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NOTE What's Wrong With Keynes?

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Very glad right now to be joined by G.P. Manish, who is Assistant Professor of Economics in the Sorrell College of Business at Troy University, where he's also a member of the Manuel H. Johnson Center of Political Economy, which is a very free market institution. He holds a PhD from Suffolk University in Boston, and I'm very glad to welcome him right now to the show. G.P., glad to talk to you. Hi, Tom. Great to be here. Thanks for having me. All right. I want to talk to you specifically about, not just about

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about this crisis that the economy has gone through and the boom-bust cycle, but specifically

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about Keynes and Keynesianism and Keynesian remedies to situations like the one that we're

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in.

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So let's get started with, we're talking about the economist John Maynard Keynes and he said

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a great many things, but if you had to summarize for a lay audience, what is his basic argument

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that he's making?

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If you had to summarize the whole thing in one claim, what would that claim be?

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Well, that claim would be that a market-based capitalist economy is inherently unstable.

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That due to certain psychological propensities on the part of consumers and investors, the

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market economy is inherently unstable in the sense that it is constantly subject to waves

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of depression and then booms, and so you always have the prospect of unemployment and idleness

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So what follows then from that claim? I mean, in terms of policy, is there something that can be done according to the Keynesians?

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Well, I mean, what follows is basically that you have to somehow boost expenditure. So what Keynesians would say when he explains, for example, a depression or a recession,

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He will say, well, you know, investors and consumers just suddenly got spooked.

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I mean, they just, you know, stopped wanting to spend money.

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And so because they stopped wanting to spend money and they just hoarding cash,

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well, that's why you have these declines in output and then you have severe unemployment.

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And of course, this is something which is inherent in a market economy.

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The market forces cannot do anything to correct it.

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So obviously then what we need to do is to somehow boost expenditure or aggregate demand, as he would call it, from the outside.

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So we need either, you know, government expenditure in the form of fiscal policy, or we need the central bank to expand, you know, the currency through monetary policy.

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So that would be the policy aspect of the Keynesian doctrine.

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Now, there's a difficulty here for the man on the street, because when he hears this, there is a certain plausibility to it, because it sounds to him like, well, if there is less spending, then there would be a problem, because it does seem to him that economic activity is a matter of somebody buying a hat, and then the hat maker buys a banana, and then the banana person buys something else, and if that stream of expenditures comes to a halt, then clearly we are going to be thrown out of work, so we have to

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The Great Economist William Hutt said on the market there are no demand or expenditure problems. There are only pricing problems. So in other words, you need to understand why is it that this expenditure stream has dried up in the sense that it is not something which just falls from heaven, you know, like manna from heaven. It doesn't just, you know, fall on us unexpectedly. It's because there's no demand. There's no demand. There's no demand. There's no demand. There's no demand.

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There is some problem in the price mechanism because we would expect that if people want

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to spend less and if they want to increase the money that they demand, that entrepreneurs

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would adjust the production structure to those preferences because that's what entrepreneurs

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do on the marketplace.

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They're constantly in the business of speculating and trying to estimate prices or the prices

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of the Product of their products and if consumer preferences do change with respect to you

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know expenditure levels then well they are the best people available to adjust production

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activities to those preferences.

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Well you know of course in the wake of a bust we will of course see retrenchment in spending

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on the part of consumers.

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So how does how would somebody like yourself an Austrian economist when you look at these

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phenomena how are you interpreting them?

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How do you make sense of them?

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Right.

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And this is the other aspect, that the one grain of truth in Keynes and Keynesianism

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is to say that, well, in a recession, that consumers and investors are spooked.

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In the sense that is correct.

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But that doesn't just come about due to certain psychological, you know, problems on their

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part, that they just got scared all of a sudden.

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For coming from an Austrian perspective, well, we would look for the seeds of that expenditure

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problem in the boom itself.

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So in other words, we would say, well, no, it's not just that consumers and investors

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just suddenly just got paralyzed into spending, into reducing their expenditures.

