WEBVTT NOTE Did Keynesian Economics Win the Battle of Ideas? 1 00:00:00.000 --> 00:00:03.800 Well, good morning. It's so wonderful to be here with you today. 2 00:00:03.800 --> 00:00:08.600 As Doug mentioned, I was a former Mises Fellow, like our two previous speakers, 3 00:00:08.600 --> 00:00:16.000 and, like Bob Murphy, I also met my wife at a Mises Institute event. 4 00:00:16.000 --> 00:00:21.800 Even better, it was right here at Jekyll Island in 1992, 5 00:00:21.800 --> 00:00:25.800 when the Mises Institute held a conference on the Federal Reserve system. 6 00:00:25.800 --> 00:00:29.800 We were both graduate students at that time and Mises Fellows. 7 00:00:29.800 --> 00:00:37.000 We met here at the conference, Mises Institute Conference on the Fed, carried on a long distance courtship, 8 00:00:37.000 --> 00:00:41.300 eventually ending in marriage and three wonderful children and all the rest is history. 9 00:00:41.300 --> 00:00:54.900 So, as Doug mentioned this morning, if you are single, forget about the bar scene, online dating, come to Mises Institute events. 10 00:00:54.900 --> 00:01:09.900 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. 11 00:01:09.900 --> 00:01:15.900 Thank you. Thank you, Wilson. Thank you, Mr. Rockefeller, Mr. Morgan, and so on. 12 00:01:15.900 --> 00:01:19.980 I should also add that I did have a personal encounter 13 00:01:19.980 --> 00:01:24.980 with Ben Bernanke about nine months ago in May of 2009. 14 00:01:26.800 --> 00:01:29.060 I was attending a research workshop 15 00:01:29.060 --> 00:01:32.660 at the Federal Reserve Board in Washington 16 00:01:32.660 --> 00:01:37.300 and my host and I were going to lunch in the canteen there 17 00:01:37.300 --> 00:01:41.480 and we got on the elevator, just myself and my host 18 00:01:41.480 --> 00:01:43.400 and just as the elevator door was about to close, 19 00:01:43.400 --> 00:01:48.600 It opened again and in walks Mr. Bernanke and his secret service aide. 20 00:01:48.600 --> 00:01:51.100 So it's just the four of us on this elevator ride. 21 00:01:51.100 --> 00:01:54.800 Now, you know, this is one of these moments that you, you know, 22 00:01:54.800 --> 00:01:57.200 you don't anticipate something like this happening. 23 00:01:57.200 --> 00:02:02.000 Now, if I had been prepared, you know, there's a whole lot of things I could have done. 24 00:02:02.000 --> 00:02:06.200 I don't mean, you know, bodily harm, but, you know, 25 00:02:06.200 --> 00:02:08.400 I wish I'd had a copy of End the Fed with me. 26 00:02:08.400 --> 00:02:11.200 I could have whipped it out, you know, asked him to sign it. 27 00:02:11.200 --> 00:02:41.200 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. 28 00:02:41.200 --> 00:02:51.200 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. 29 00:02:51.200 --> 00:02:58.200 They have different stations, they have a salad bar and a Mexican food station, a pizza station and so on. 30 00:02:58.200 --> 00:03:02.200 He went right to the pizza station, and so I was curious to see what he would order. 31 00:03:02.200 --> 00:03:08.200 And so he ordered a personal pizza, and when he went to pick it up, the attendant said, 32 00:03:08.200 --> 00:03:11.200 Would you like me to cut it into six slices or eight? 33 00:03:11.200 --> 00:03:16.200 And he said, well I'm extra hungry today, you better make it eight. 34 00:03:27.200 --> 00:03:33.200 Well, speaking of bad guys, I want to talk to you this morning about John Maynard Keynes. 35 00:03:33.200 --> 00:04:03.200 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. 36 00:04:03.200 --> 00:04:09.900 You know, which makes it a tough time for Austrians, in a sense it provides a wonderful opportunity, 37 00:04:09.900 --> 00:04:17.500 you know, what they call a teachable moment, at the same time it can be a little bit discouraging. 38 00:04:17.500 --> 00:04:24.900 In the fall, David Leonhart, who writes a column for the New York Times, said the following, 39 00:04:24.900 --> 00:04:30.700 he said, the indispensable economist of the moment is clearly John Maynard Keynes. 40 00:04:30.700 --> 00:04:43.700 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. 41 00:04:43.700 --> 00:04:51.700 And, you know, Leonhardt is right, at least as far as public perception and to some degree within academia as well. 42 00:04:51.700 --> 00:04:58.340 Keynesian economics once thought to have been buried by the monetarist counter-revolution 43 00:04:58.340 --> 00:05:03.980 and the rational expectations movements of the 1970s and 1980s within academia and within 44 00:05:03.980 --> 00:05:10.540 practice as well, Keynesian economics has returned and with a vengeance. 