problematic our situation gets the more government involvement there has to be so in light of where we are at today, it's really a stretch to say that Keynesian-ism is dead. Let's just go back to the fact that my time, labor and skill set is worth what I say it's worth; not what a system which uses fiat debt as its principal medium for exchange says it's worth.ReplyDelete
Econometrics is extremely mathematical and a lot of differential calculus. Introductory econ classes tend to be more theory driven, but isn't that to be expected? I think the biggest failure, theory-wise is the perversion of Adam Smith into "trickle down" "Reaganomics" as a justification for monopoly capitalism. The other big failure responsible for the current predicament is the disregard for Ricardian Equivalence--it's okay to stimulate the economy out of recession, so long as you pay off the deficit when there are growth times. The last 40 years of American history is about stimulation all the time. You might call it the addiction of the "financial-political elite" who never want to stop self administering, because the inevitable pain and self-destruction and withdrawal is forced onto the poor. As long as the trip keeps you seeing Maseratis and mansions, you want to keep it going. Your political lackeys will want to keep it going too.ReplyDelete
I always recommend John Kenneth Galbraith's "Economics In Perspective" to people who are interested in an entertaining and informative exploration of economic history.