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On the other hand, it's because of the fact that they made mistakes in the boom, right?

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So the boom was unsustainable, not only entrepreneurs, but even consumers are misled into making

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wrong choices, right?

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And that's largely because of the increases in money supply which take place during a

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boom.

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The result of that, when their errors are revealed, and that's precisely what a recession

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or a bust is all about, when errors which have been made during a boom are then revealed,

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well then, yes, they do get spooked because entrepreneurs are not used to making such

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drastic errors and not being corrected sooner because the market generally has a profit-loss

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system to weed out entrepreneurs who are making errors.

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So because of that, they do get spooked and then they do, you know, try to reduce their

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expenditures because they're trying to figure out what they did wrong and how to reallocate

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the resources to get back to profitability.

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But that is just a transient or passing phenomenon.

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It doesn't become entrenched in a market economy unless you have a whole slew of government

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measures to try to correct that process of correction.

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All right.

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Now, before we go any further, just for the sake of completeness, I suppose you can give

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What is the source of the errors that entrepreneurs are found to have made in the wake of a boom?

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Well, the errors are because of the elastic or expansionary monetary policy fed through the banking system.

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So because of the fact that interest rates are artificially lowered, entrepreneurs are fooled into thinking that there is a greater pool of savings than there actually is.

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and because of that they start undertaking these long-term, longer-term projects than they would undertake otherwise and of course as this extra money is flowing down from entrepreneurs through to the people they employ and then of course consumers also start spending that money, right, and so there's a consumption boom as well.

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So the entrepreneur who is undertaking wrong or being misled into undertaking certain production projects,

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but on the other hand, consumers are also being misled into spending more than they would have otherwise

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because most of the assets that they own, for example, stocks or shares or in the most recent recession it was housing,

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all these assets are rising in wealth and so they get fooled into thinking that they're wealthier than they were before.

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In a sense, it's all these errors which are all caused by an expansionary monetary policy.

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Now I think on a popular level, a lot of people who are, you know, like free market college

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students and stuff, or just the, again, the man on the street who has an inclination that

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the free market is the best economic system, sometimes when they're faced with Keynesian

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arguments, they'll just throw the broken window fallacy out there and say, ah, well, this

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is just the broken window fallacy.

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The Keynesians will say, you know, well, we need to build a bridge and that'll put people back to work.

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And then the free market people say, well, that's just going to take money from somewhere else and resources from somewhere else.

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And so it's a wash. But the Keynesians understand that under full employment, it would be a wash.

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They understand the broken window fallacy.

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So what they're saying is that in a depression, things are different because the resources have no alternative uses.

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They're idle. So there is nothing else that the guy with the window would have done with the money.

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So how do you answer that when they say we need fiscal stimulus and it isn't going to hurt us because these resources are idle and they have no alternative use? The broken window fallacy doesn't apply here.

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Well, I mean, the first thing to say to that would be that, well, just because they're idle doesn't mean they're not scarce anymore, right? There is scarcity. They do have alternate uses and the market is the best place.

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Entrepreneurs are the best people to decide what to do with idle resources. But more, again, this comes back to the problem of why are they idle in the first place? Right? And that's the real problem where we have to debate the Keynesians. Because for Keynesians, idleness is just, you know, something which just arises because investors just got spooked. You know, they just suddenly stop spending because they have a wave of pessimism. Do we have to understand why is it that idleness arises in the first place? And then, of course, to also stress the fact that just because

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Transcription is available on the web at www.profile-financial.com.

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We treat it as if, you know, this idleness just, we have to do something, like this mentality of that, oh, now that we have idleness, we have to do something, we have to understand why is it that the market, I mean, or this idleness arose, and then once you understand that, then of course, the next logical step is to realize that you don't repeat the same mistakes. That caused the idleness in the first place. Right, and I quoted at one point Krugman several years ago, saying how impatient he was with all these people, spending their time considering how we get into this mess, instead of talking about

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about how to get out of it.