45 00:05:10.540 --> 00:05:14.180 Now to the Austrian economist as you've already heard a little bit this morning and we'll 46 00:05:14.180 --> 00:05:20.520 continue to discuss this weekend, Keynesian economics is both in its original form and 47 00:05:20.520 --> 00:05:27.960 and in some of its fancy modern reincarnations, nothing more than a tissue of fallacies, a 48 00:05:27.960 --> 00:05:34.320 resurrection of long discredited under-consumptionist theories that were well known in the 19th 49 00:05:34.320 --> 00:05:41.080 and early 20th centuries and in which no serious economist, no economist in the 1930s, early 50 00:05:41.080 --> 00:05:43.080 1930s would have taken seriously. 51 00:05:43.080 --> 00:05:50.000 Indeed, at the beginning of the Great Depression, one of the leading, if not the leading explanation 52 00:05:50.000 --> 00:05:57.480 for the crisis done underway was the Austrian theory of the business cycle associated with 53 00:05:57.480 --> 00:06:05.520 Mises and Hayek, popularized by Lionel Robbins in the UK in his book The Great Depression, 54 00:06:05.520 --> 00:06:11.040 the understanding that there had been a credit boom in the previous decade, an unsustainable 55 00:06:11.040 --> 00:06:17.760 boom that had burst, revealing a pattern of malinvestments that needed to be liquidated 56 00:06:17.760 --> 00:06:19.280 for recovery to take place. 57 00:06:19.280 --> 00:06:26.320 This was conventional wisdom among intellectuals and policy makers, at least in some circles 58 00:06:26.320 --> 00:06:27.800 in the 1930s. 59 00:06:27.800 --> 00:06:33.020 But all of that was swept aside when John Maynard Keynes published his famous book The 60 00:06:33.020 --> 00:06:38.420 General Theory of Employment, Interest and Money in 1936. 61 00:06:38.420 --> 00:06:44.280 Forget the boom, forget malinvestment, forget the capital structure according to Keynes. 62 00:06:44.280 --> 00:06:57.280 No, the problem is very simple. Insufficient aggregate demand, a problem easily solved with cheap money and massive government expenditures. 63 00:06:57.280 --> 00:07:04.280 Best of all, it didn't matter what the government spent the money on, just as long as the government spent, 64 00:07:04.280 --> 00:07:11.280 because spending has this marvelous, indeed miraculous ripple effect, pulling the private economy back on its feet. 65 00:07:11.280 --> 00:07:15.280 Politicians, as you can imagine, ate this up. They loved this. 66 00:07:15.280 --> 00:07:23.280 Keynes's younger disciples mathematized the theory and mainstream macroeconomics was born. 67 00:07:23.280 --> 00:07:29.280 Now Keynesianism quickly became the dominant approach to macroeconomic thinking, 68 00:07:29.280 --> 00:07:33.280 especially after it was incorporated into the textbooks, 69 00:07:33.280 --> 00:07:37.280 into the advanced graduate texts and the standard undergraduate textbooks 70 00:07:37.280 --> 00:07:44.280 by evangelical Keynesians such as the late Paul Samuelson in the 1940s, early 1950s. 71 00:07:44.280 --> 00:07:59.280 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 72 00:07:59.280 --> 00:08:03.280 was always in the interest of maintaining full employment, of course. 73 00:08:03.280 --> 00:08:19.280 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. 74 00:08:19.280 --> 00:08:25.280 I should have brought a picture. If you look up the Phillips machine on Google, you can find some pictures of this machine. 75 00:08:25.280 --> 00:08:39.280 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. 76 00:08:39.280 --> 00:08:46.280 Okay, the economy is like a giant hydraulic machine that the Keynesian engineer can manipulate. 77 00:08:46.280 --> 00:08:54.280 Now, things indeed got better in the 1970s. Hayek won a Nobel Prize, as Chris Wesley mentioned, 1974. 78 00:08:54.280 --> 00:09:16.280 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. 79 00:09:16.280 --> 00:09:26.280 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. 80 00:09:26.280 --> 00:09:40.280 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. 81 00:09:40.280 --> 00:09:43.360 We thought that Keynesian economics was more or less dead, right? 82 00:09:43.360 --> 00:09:50.600 But then we had the financial crisis in 2008 and 2009, the recession and so on, right? 