Well, good morning. It's so wonderful to be here with you today.
As Doug mentioned, I was a former Mises Fellow, like our two previous speakers,
and, like Bob Murphy, I also met my wife at a Mises Institute event.
Even better, it was right here at Jekyll Island in 1992,
when the Mises Institute held a conference on the Federal Reserve system.
We were both graduate students at that time and Mises Fellows.
We met here at the conference, Mises Institute Conference on the Fed, carried on a long distance courtship,
eventually ending in marriage and three wonderful children and all the rest is history.
So, as Doug mentioned this morning, if you are single, forget about the bar scene, online dating, come to Mises Institute events.
I guess, by the way, that does make me probably the only person here in the room or make my wife and I the only two people here, you know, personally to benefit from the creation of the Federal Reserve system in a very substantial way.
Thank you. Thank you, Wilson. Thank you, Mr. Rockefeller, Mr. Morgan, and so on.
I should also add that I did have a personal encounter
with Ben Bernanke about nine months ago in May of 2009.
I was attending a research workshop
at the Federal Reserve Board in Washington
and my host and I were going to lunch in the canteen there
and we got on the elevator, just myself and my host
and just as the elevator door was about to close,
It opened again and in walks Mr. Bernanke and his secret service aide.
So it's just the four of us on this elevator ride.
Now, you know, this is one of these moments that you, you know,
you don't anticipate something like this happening.
Now, if I had been prepared, you know, there's a whole lot of things I could have done.
I don't mean, you know, bodily harm, but, you know,
I wish I'd had a copy of End the Fed with me.
I could have whipped it out, you know, asked him to sign it.
You know, all I could think of was to mention the fact that it was, in fact, my birthday that day, which it was, and I asked him if he could sing a few bars of Happy Birthday. I wish he did, actually. So that is at least one trivial sense in which I was able to become the Chairman of the Federal Reserve Board to sort of do my bidding. You know, this may give me an opening now to ask him to do a few other things, like resign.
So, by the way, I sort of followed him into the canteen or the mess hall there at the Fed, it's actually pretty nice, as you could imagine.
They have different stations, they have a salad bar and a Mexican food station, a pizza station and so on.
He went right to the pizza station, and so I was curious to see what he would order.
And so he ordered a personal pizza, and when he went to pick it up, the attendant said,
Would you like me to cut it into six slices or eight?
And he said, well I'm extra hungry today, you better make it eight.
Well, speaking of bad guys, I want to talk to you this morning about John Maynard Keynes.
You know, many people have described the last year or so, the last couple of years, in terms of most people's diagnosis or analysis of the financial crisis and the recession and indeed the policy response to those events as sort of a rebirth or a rediscovery of the ideas of the great John Maynard Keynes. It's truly been a Keynesian moment. Recent events have been a series of Keynesian moments for good or ill.
You know, which makes it a tough time for Austrians, in a sense it provides a wonderful opportunity,
you know, what they call a teachable moment, at the same time it can be a little bit discouraging.
In the fall, David Leonhart, who writes a column for the New York Times, said the following,
he said, the indispensable economist of the moment is clearly John Maynard Keynes.
Keynes's prescription for financial crisis, aggressive government action, and by definition big budget deficits, has been Washington's basic approach since Lehman Brothers collapsed in September of 2008.
And, you know, Leonhardt is right, at least as far as public perception and to some degree within academia as well.
Keynesian economics once thought to have been buried by the monetarist counter-revolution
and the rational expectations movements of the 1970s and 1980s within academia and within
practice as well, Keynesian economics has returned and with a vengeance.
Now to the Austrian economist as you've already heard a little bit this morning and we'll
continue to discuss this weekend, Keynesian economics is both in its original form and
and in some of its fancy modern reincarnations, nothing more than a tissue of fallacies, a
resurrection of long discredited under-consumptionist theories that were well known in the 19th
and early 20th centuries and in which no serious economist, no economist in the 1930s, early
1930s would have taken seriously.
Indeed, at the beginning of the Great Depression, one of the leading, if not the leading explanation
for the crisis done underway was the Austrian theory of the business cycle associated with
Mises and Hayek, popularized by Lionel Robbins in the UK in his book The Great Depression,
the understanding that there had been a credit boom in the previous decade, an unsustainable
boom that had burst, revealing a pattern of malinvestments that needed to be liquidated
for recovery to take place.
This was conventional wisdom among intellectuals and policy makers, at least in some circles
in the 1930s.
But all of that was swept aside when John Maynard Keynes published his famous book The
General Theory of Employment, Interest and Money in 1936.