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But obviously the two things are related.

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So why then, why are we suddenly faced

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with a whole bunch of idle resources,

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whether it's usually labor,

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but also a great many capital goods?

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Why are they suddenly idle?

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Well, they're suddenly idle because the market

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has to go through this huge adjustment process

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to correct errors.

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So when a boom turns to a bust

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and all of a sudden entrepreneurs are faced

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with all these errors that they've made,

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And they need time to readjust the production structure to the underlying preferences because

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they have been misled by, you know, the elastic monetary policy or the expansionary monetary

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policy.

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So the savings which they thought were there were not there.

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So now they need to readjust the production structure to, you know, the preferences that

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exist right now, which they were misled into thinking, into, you know, into misestimating.

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And that process takes time.

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And so, yes, there will be some idleness as that process readjusts when a boom turns to

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a bust.

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But of course, that idleness is only going to be ephemeral, it's going to be fleeting,

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right?

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Entrepreneurs, that's what they do for a living.

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They try to allocate resources the best possible way.

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But what makes it something which is, you know, something which lasts for many years

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is because then the government gets involved and tries to stop that adjustment process.

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So we need the markets more than ever when the process of adjustment is going to take place.

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Alright, we have to take a break right now, so stand by for me to the other side of the break where we're going to talk about,

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continue talking a little bit about Keynes, but also just about the Austrian School in general and what its prospects are,

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given that it seems like we have the answers and all they have is destruction and despair,

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so you would think we would be victorious one of these days.

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Since the Peter Schiff Show was last on the air, the national debt added another $7.89 million.

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Luckily, Peter's intelligence is growing twice as fast.

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Welcome back everybody to The Peter Schiff Show. Tom Woods filling in for Peter.

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Joined by Professor G.P. Manish, whom you can visit at GPManish.com. That's G-P-M-A-N-I-S-H.com.

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G.P., we have an in-house question here. I'm going to read it to you and then try and get a

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brief answer from you because there's a limited time and I want to cover a lot of stuff. So here

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Here goes. Everybody hates the bust part of the cycle. To some extent, Keynesianism, or modern economics, seems to be an attempt to ease or reduce these busts.

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Is the message of the guest that we should learn to see the busts as good and necessary?

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And does this mean we would go back to what we had in the 1800s when bank failures were very common? Would this be a good thing?

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Are such frequent bank failures somehow good and necessary? Okay, ready, go.

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All right. Partly yes and partly no in the sense that given that we've had a boom and all the errors,

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yes, the best thing to do would be to let the errors be liquidated, to let it play out,

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to correct the production structure to the underlying consumer preferences the right way.

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So yes, I do agree that insofar as you do have a boom and you do have errors, the best thing to do

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would be to let market forces play out. But of course, the thing is how do we stop these

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Right, and that's what the Austrian School with the business cycle theory, talking about getting the Fed and getting artificial credit creation stopped, that's where the fake booms are coming from, and so that's what we are, we are also trying to ease or reduce these busts, that's what the Austrians are trying to do, but in a different way.

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Alright, now today, I mean, just shifting gears a bit to current events, we've had jobs figures come in, 7.7% the unemployment rate is down to, and so there's a lot of cheering about this, but on the other hand, the labor force participation rate is also falling considerably, and that's one of the reasons that we've seen this number fall.

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So what do you make of this and do you believe that what has happened in terms of unemployment

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since 2008 is, well, I mean, do you think it hurts the Keynesians?

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Does it vindicate them?

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Does it vindicate us?

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How do you make sense of it all?

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Well, I mean, the first thing you'd have to do is to disaggregate the numbers and lots

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Most of the jobs which have been added have been added in DC related to government work

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and so that's not a healthy sign.

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You want the private sector to be adding jobs, not the jobs to be going to DC.

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Secondly, the unemployment rate hasn't gone down the way the Keynesians would have liked

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it to go down.