83 00:09:50.600 --> 00:09:55.640 So like, you know, like one of those movie zombies or vampires that, you know, 84 00:09:55.640 --> 00:09:59.320 you stab it with a knife and you walk away and you think everything's fine, 85 00:09:59.320 --> 00:10:02.960 and then it sits back up again and starts, you know, starts coming after you. 86 00:10:02.960 --> 00:10:06.160 Keynesian economics is like that zombie, right? 87 00:10:06.160 --> 00:10:08.680 We just, we can't kill the beast. 88 00:10:08.680 --> 00:10:17.080 It keeps coming back. Is the economy in the doldrums? All it needs is stimulus. We just need some stimulus. 89 00:10:17.080 --> 00:10:25.540 Turn on the printing presses. Flood the bond markets with treasury bills. Have the government spend, spend, spend, spend. 90 00:10:25.540 --> 00:10:29.080 Of course, the free market doesn't spend enough. That's the problem, right? 91 00:10:29.080 --> 00:10:35.280 We unenlightened individuals tend to hoard our money according to Keynes. We don't spend enough. 92 00:10:35.280 --> 00:10:39.980 So only the state, the enlightened state, can fill that gap. 93 00:10:39.980 --> 00:10:43.080 It's the duty of the state to step in and fill that gap. 94 00:10:43.080 --> 00:10:48.880 Now, by the way, if you're worried that some of this additional money might lead to inflation, 95 00:10:48.880 --> 00:10:52.680 you don't need to worry. 96 00:10:52.680 --> 00:10:58.180 Recent speech by Janet Yellen, also a Berkeley professor, like Christina Romer. 97 00:10:58.180 --> 00:11:02.380 Yellen is the head of the Federal Reserve Bank of San Francisco. 98 00:11:02.380 --> 00:11:07.140 remarkable statement last fall she said I will be the first to say that it is 99 00:11:07.140 --> 00:11:13.900 always difficult to get monetary policy just right thank goodness but but she 100 00:11:13.900 --> 00:11:18.820 says the feds analytical prowess is top-notch and our forecasting record is 101 00:11:18.820 --> 00:11:21.580 second to none 102 00:11:23.740 --> 00:11:28.120 yeah you have to stop and laugh at that one for just a moment she says with 103 00:11:28.120 --> 00:11:32.300 respect to our toolkit we certainly have the means to unwind the stimulus 104 00:11:32.300 --> 00:11:48.460 Decades of careful analysis of the Keynesian doctrine, of substantive critique, systematic 105 00:11:48.460 --> 00:11:56.900 refutation by Austrians and by other economists, many many presentations of superior alternative 106 00:11:56.900 --> 00:12:02.060 Explanations, the Austrian Theory of the Business Cycle in particular, seem to have 107 00:12:02.060 --> 00:12:09.060 little effect on sort of the public consciousness when we enter a time of crisis. So all of 108 00:12:09.140 --> 00:12:14.220 the hard work that Austrians and other critics of Keynes have done over many, many years 109 00:12:14.220 --> 00:12:19.820 seems to have had little effect. Sort of, it seems to have been all for naught. What's 110 00:12:19.820 --> 00:12:25.740 going on? Why can't we kill this beast? Why can't we slay the Keynesian dragon once for 111 00:12:25.740 --> 00:12:35.140 Or, more generally, if we Austrians are so right, if our theories are so true, our explanation 112 00:12:35.140 --> 00:12:43.420 is so correct, why aren't we in the majority? Why aren't the top, most prestigious, mainstream 113 00:12:43.420 --> 00:12:49.260 academic institutions filled with Austrians? Why isn't Austrian economics the dominant 114 00:12:49.260 --> 00:12:54.300 or mainstream paradigm? The fact that it isn't, according to some critics, suggests that it 115 00:12:54.300 --> 00:13:09.300 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. 116 00:13:09.300 --> 00:13:22.300 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. 117 00:13:22.300 --> 00:13:35.300 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. 118 00:13:35.300 --> 00:13:47.300 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. 119 00:13:47.300 --> 00:13:56.300 The Austrians, according to their view, simply lost the battle of ideas and should step away, should resign from the battlefield. 120 00:13:56.300 --> 00:14:04.300 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, 121 00:14:04.300 --> 00:14:14.300 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. 122 00:14:14.300 --> 00:14:24.800 According to this perspective, the simple fact is Keynes beat Hayek and Mises in the 1930s. 123 00:14:24.800 --> 00:14:31.300 His ideas were better than theirs. His ideas won out in the debate intellectually and among the public. 