Forget the boom, forget malinvestment, forget the capital structure according to Keynes.
No, the problem is very simple. Insufficient aggregate demand, a problem easily solved with cheap money and massive government expenditures.
Best of all, it didn't matter what the government spent the money on, just as long as the government spent,
because spending has this marvelous, indeed miraculous ripple effect, pulling the private economy back on its feet.
Politicians, as you can imagine, ate this up. They loved this.
Keynes's younger disciples mathematized the theory and mainstream macroeconomics was born.
Now Keynesianism quickly became the dominant approach to macroeconomic thinking,
especially after it was incorporated into the textbooks,
into the advanced graduate texts and the standard undergraduate textbooks
by evangelical Keynesians such as the late Paul Samuelson in the 1940s, early 1950s.
The Keynesian idea that the economy is sort of a giant machine that can be manipulated or steered or indeed fine-tuned by enlightened bureaucrats and politicians
was always in the interest of maintaining full employment, of course.
This was so ingrained by the 1950s that a New Zealand engineer named Bill Phillips built an actual machine, a water-operated machine out of tanks, valves, pipes and tubes.
I should have brought a picture. If you look up the Phillips machine on Google, you can find some pictures of this machine.
was designed to model the economy, a water-based model of the sort of a Keynesian flow diagram, hence people sometimes refer to this period of thinking as the era of hydraulic Keynesianism.
Okay, the economy is like a giant hydraulic machine that the Keynesian engineer can manipulate.
Now, things indeed got better in the 1970s. Hayek won a Nobel Prize, as Chris Wesley mentioned, 1974.
The Austrian School experienced a revival within sort of academia, not only the Austrian approach, but in particular, the monetarist and rational expectations movements, which are in a sense, definite improvements over the Keynesian doctrine, help to drive the nail in the Keynesian coffin, or at least that's what we all thought.
When I was a graduate student in the 1980s and early 1990s, we learned that traditional Keynesianism was sort of a thing of the past.
And there were sort of so-called new Keynesian approaches that agreed with some of the Keynesian conclusions, but had a radically different sort of theoretical underpinning.
We thought that Keynesian economics was more or less dead, right?
But then we had the financial crisis in 2008 and 2009, the recession and so on, right?
So like, you know, like one of those movie zombies or vampires that, you know,
you stab it with a knife and you walk away and you think everything's fine,
and then it sits back up again and starts, you know, starts coming after you.
Keynesian economics is like that zombie, right?
We just, we can't kill the beast.
It keeps coming back. Is the economy in the doldrums? All it needs is stimulus. We just need some stimulus.
Turn on the printing presses. Flood the bond markets with treasury bills. Have the government spend, spend, spend, spend.
Of course, the free market doesn't spend enough. That's the problem, right?
We unenlightened individuals tend to hoard our money according to Keynes. We don't spend enough.
So only the state, the enlightened state, can fill that gap.
It's the duty of the state to step in and fill that gap.
Now, by the way, if you're worried that some of this additional money might lead to inflation,
you don't need to worry.
Recent speech by Janet Yellen, also a Berkeley professor, like Christina Romer.
Yellen is the head of the Federal Reserve Bank of San Francisco.
remarkable statement last fall she said I will be the first to say that it is
always difficult to get monetary policy just right thank goodness but but she
says the feds analytical prowess is top-notch and our forecasting record is
second to none
yeah you have to stop and laugh at that one for just a moment she says with
respect to our toolkit we certainly have the means to unwind the stimulus
Decades of careful analysis of the Keynesian doctrine, of substantive critique, systematic
refutation by Austrians and by other economists, many many presentations of superior alternative
Explanations, the Austrian Theory of the Business Cycle in particular, seem to have
little effect on sort of the public consciousness when we enter a time of crisis. So all of
the hard work that Austrians and other critics of Keynes have done over many, many years
seems to have had little effect. Sort of, it seems to have been all for naught. What's
going on? Why can't we kill this beast? Why can't we slay the Keynesian dragon once for
Or, more generally, if we Austrians are so right, if our theories are so true, our explanation
is so correct, why aren't we in the majority? Why aren't the top, most prestigious, mainstream
academic institutions filled with Austrians? Why isn't Austrian economics the dominant
or mainstream paradigm? The fact that it isn't, according to some critics, suggests that it
must not be any good, right? That Austrians have lost in the battle of, they've lost the battle of ideas. They've lost in the marketplace of ideas to Keynes and other sort of interventionist approaches.
There's been some research and some debate on specifically this question. There was an article a few years back by Sherwin Rosen, not a Keynesian but a neoclassical economist at Princeton University.