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Of course, then they say that, well, it would have been much worse if we hadn't done it,

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but then their whole argument to begin with was that it would go down phenomenally with

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with the stimulus program, but that didn't happen, so I would say that is a problem for the Keynesians. It doesn't vindicate their position.

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Now, what year did you move to the United States?

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2008, in fact. It was right in the middle of all of this stuff.

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Okay. All right. Just the right time. Well, of course, that would have been a good...

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Absolutely the right time. Just before the bailouts, I think.

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That's right. It would have been a good time to think about buying a house, I suppose.

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I've never actually asked you your full story and then I didn't want to ask you in advance of this because I didn't want the interview to be canned, but I sort of feel like I've heard fleeting anecdotes about how you were watching Austrian-related and even Ron Paul YouTubes in India. Did this inspire you to come to the US? What's your story?

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Well, I got into Austrian economics long before Ron Paul's first presidential run.

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It was largely because I was dissatisfied with the economics I was being taught when

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I did my masters in India, so I just nosed around in the library and I found books by

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Mises and Hayek and Rothbard and Kirzner, which had been there since the 1950s.

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Somebody had been interested in it and had been collecting these books in our library

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in India.

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I, you know, that's when I got started. And of course, I also had, I mean, I was lucky that I could share some part of that process with, you know, my wife, who was then my girlfriend, who's also into economics and Austrian economics. But of course, we were alone. We just had a few friends who were kind of into this stuff. But with the Ron Paul thing, I was amazed that there were so many people who were actually interested in these ideas. That was a revelation to me. So yes, it did play some role in inspiring me to get

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more into this. And then the both of you, you and your wife moved to the U.S. and got your PhDs

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together at Suffolk University in Boston. Yes. Now you're at Troy University, she's at the College

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of Charleston, but as of next year you'll both be teaching at the same university. You guys are like

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living the academic dream. No husband and wife team can make that work. Yeah, we've been very

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lucky because firstly, I mean, it's because the people here at the Johnson Center really wanted

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to hire her as well. So, you know, that's why it worked out. We're just extremely lucky this doesn't happen often.

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Now, I know, obviously, given that you've only lived here since 2008, you can't comment on what the job prospects for an Austrian in academia have been over the past 20 years.

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But in your limited experience since being here, would you say that it's better than it once was, that maybe it's not hopeless to be an Austrian in academia?

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Well, I don't think it is hopeless. I think more and more Austrians are getting jobs. You just have to be smart about your dissertation topic and make sure that it's something which people are interested in.

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But definitely you can see the number of more and more people, for example, from George Mason University, which is, as of now, the main place from where PhD students interested in Austrian economics go to do their PhD.

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There are other PhD programs such as West Virginia University, for example Florida State University, where they are friendly. There might be one opening at Texas Tech University in the future under my dissertation advisor Ben Powell. So there are opportunities and the job market is, I mean, as far as, again, I wouldn't know what it was like in the 80s or the 90s, but there are

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We've got about a minute left. What would you recommend to somebody who is fascinated by this stuff, wants to know more, and wants to read one or two books to get started on the path of knowledge? Where would you steer that person?

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Well, I'd definitely steer him towards reading Rothbard, Hayek. If he's interested, for example, in what's happening with the current monetary problems to pick up Rothbard's America's Great Depression or to read Roger Garrison's Time and Money, these are the books which would help him if he's an introductory reader, if he hasn't read these ideas before.

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After he does read those books he should go on to read the books of Mises and Hayek, and even Henry Hazlitt, Henry Hazlitt's book, Criticizing Kings, is one of the books which got me started in Austrian economics.

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I think it's called the failure of new economics, if I'm not mistaken.

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Yes, that's right. Well, unfortunately, we're out of time, but thank you very much, GP. A great pleasure talking to you, as always.

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Thank you. It's great to be with you.

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All right, GP Manish, everybody. GPManish.com.