124 00:14:31.300 --> 00:14:39.300 Nowadays, people like Paul Krugman and Brad DeLong or Christina Romer or whoever, they've beaten us. 125 00:14:39.300 --> 00:14:44.980 They're beating the contemporary Austrians. Their ideas have won out, so we should just sort of step aside. 126 00:14:44.980 --> 00:14:50.060 In other words, the intellectual marketplace has spoken and the Keynesians have won. 127 00:14:50.060 --> 00:14:52.740 Keynes is right. 128 00:14:52.740 --> 00:14:58.780 Well, there's a major problem with this view, with this view of the world. 129 00:14:58.780 --> 00:15:06.240 It's that this view rests on a particular understanding of how science works, 130 00:15:06.240 --> 00:15:09.960 an understanding of what sort of the academic marketplace or the intellectual 131 00:15:09.960 --> 00:15:11.440 marketplace 132 00:15:11.440 --> 00:15:15.240 such as it is, you know, what it really is, how it works. 133 00:15:15.240 --> 00:15:19.100 In fact, I would argue that this particular view of science is 134 00:15:19.100 --> 00:15:23.440 completely contrary to everything we know about how science 135 00:15:23.440 --> 00:15:26.960 has actually operated in human history. 136 00:15:26.960 --> 00:15:30.800 It's a dangerously naive and misleading understanding 137 00:15:30.800 --> 00:15:35.060 of the history of science, the economics of science, the politics of science, 138 00:15:35.060 --> 00:15:38.740 the sociology of science, the culture of science, and so on. 139 00:15:42.980 --> 00:15:46.380 If you take the time to study Murray Rothbard's 140 00:15:46.380 --> 00:15:49.660 great two-volume set on the history of economic thought, 141 00:15:49.660 --> 00:15:52.880 one of the important contributions of Rothbard's work 142 00:15:52.880 --> 00:15:55.420 is sort of the overall framework 143 00:15:55.420 --> 00:15:57.620 that is presented in the early chapters 144 00:15:57.620 --> 00:16:00.900 for how to study the history of a scientific discipline, 145 00:16:00.900 --> 00:16:02.580 economics in particular, 146 00:16:02.580 --> 00:16:07.580 and why we would want to read the history of economic thought. 147 00:16:07.580 --> 00:16:10.820 The conventional view is understood by most people 148 00:16:10.820 --> 00:16:14.100 and as taught to most of us in high school 149 00:16:14.100 --> 00:16:16.940 where we're taught about the so-called 150 00:16:16.940 --> 00:16:21.940 the scientific method, the dispassionate search for truth, 151 00:16:22.700 --> 00:16:26.300 the formulation of hypotheses that are then tested 152 00:16:26.300 --> 00:16:29.820 against the empirical data with those that are correct 153 00:16:29.820 --> 00:16:35.340 are validated, sort of embraced and incorporated into the received body of doctrine and those 154 00:16:35.340 --> 00:16:42.700 that are wrong or refuted by the data discarded until we move gradually, incrementally, step-by-step 155 00:16:42.700 --> 00:16:47.340 as Rothbard used to put it, upward and onward into the light. 156 00:16:47.340 --> 00:16:53.880 That view does not square with what we know about how science actually operates. 157 00:16:53.880 --> 00:17:00.640 In reality, scientific errors, errors in any field of science, particularly in social science 158 00:17:00.640 --> 00:17:07.600 or the humanities, errors can stick around for a very long time. 159 00:17:07.600 --> 00:17:11.000 Truth doesn't always win out over error in the scientific enterprise. 160 00:17:11.000 --> 00:17:12.000 Why? 161 00:17:12.000 --> 00:17:16.480 Well, there are a lot of reasons, institutional reasons, funding reasons, there are a lot 162 00:17:16.480 --> 00:17:21.240 of financial and other incentives, there are personality issues, so it's an extremely 163 00:17:21.240 --> 00:17:23.280 complex process. 164 00:17:23.280 --> 00:17:28.880 But we must always be on guard against what Rothbard called the Whig Theory of Intellectual 165 00:17:28.880 --> 00:17:29.880 History. 166 00:17:29.880 --> 00:17:33.960 And I'll quote from the introduction to Rothbard's History of Thought. 167 00:17:33.960 --> 00:17:41.200 He says, quote, on analogy with the Whig Theory of History, coined in mid-19th century England, 168 00:17:41.200 --> 00:17:46.520 which maintained that things are always getting and therefore just get better and better, 169 00:17:46.520 --> 00:17:51.760 the Whig Historian of Science, seemingly on firmer grounds than the regular Whig Historian, 170 00:17:51.760 --> 00:17:57.960 implicitly or explicitly asserts that later is always better in any particular scientific 171 00:17:57.960 --> 00:18:03.160 discipline. The Whig historian, whether of science or history proper, really maintains 172 00:18:03.160 --> 00:18:09.880 that for any point of historical time, whatever was, was right, or at least better than whatever 173 00:18:09.880 --> 00:18:18.880 was earlier. The result, Rothbard concludes, is an infuriating, pan-Glossian optimism. 