Also, the Auburn economist David Laband and Robert Tolleson, now at the University of Mississippi, I think, wrote a couple of articles on this, precisely on this idea of sort of the market test.
You know, has Austrian economics failed the market test by the fact that it has not been accepted by the mainstream of, within the academy and among the intellectuals and so on.
The Austrians, according to their view, simply lost the battle of ideas and should step away, should resign from the battlefield.
Now, by the way, neither of these three gentlemen is a Keynesian, and I sort of wonder how they feel about the resurgence of Keynesian economics,
if they feel that sort of neoclassical macro, their own preferred non-Keynesian models have also been rejected and failed the market test, I haven't asked.
According to this perspective, the simple fact is Keynes beat Hayek and Mises in the 1930s.
His ideas were better than theirs. His ideas won out in the debate intellectually and among the public.
Nowadays, people like Paul Krugman and Brad DeLong or Christina Romer or whoever, they've beaten us.
They're beating the contemporary Austrians. Their ideas have won out, so we should just sort of step aside.
In other words, the intellectual marketplace has spoken and the Keynesians have won.
Keynes is right.
Well, there's a major problem with this view, with this view of the world.
It's that this view rests on a particular understanding of how science works,
an understanding of what sort of the academic marketplace or the intellectual
marketplace
such as it is, you know, what it really is, how it works.
In fact, I would argue that this particular view of science is
completely contrary to everything we know about how science
has actually operated in human history.
It's a dangerously naive and misleading understanding
of the history of science, the economics of science, the politics of science,
the sociology of science, the culture of science, and so on.
If you take the time to study Murray Rothbard's
great two-volume set on the history of economic thought,
one of the important contributions of Rothbard's work
is sort of the overall framework
that is presented in the early chapters
for how to study the history of a scientific discipline,
economics in particular,
and why we would want to read the history of economic thought.
The conventional view is understood by most people
and as taught to most of us in high school
where we're taught about the so-called
the scientific method, the dispassionate search for truth,
the formulation of hypotheses that are then tested
against the empirical data with those that are correct
are validated, sort of embraced and incorporated into the received body of doctrine and those
that are wrong or refuted by the data discarded until we move gradually, incrementally, step-by-step
as Rothbard used to put it, upward and onward into the light.
That view does not square with what we know about how science actually operates.
In reality, scientific errors, errors in any field of science, particularly in social science
or the humanities, errors can stick around for a very long time.
Truth doesn't always win out over error in the scientific enterprise.
Why?
Well, there are a lot of reasons, institutional reasons, funding reasons, there are a lot
of financial and other incentives, there are personality issues, so it's an extremely
complex process.
But we must always be on guard against what Rothbard called the Whig Theory of Intellectual
History.
And I'll quote from the introduction to Rothbard's History of Thought.
He says, quote, on analogy with the Whig Theory of History, coined in mid-19th century England,
which maintained that things are always getting and therefore just get better and better,
the Whig Historian of Science, seemingly on firmer grounds than the regular Whig Historian,
implicitly or explicitly asserts that later is always better in any particular scientific
discipline. The Whig historian, whether of science or history proper, really maintains
that for any point of historical time, whatever was, was right, or at least better than whatever
was earlier. The result, Rothbard concludes, is an infuriating, pan-Glossian optimism.
This implies that every individual economist contributed their important might to the inexorable
upward march. There can, then, be no such thing as gross systematic error that deeply
flawed or even invalidated an entire school of economic thought, much less sent the world
of economics permanently astray. So, according to the conventional understanding that many
people have of how the scientific enterprise works, there can be no such thing as gross
systematic error within a body of scientific thought because it would have been discovered,
these errors would have been refuted by experimental evidence and other evidence, and the scientists
would have rejected those errors and moved on.
Now this, you know, this naive Panglossian view of science was shattered with the publication
of Thomas Kuhn's influential book, The Structure of Scientific Revolutions in 1962.
This is the book that coined or at least popularized the term paradigm.
We all talk about the old paradigm, the new paradigm.
This comes out of Kuhn's book where he describes science as operating at any particular time
under the influence of a dominant or reigning paradigm.
So in Kuhn's view, within any particular scientific discipline, there are a set of ground rules
that establish sort of what questions can legitimately be asked, what questions are
kind of beyond the pale and inappropriate for study, what kinds of research methods
can be used, what kinds of analytical techniques, what kinds of discourse are allowed and so
on. This set of ground rules constitutes the dominant paradigm or the ruling paradigm.
So there may be kinds of scientific investigation within that field that are not performed or
or if performed are sort of ignored or shunned to the side because they don't follow these
established rules.
