The above title, absent our parenthetical addition, is also the title of a just published book (Public Affairs Books; ISBN 9781586488277) by Robert Skidelsky, the preeminent biographer of British economist John Maynard Keynes (1883 – 1946). As the title suggests, Skidelsky considers Keynes to be “the Master,” and the book is a veritable celebration of his return to popularity following the recent “failure of capitalism.” And, Skidelsky is not alone. Keynes’ fans include President Barak Obama and the Democratic majorities in both houses of Congress.
The master . . .
Without question, Keynes contributed greatly to economic thought. His recognition of the discipline as a social/behavioral science as opposed to a mathematical exercise is invaluable in understanding the workings of an economy. Even today, we see too little appreciation for Keynes’ admonition that economists (and their private and public sector clients) not put too much confidence in quantitative economic analysis. Most aspects of the future are simply immeasurable – they are what he describes as unknowable “uncertainty,” not calculable “risk.” To assign probabilities to future economic measures is foolhardy. To act on them is irresponsible.
Or courting disaster?
But, we are troubled by one of the core tenants of Keynesian thought – the belief in the propriety of heavy-handed intervention by governments in their economies. In fact, we believe the recent “failure of capitalism” was more a failure of governments in implementing exactly what Keynes promotes – aggressive fiscal and monetary intervention. Such actions provide little measurable near-term benefit while invariably sowing the seeds of the next economic disaster.
The most recent economic meltdown is a good example. Between the Federal Reserve’s speculation-inducing too-easy money and too-low interest rates in response to past economic slowdowns, and Congress’s steadily ballooning deficit spending, private sector excesses were not only widely encouraged, but were willingly financed. Add Congress’ irresponsible relaxation of mortgage lending standards, and housing became the epicenter of the second worst economic collapse in our nation’s history, and the worst in terms of worldwide losses.
Not only did governments (especially ours) do what they shouldn’t have done, they also failed to do what they should have done. They shirked their responsibility to properly oversee and regulate their public and private sector enterprises. Free-market capitalism excels at building national wealth, but without proper constraints, it can result in unhealthy concentrations of private sector wealth and power, and in alternating excesses of optimism and pessimism. This, too, was a factor in the recent economic maelstrom.
An even more severe criticism of Keynesian principles comes from the Austrian School of economic thought led by Nobel Laureate Friedrich von Hayek. It opines that application of Keynes' policies inevitably leads to excessive state control if not pure socialism, to the severe detriment of international competitiveness, living standards, and personal freedoms.
The core strength of a capitalistic economy accrues from the multitude of small, largely self-interest-motivated economic decisions made daily by its millions of citizens. If properly regulated, this constantly evolving economic organism will produce a more effective, efficient, and stable economy than any central authority could ever be expected to achieve. To us, it’s the economic equivalent of democracy versus oligarchy. The economic “votes” of the citizenry will serve the economy better than the decisions of an elite few, no matter how well intentioned they may be.
Conflicting conclusions
Skidelsky concludes his arguments with the contention that Keynesian principles have historically delivered better economic results. He cites the period between 1951 and 2009, and suggests that what he identifies as the Keynesian period (1951 – 1973) saw higher GDP growth, less disparity of family incomes, and less unemployment than the Neo-Classical period (1980 – 2009). The inflation rate was slightly lower in the Neo-Classical period, but most importantly to Skidelsky, it suffered five periods of economic contraction versus none during the Keynesian period.
Our views differ, but not just for the reasons cited above. Even if government intervention can, or is believed to, moderate business cycles, it brings unintended and very unfavorable consequences. Individuals and companies throughout the economy see the moderated cycles as license to undertake increasingly risky behaviors (more debt, speculative trading, etc.). Eventually, these create excesses, often in the form of price bubbles, which are unsustainable and lead to collapsing markets that are beyond the government’s ability to contain, at least not without creating even more severe problems in the future. The financial system meltdown, still deflating housing bubble, and fiscally irresponsible government response provide a resounding example.
Much like the levees of New Orleans, the government “protections” espoused by Keynes and pursued by our government the last several years may have “worked.” But, they also created over-confidence and unwitting exposure to unpredictable and immeasurable calamities. In the end, these well-meaning “protections” exposed the citizenry to losses far in excess of what would have been incurred simply letting the economy (or river) flow through its natural cycles. Not only would the economic damage have been less, the public and private sector participants would have gained a better understanding of the risks and their responsibilities in a market-based economy.
www.corestates.us