174 00:18:18.880 --> 00:18:24.440 This implies that every individual economist contributed their important might to the inexorable 175 00:18:24.440 --> 00:18:30.920 upward march. There can, then, be no such thing as gross systematic error that deeply 176 00:18:30.920 --> 00:18:36.340 flawed or even invalidated an entire school of economic thought, much less sent the world 177 00:18:36.340 --> 00:18:41.500 of economics permanently astray. So, according to the conventional understanding that many 178 00:18:41.500 --> 00:18:46.820 people have of how the scientific enterprise works, there can be no such thing as gross 179 00:18:46.820 --> 00:18:52.980 systematic error within a body of scientific thought because it would have been discovered, 180 00:18:52.980 --> 00:18:57.320 these errors would have been refuted by experimental evidence and other evidence, and the scientists 181 00:18:57.320 --> 00:19:00.180 would have rejected those errors and moved on. 182 00:19:00.180 --> 00:19:07.400 Now this, you know, this naive Panglossian view of science was shattered with the publication 183 00:19:07.400 --> 00:19:13.040 of Thomas Kuhn's influential book, The Structure of Scientific Revolutions in 1962. 184 00:19:13.040 --> 00:19:18.480 This is the book that coined or at least popularized the term paradigm. 185 00:19:18.480 --> 00:19:21.160 We all talk about the old paradigm, the new paradigm. 186 00:19:21.160 --> 00:19:27.360 This comes out of Kuhn's book where he describes science as operating at any particular time 187 00:19:27.360 --> 00:19:32.720 under the influence of a dominant or reigning paradigm. 188 00:19:32.720 --> 00:19:42.280 So in Kuhn's view, within any particular scientific discipline, there are a set of ground rules 189 00:19:42.280 --> 00:19:48.320 that establish sort of what questions can legitimately be asked, what questions are 190 00:19:48.320 --> 00:19:53.160 kind of beyond the pale and inappropriate for study, what kinds of research methods 191 00:19:53.160 --> 00:19:58.360 can be used, what kinds of analytical techniques, what kinds of discourse are allowed and so 192 00:19:58.360 --> 00:20:04.820 on. This set of ground rules constitutes the dominant paradigm or the ruling paradigm. 193 00:20:04.820 --> 00:20:11.240 So there may be kinds of scientific investigation within that field that are not performed or 194 00:20:11.240 --> 00:20:15.840 or if performed are sort of ignored or shunned to the side because they don't follow these 195 00:20:15.840 --> 00:20:20.160 established rules. 196 00:20:20.160 --> 00:20:26.800 One implication is that knowledge can be lost, that a particular paradigm may be inappropriate 197 00:20:26.800 --> 00:20:31.160 for addressing concerns, real world or other concerns. 198 00:20:31.160 --> 00:20:39.760 The new paradigm might actually be worse than the old paradigm. 199 00:20:39.760 --> 00:20:46.040 So in other words, in periods of crisis like we have now, we see a lot of discredited theories 200 00:20:46.040 --> 00:20:51.960 like Keynesian economics that sort of experience a rebirth, right, and are embraced for a variety 201 00:20:51.960 --> 00:20:55.240 of reasons having little or nothing to do with scientific truth. 202 00:20:55.240 --> 00:21:00.640 By the way, Keynesian economics is not the only old fallacy making a comeback. 203 00:21:00.640 --> 00:21:06.520 I've also seen some calls in recent weeks for a new sort of state industrial planning 204 00:21:06.520 --> 00:21:12.760 like the, you know, the Japanese meaty experience in the 1980s, which worked, turned out so well. 205 00:21:12.760 --> 00:21:21.200 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. 206 00:21:21.200 --> 00:21:25.240 It was written by a former executive of the Shell Oil Company. 207 00:21:25.240 --> 00:21:36.480 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. 208 00:21:36.480 --> 00:21:50.480 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. 209 00:21:50.480 --> 00:22:00.480 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. 