One implication is that knowledge can be lost, that a particular paradigm may be inappropriate
for addressing concerns, real world or other concerns.
The new paradigm might actually be worse than the old paradigm.
So in other words, in periods of crisis like we have now, we see a lot of discredited theories
like Keynesian economics that sort of experience a rebirth, right, and are embraced for a variety
of reasons having little or nothing to do with scientific truth.
By the way, Keynesian economics is not the only old fallacy making a comeback.
I've also seen some calls in recent weeks for a new sort of state industrial planning
like the, you know, the Japanese meaty experience in the 1980s, which worked, turned out so well.
The Wall Street Journal had a piece about two weeks ago calling for, quote, systematic government incentives to help U.S. industry compete across the board.
It was written by a former executive of the Shell Oil Company.
And in the current issue of the Harvard Business Review, there's a piece by Nobel laureate Edmund Phelps and his co-author Leo Tillman calling for a first national bank of innovation.
A government enterprise to help fund long-term, high-risk investment, because you see private investors are unwilling to fund appropriate levels of high-risk, long-term investment.
So, in other words, in the Kuhnian model, there's no reason to think that the reigning paradigm is necessarily more correct than alternative paradigms.
It just happens to be the paradigm that rules at any particular time.
By the way, those in charge of the reigning paradigm work hard to suppress dissenting opinion, mostly by ignoring it, occasionally by ridiculing it, witness the occasional mention of Austrian economics by people like Paul Krugman, his infamous piece in Slate in 1998, I think, belittling the Austrian business cycle theory as what he called the hangover theory, despite many, many responses
Mr. Krugman explaining carefully how he doesn't understand anything about the Austrian approach.
He continues to refer to his decisive reputation.
Look at the sort of climate gate scandal.
This is very clear, whatever the truth is in regard to what was done and what records
were kept and so on.
This is one of the great things about the climate gate scandal is to challenge this
sort of naive view that scientists are completely disinterested and that they're always open
into challenges to their received views and so on.
That, you know, this simply isn't the case.
By the way, I'm not endorsing
sort of a prescriptive Koonianism,
saying it's good that science works this way.
I'm simply claiming that this is the way
that science, in fact, does work.
Other speakers have already mentioned
kind of the basic elements of the Keynesian doctrine.
We'll talk even more about it in other,
rest of the weekend.
You know, so I won't go through the details now, but we'll stipulate that from the Austrian
perspective there are very few redeeming features of the Keynesian doctrine, okay?
So if it's so bad, why can't we kill it?
Why does it keep coming back?
I mean, there are some, you know, we could give mainstream economists, both in the 1930s
and 40s and today, you know, sort of the benefit of the doubt, and say that, well, I mean,
there are some, there were some defects or deficiencies in the presentation of the Austrian
cycle theory as it was made in the 30s. I mean, for one thing, even well-meaning scholars
and intellectuals at the time, you know, the phenomenon they wanted to understand was why
Why the Great Depression was so deep, why it was lasting so long, and focusing on the
boom of the previous decade seemed very disconnected to many of them. They wanted to know, well,
what do we do now? Forget about how we got here. What do we do now to get out? And the
Austrian remedy of, well, sit back, allow the malinvestments to be liquidated, that
That didn't seem very appealing to many people.
You know, Keynes said, it doesn't matter how we got here, but here's how you can spend
your way out.
A lot of people said, well, I mean, maybe this guy is offering an explanation for something
that the Austrians really haven't focused on.
And to be honest, Austrian capital theory, on which the business cycle, Mises-Huyck business
cycle theory is based, can be difficult and challenging.
In economics, Austrian prescriptions don't fit on bumper stickers.
It's hard to get them on t-shirts, even though the Mises Institute does have a nice t-shirt
series.
Unlike sort of Keynesian prescriptions, it's just hard to get people to accept this.
But I think there are other more ideological sort of interest group explanations at work
as well.
There's an interesting book that came out in 2008 by historian of economic thought John
and Wood called The History of Macroeconomic Policy in the United States published by Routledge.
And he argued that U.S. fiscal and monetary policy have been remarkably consistent over
a long period throughout U.S. history as sort of independent of what sort of academics or
what economic theory says to do with the time.
In other words, the direction of influence is from economic policy to macroeconomic theory
rather than the other way around.
and this is of course the typical explanation, easiest explanation for the spread of Keynesianism
after 1936. Rather than proposing a new and sort of superior theory of how economies work,
rather Keynesianism provided a rationalization, intellectual cover if you like, for the massive
deficit spending and expansionary policies that were already underway, that had long
have long been favored by interventionist governments and at last, which at last finally had an intellectual champion.