210 00:22:00.480 --> 00:22:05.480 It just happens to be the paradigm that rules at any particular time. 211 00:22:05.480 --> 00:22:35.480 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 212 00:22:35.480 --> 00:22:41.160 Mr. Krugman explaining carefully how he doesn't understand anything about the Austrian approach. 213 00:22:41.160 --> 00:22:44.800 He continues to refer to his decisive reputation. 214 00:22:44.800 --> 00:22:46.520 Look at the sort of climate gate scandal. 215 00:22:46.520 --> 00:22:52.880 This is very clear, whatever the truth is in regard to what was done and what records 216 00:22:52.880 --> 00:22:55.040 were kept and so on. 217 00:22:55.040 --> 00:22:59.480 This is one of the great things about the climate gate scandal is to challenge this 218 00:22:59.480 --> 00:23:04.580 sort of naive view that scientists are completely disinterested and that they're always open 219 00:23:04.580 --> 00:23:07.460 into challenges to their received views and so on. 220 00:23:07.460 --> 00:23:09.420 That, you know, this simply isn't the case. 221 00:23:09.420 --> 00:23:12.300 By the way, I'm not endorsing 222 00:23:12.300 --> 00:23:14.340 sort of a prescriptive Koonianism, 223 00:23:14.340 --> 00:23:16.740 saying it's good that science works this way. 224 00:23:16.740 --> 00:23:18.540 I'm simply claiming that this is the way 225 00:23:18.540 --> 00:23:21.380 that science, in fact, does work. 226 00:23:21.380 --> 00:23:23.340 Other speakers have already mentioned 227 00:23:23.340 --> 00:23:26.420 kind of the basic elements of the Keynesian doctrine. 228 00:23:26.420 --> 00:23:28.500 We'll talk even more about it in other, 229 00:23:29.540 --> 00:23:30.780 rest of the weekend. 230 00:23:30.780 --> 00:23:38.960 You know, so I won't go through the details now, but we'll stipulate that from the Austrian 231 00:23:38.960 --> 00:23:45.200 perspective there are very few redeeming features of the Keynesian doctrine, okay? 232 00:23:45.200 --> 00:23:49.380 So if it's so bad, why can't we kill it? 233 00:23:49.380 --> 00:23:54.660 Why does it keep coming back? 234 00:23:54.660 --> 00:24:00.380 I mean, there are some, you know, we could give mainstream economists, both in the 1930s 235 00:24:00.380 --> 00:24:04.900 and 40s and today, you know, sort of the benefit of the doubt, and say that, well, I mean, 236 00:24:04.900 --> 00:24:11.880 there are some, there were some defects or deficiencies in the presentation of the Austrian 237 00:24:11.880 --> 00:24:17.540 cycle theory as it was made in the 30s. I mean, for one thing, even well-meaning scholars 238 00:24:17.540 --> 00:24:22.660 and intellectuals at the time, you know, the phenomenon they wanted to understand was why 239 00:24:22.660 --> 00:24:30.480 Why the Great Depression was so deep, why it was lasting so long, and focusing on the 240 00:24:30.480 --> 00:24:36.880 boom of the previous decade seemed very disconnected to many of them. They wanted to know, well, 241 00:24:36.880 --> 00:24:41.540 what do we do now? Forget about how we got here. What do we do now to get out? And the 242 00:24:41.540 --> 00:24:48.140 Austrian remedy of, well, sit back, allow the malinvestments to be liquidated, that 243 00:24:48.140 --> 00:24:52.340 That didn't seem very appealing to many people. 244 00:24:52.340 --> 00:24:56.180 You know, Keynes said, it doesn't matter how we got here, but here's how you can spend 245 00:24:56.180 --> 00:24:57.180 your way out. 246 00:24:57.180 --> 00:25:00.960 A lot of people said, well, I mean, maybe this guy is offering an explanation for something 247 00:25:00.960 --> 00:25:04.380 that the Austrians really haven't focused on. 248 00:25:04.380 --> 00:25:09.420 And to be honest, Austrian capital theory, on which the business cycle, Mises-Huyck business 249 00:25:09.420 --> 00:25:13.580 cycle theory is based, can be difficult and challenging. 250 00:25:13.580 --> 00:25:19.820 In economics, Austrian prescriptions don't fit on bumper stickers. 251 00:25:19.820 --> 00:25:23.660 It's hard to get them on t-shirts, even though the Mises Institute does have a nice t-shirt 252 00:25:23.660 --> 00:25:24.660 series. 253 00:25:24.660 --> 00:25:29.380 Unlike sort of Keynesian prescriptions, it's just hard to get people to accept this. 254 00:25:29.380 --> 00:25:33.220 But I think there are other more ideological sort of interest group explanations at work 255 00:25:33.220 --> 00:25:34.220 as well. 256 00:25:34.220 --> 00:25:39.660 There's an interesting book that came out in 2008 by historian of economic thought John 257 00:25:39.660 --> 00:25:45.500 and Wood called The History of Macroeconomic Policy in the United States published by Routledge. 258 00:25:45.500 --> 00:25:50.580 And he argued that U.S. fiscal and monetary policy have been remarkably consistent over 259 00:25:50.580 --> 00:25:57.420 a long period throughout U.S. history as sort of independent of what sort of academics or 260 00:25:57.420 --> 00:26:00.180 what economic theory says to do with the time. 261 00:26:00.180 --> 00:26:05.920 In other words, the direction of influence is from economic policy to macroeconomic theory 262 00:26:05.920 --> 00:26:08.380 rather than the other way around. 263 00:26:08.380 --> 00:26:14.580 and this is of course the typical explanation, easiest explanation for the spread of Keynesianism 264 00:26:14.580 --> 00:26:24.540 after 1936. Rather than proposing a new and sort of superior theory of how economies work, 265 00:26:24.540 --> 00:26:31.860 rather Keynesianism provided a rationalization, intellectual cover if you like, for the massive 266 00:26:31.860 --> 00:26:37.420 deficit spending and expansionary policies that were already underway, that had long 267 00:26:37.420 --> 00:26:43.420 have long been favored by interventionist governments and at last, which at last finally had an intellectual champion. 268 00:26:43.420 --> 00:26:48.420 This is no surprise to see why the Keynesian doctrine appealed to so many people. 269 00:26:48.420 --> 00:26:55.420 The Chicago economist Luigi Zingales had a nice way of putting it last year in an op-ed piece. 270 00:26:55.420 --> 00:27:00.420 He said, Keynesianism has conquered the hearts and minds of politicians and ordinary people alike 271 00:27:00.420 --> 00:27:06.420 because it provides a theoretical justification for irresponsible behavior. 272 00:27:06.420 --> 00:27:11.420 Medical science has established that one or two glasses of wine per day are good for your long-term health, 273 00:27:11.420 --> 00:27:16.420 but no doctor would recommend a recovering alcoholic to follow this prescription. 274 00:27:16.420 --> 00:27:20.420 Unfortunately, Keynesian economists do exactly this. 275 00:27:20.420 --> 00:27:26.420 They tell politicians who are addicted to spending our money that government expenditures are good. 276 00:27:26.420 --> 00:27:30.420 They tell consumers who are affected by severe spending problems, 277 00:27:30.420 --> 00:27:35.540 Problems, the plasma TVs and so on that Bob Murphy mentioned, that consuming is good and 278 00:27:35.540 --> 00:27:41.420 saving is bad. In medicine, such behavior would get you expelled from the medical profession. 279 00:27:41.420 --> 00:27:48.140 In economics, it gives you a job in Washington. I think this description applies equally well 280 00:27:48.140 --> 00:27:54.140 to the events of the 1930s and 1940s when the Keynesian consensus emerged. As I point 281 00:27:54.140 --> 00:27:59.020 out, this idea of massive deficit spending to cure the depression began with Hoover, 282 00:27:59.020 --> 00:28:06.020 This was mentioned earlier, and Roosevelt in the early 30s, long before Keynes' book appeared in 1936. 283 00:28:06.020 --> 00:28:11.020 Keynes' book did propose a new direction for economic policy. 284 00:28:11.020 --> 00:28:16.020 Sorry, Keynes' book did not provide a new direction for economic policy. 285 00:28:16.020 --> 00:28:22.020 It just provided a scientific rationale, an allegedly scientific rationale, for policies already in place. 286 00:28:22.020 --> 00:28:33.980 Place. So I guess let me conclude by recommending, well let me say just a word about sort of 287 00:28:33.980 --> 00:28:38.500 the revival of Austrian ideas that we've seen in the last year or two. I mean this is tremendous, 288 00:28:38.500 --> 00:28:44.020 it's all for the good, right, that as the Keynesian perspective has been revived and 289 00:28:44.020 --> 00:28:49.100 has, is getting so much attention, you know, a few thoughtful people, even a few thoughtful 290 00:28:49.100 --> 00:28:53.540 People in Academia are beginning to look for plausible alternatives. 291 00:28:53.540 --> 00:29:00.140 Just in case the dominant Keynesian model is wrong, what else could we put in its place? 292 00:29:00.140 --> 00:29:06.660 The Austrian theory of the business cycle is beginning to get a little bit more attention. 293 00:29:06.660 --> 00:29:11.660 Someone mentioned, I think Doug mentioned the rap video, the Hayek-Keynes rap video, 294 00:29:11.660 --> 00:29:12.660 which is tremendous. 