This is no surprise to see why the Keynesian doctrine appealed to so many people.
The Chicago economist Luigi Zingales had a nice way of putting it last year in an op-ed piece.
He said, Keynesianism has conquered the hearts and minds of politicians and ordinary people alike
because it provides a theoretical justification for irresponsible behavior.
Medical science has established that one or two glasses of wine per day are good for your long-term health,
but no doctor would recommend a recovering alcoholic to follow this prescription.
Unfortunately, Keynesian economists do exactly this.
They tell politicians who are addicted to spending our money that government expenditures are good.
They tell consumers who are affected by severe spending problems,
Problems, the plasma TVs and so on that Bob Murphy mentioned, that consuming is good and
saving is bad. In medicine, such behavior would get you expelled from the medical profession.
In economics, it gives you a job in Washington. I think this description applies equally well
to the events of the 1930s and 1940s when the Keynesian consensus emerged. As I point
out, this idea of massive deficit spending to cure the depression began with Hoover,
This was mentioned earlier, and Roosevelt in the early 30s, long before Keynes' book appeared in 1936.
Keynes' book did propose a new direction for economic policy.
Sorry, Keynes' book did not provide a new direction for economic policy.
It just provided a scientific rationale, an allegedly scientific rationale, for policies already in place.
Place. So I guess let me conclude by recommending, well let me say just a word about sort of
the revival of Austrian ideas that we've seen in the last year or two. I mean this is tremendous,
it's all for the good, right, that as the Keynesian perspective has been revived and
has, is getting so much attention, you know, a few thoughtful people, even a few thoughtful
People in Academia are beginning to look for plausible alternatives.
Just in case the dominant Keynesian model is wrong, what else could we put in its place?
The Austrian theory of the business cycle is beginning to get a little bit more attention.
Someone mentioned, I think Doug mentioned the rap video, the Hayek-Keynes rap video,
which is tremendous.
It's highly recommended.
It's very useful for teaching purposes.
There was also the series that came out a few years ago on PBS called The Commanding
Heights. There's a book and a video series that I also recommend. It's very instructive
on sort of intellectual battles around macroeconomic theory and policy. But there's a sense that
sort of both the video and the commanding heights, both the rap video and the commanding
height series, they're a little bit misleading in one respect, namely that they imply that
within sort of intellectual circles and policy circles, there was this great debate between
Keynes and Hayek, or Keynes and Hayek and Mises, leading people to suspect, well Keynes
won so I guess maybe he was right. In fact, there really wasn't a battle like that. Hayek
and Mises and the Austrians were not refuted by Keynes and his followers. They were simply
ignored. They were simply ignored. Keynes' view attracted many young disciples. The Austrian
Austrian Theory kind of petered out, as the famous line attributed to Max Planck, if science
progresses one funeral at a time. And therefore the challenge for us, those wishing to promote
the Austrian understanding of the world, in particular the Austrian Theory of the Business
Cycle, may wish to focus our attentions on reaching the next generation. It's great
to see so many Mises fellows here at the conference today and hopefully some of them will end
We end up being speakers at the conference celebrating the death of the Fed, maybe, that we have 10 years from now, something like that.
And maybe that's one approach for us to take to focus on the next generation.
We can also focus on trying to influence what Hayek called the second-hand dealers and ideas, right?
Not the professors and not the government officials so much, but journalists and people in think tanks and teachers and clergy
and others who have an influence on public opinion and may be in a position to consider
an alternative view. To a tenured professor who's thoroughly committed to either neoclassical
economics more generally or Keynesian macroeconomics more specifically, to that person there's
very little reason to abandon a lifetime of study and a long commitment to a particular
view of the world to embrace a radical alternative. There's just not much in it for that person.
They might prefer to embrace the lyric from the old blues song,
If loving you is wrong, I don't want to be right.
I won't sing it for you as Jeff Tucker sang in Salamanca for those who are here.
So, Mises reminded us in adopting that motto from Virgil,
remember Mises' motto, do not give in to evil but proceed ever more boldly against it.
Well, now, in the middle of this Keynesian moment, I think we have a unique opportunity
not to give in to Keynesian thinking, not to treat the revival of Keynes and the dominant
of Keynes' thinking as inevitable, but rather to fight very boldly against it.
Not by trying to refute systematically those who hold the opposite view, but to bypass
that view, to try to reach the next generation, to try to reach influential thinkers and writers
and teachers and maybe at last through that mechanism we can finally put the
blade in the heart of this zombie and kill the Keynesian monster once and for
all. Thank you.