295 00:29:12.660 --> 00:29:13.660 It's highly recommended. 296 00:29:13.660 --> 00:29:16.700 It's very useful for teaching purposes. 297 00:29:16.700 --> 00:29:21.140 There was also the series that came out a few years ago on PBS called The Commanding 298 00:29:21.140 --> 00:29:26.540 Heights. There's a book and a video series that I also recommend. It's very instructive 299 00:29:26.540 --> 00:29:33.860 on sort of intellectual battles around macroeconomic theory and policy. But there's a sense that 300 00:29:33.860 --> 00:29:38.540 sort of both the video and the commanding heights, both the rap video and the commanding 301 00:29:38.540 --> 00:29:43.020 height series, they're a little bit misleading in one respect, namely that they imply that 302 00:29:43.020 --> 00:29:48.860 within sort of intellectual circles and policy circles, there was this great debate between 303 00:29:48.860 --> 00:29:54.700 Keynes and Hayek, or Keynes and Hayek and Mises, leading people to suspect, well Keynes 304 00:29:54.700 --> 00:30:00.700 won so I guess maybe he was right. In fact, there really wasn't a battle like that. Hayek 305 00:30:00.700 --> 00:30:05.460 and Mises and the Austrians were not refuted by Keynes and his followers. They were simply 306 00:30:05.460 --> 00:30:12.260 ignored. They were simply ignored. Keynes' view attracted many young disciples. The Austrian 307 00:30:12.260 --> 00:30:19.320 Austrian Theory kind of petered out, as the famous line attributed to Max Planck, if science 308 00:30:19.320 --> 00:30:26.420 progresses one funeral at a time. And therefore the challenge for us, those wishing to promote 309 00:30:26.420 --> 00:30:30.420 the Austrian understanding of the world, in particular the Austrian Theory of the Business 310 00:30:30.420 --> 00:30:36.320 Cycle, may wish to focus our attentions on reaching the next generation. It's great 311 00:30:36.320 --> 00:30:41.220 to see so many Mises fellows here at the conference today and hopefully some of them will end 312 00:30:41.220 --> 00:30:49.220 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. 313 00:30:49.220 --> 00:30:55.220 And maybe that's one approach for us to take to focus on the next generation. 314 00:30:55.220 --> 00:31:02.220 We can also focus on trying to influence what Hayek called the second-hand dealers and ideas, right? 315 00:31:02.220 --> 00:31:10.220 Not the professors and not the government officials so much, but journalists and people in think tanks and teachers and clergy 316 00:31:10.220 --> 00:31:15.700 and others who have an influence on public opinion and may be in a position to consider 317 00:31:15.700 --> 00:31:22.220 an alternative view. To a tenured professor who's thoroughly committed to either neoclassical 318 00:31:22.220 --> 00:31:28.420 economics more generally or Keynesian macroeconomics more specifically, to that person there's 319 00:31:28.420 --> 00:31:34.700 very little reason to abandon a lifetime of study and a long commitment to a particular 320 00:31:34.700 --> 00:31:39.700 view of the world to embrace a radical alternative. There's just not much in it for that person. 321 00:31:39.700 --> 00:31:44.900 They might prefer to embrace the lyric from the old blues song, 322 00:31:44.900 --> 00:31:48.700 If loving you is wrong, I don't want to be right. 323 00:31:48.700 --> 00:31:54.100 I won't sing it for you as Jeff Tucker sang in Salamanca for those who are here. 324 00:31:54.100 --> 00:32:01.100 So, Mises reminded us in adopting that motto from Virgil, 325 00:32:01.100 --> 00:32:07.300 remember Mises' motto, do not give in to evil but proceed ever more boldly against it. 326 00:32:07.300 --> 00:32:12.460 Well, now, in the middle of this Keynesian moment, I think we have a unique opportunity 327 00:32:12.460 --> 00:32:19.260 not to give in to Keynesian thinking, not to treat the revival of Keynes and the dominant 328 00:32:19.260 --> 00:32:25.160 of Keynes' thinking as inevitable, but rather to fight very boldly against it. 329 00:32:25.160 --> 00:32:30.140 Not by trying to refute systematically those who hold the opposite view, but to bypass 330 00:32:30.140 --> 00:32:36.820 that view, to try to reach the next generation, to try to reach influential thinkers and writers 331 00:32:36.820 --> 00:32:42.620 and teachers and maybe at last through that mechanism we can finally put the 332 00:32:42.620 --> 00:32:46.580 blade in the heart of this zombie and kill the Keynesian monster once and for 333 00:32:46.580 --> 00:32:47.580 all. Thank you.