WEBVTT NOTE Keynesian Economics: The Beast That Won't Die 1 00:00:00.000 --> 00:00:07.800 It's time for our first speaker, who received his Ph.D. in Economics from the University of California, Berkeley. 2 00:00:07.800 --> 00:00:11.320 That's a little deceiving. 3 00:00:11.320 --> 00:00:14.320 Yeah, dig yourself out of that hole. 4 00:00:14.320 --> 00:00:18.120 He's a B.A. from the University of North Carolina in Chapel Hill. 5 00:00:18.120 --> 00:00:29.960 He's the editor of two books, and he is currently associate professor in the Division of Applied Social Sciences at the University of Missouri. 6 00:00:29.960 --> 00:00:34.960 Now, he has a forthcoming book coming out that the Mises Institute is going to publish. 7 00:00:34.960 --> 00:00:44.540 We don't have a title for it yet, but anybody who has a pithy title they want to suggest 8 00:00:44.540 --> 00:00:47.880 go ahead during the course of the day. 9 00:00:47.880 --> 00:00:57.580 His specialty is entrepreneurship and business organizations, but today he's speaking on 10 00:00:57.580 --> 00:01:04.580 Keynesian Economics, the beast that won't die. Please help me welcome Dr. Peter Klein. 11 00:01:15.660 --> 00:01:21.380 Thank you, Doug. It's great to be back on the West Coast. As Doug mentioned, I did my 12 00:01:21.380 --> 00:01:28.380 I started my graduate work at Berkeley, like Seattle, a hotbed of libertarian and Austrian sentiment. 13 00:01:28.380 --> 00:01:37.380 Actually, one of my professors that I was fairly close to is now President Obama's chief economic advisor, Christina Romer. 14 00:01:37.380 --> 00:01:42.380 A very nice person, but someone whose views are a little different from mine. 15 00:01:42.380 --> 00:01:55.880 I remember when I started the program, I noticed that virtually everyone else in the economics department was some kind of a left, liberal, socialist, quasi-socialist, social democrat type. 16 00:01:55.880 --> 00:02:07.880 And I asked, I said, well, you know, I've heard all this about diversity, are there any libertarians or conservatives or people who, you know, might have different views than the dominant view in the department? 17 00:02:07.880 --> 00:02:12.800 and I was told, yeah, well, we have a conservative and it turned out what they meant was there 18 00:02:12.800 --> 00:02:18.760 was a guy from mainland China who thought that Deng Xiaoping's reforms had gone way 19 00:02:18.760 --> 00:02:26.640 too far and that they should go back to the pure communism of Chairman Mao. So I guess 20 00:02:26.640 --> 00:02:36.120 there was some diversity at Berkeley. Now, I want to talk about Keynes today and I have 21 00:02:36.120 --> 00:02:41.120 I have to confess that this is, in a sense, a depressing time to be an economist. 22 00:02:41.120 --> 00:02:44.120 It's a very difficult time to be an economist. 23 00:02:44.120 --> 00:02:47.120 Now, don't get me wrong, I love my job. 24 00:02:47.120 --> 00:02:52.120 I love teaching and researching and studying about the free market, 25 00:02:52.120 --> 00:02:57.120 about the capitalist economic system, about the entrepreneur, 26 00:02:57.120 --> 00:03:00.120 about liberty, about human flourishing. 27 00:03:00.120 --> 00:03:04.120 But, you know, the last year and a half to two years, 28 00:03:04.120 --> 00:03:34.120 This has not been a good time for it to be sort of a sound economist think about all the things that have gone on in our economy you have the bank and industry bailouts you know this is something that that nearly every competent economist opposes okay I mean saving a particular industry with government protection or taxpayer funds is you know a classic example of what the textbooks call the fallacy of composition right the idea that something that 29 00:03:34.120 --> 00:03:41.440 benefits one particular group or element in society necessarily benefits the entire group. 30 00:03:41.440 --> 00:03:46.360 I use exactly this kind of an example when I'm teaching some of these fallacies in my 31 00:03:46.360 --> 00:03:52.580 freshman level courses, bailing out the Chrysler Corporation in 1980, bailing out the airline 32 00:03:52.580 --> 00:03:58.560 and insurance industries after 9-11 and so on. There's a great chapter in Henry Hazlitt's 33 00:03:58.560 --> 00:04:08.560 has its wonderful economics in one lesson called saving the X industry as an example of Hazlitt's fallacy of the broken window. 34 00:04:08.560 --> 00:04:17.560 Saving the X industry simply transfers resources to the X industry from the Y and Z industries and from the taxpayer 35 00:04:17.560 --> 00:04:24.560 and substitutes the political process for the market process in determining how resources are allocated among activities. 36 00:04:24.560 --> 00:04:33.360 And yet when the bailouts began, first the financial sector bailouts and then the automobile industry and other industries and so on, 37 00:04:33.360 --> 00:04:38.160 the wisdom of economic doctrine was almost entirely ignored. 38 00:04:38.160 --> 00:04:50.960 The general level of discourse on the housing crisis, the bank bailouts, the industry bailouts was not just among laypersons but among the media 39 00:04:50.960 --> 00:04:54.960 and among politicians and even people who should know. 40 00:04:54.960 --> 00:05:03.960 It was just shockingly vapid, vacuous, even by the usual standards of American political discourse, right? 41 00:05:03.960 --> 00:05:09.960 You know, listening to government officials and pundits and experts and so on talk about the financial crisis. 42 00:05:09.960 --> 00:05:16.960 It was sort of like listening to my son's second grade class discussing the nuances of postmodern French literature. 43 00:05:16.960 --> 00:05:25.120 Well, it's obvious the housing crisis was caused by deregulation, too much deregulation. 44 00:05:25.120 --> 00:05:27.600 The free market has failed yet again. 45 00:05:27.600 --> 00:05:32.000 Thank goodness we have the government to step in and take care of things. 46 00:05:32.000 --> 00:05:37.200 Then you had the bailouts of individual borrowers, right, through the Obama administration's 47 00:05:37.200 --> 00:05:39.320 abominable housing plan. 48 00:05:39.320 --> 00:05:44.920 I mean, think about it, we're in a major recession triggered by a collapse in the housing market 49 00:05:44.920 --> 00:06:03.920 itself, the result not only of monetary policy, but also of specific government actions, often through Fannie Mae and Freddie Mac, you know, to make sure that the wrong loans got to the wrong people so they could buy the wrong houses, okay? 50 00:06:03.920 --> 00:06:14.720 So the administration's remedy is not to let Fannie and Freddie die, you know, they're long overdue and merciful death, but to prop them up, to give them additional powers, and to subsidize private mortgage lenders, 51 00:06:14.720 --> 00:06:22.220 to extend yet more credit to more people who can't pay it back so they can buy even more property that they can't afford 52 00:06:22.220 --> 00:06:27.220 and to make what might have been a temporary crisis into a semi-permanent one. 53 00:06:27.220 --> 00:06:29.720 So this is depressing as well. 54 00:06:29.720 --> 00:06:40.220 Now, most depressing of all is the subject of my talk this morning, the resurrection of John Maynard Keynes and Keynesian economics, 55 00:06:40.220 --> 00:06:49.220 particularly in the form of the Obama administration's 800 billion plus stimulus package, the so-called stimulus package. 56 00:06:49.220 --> 00:06:56.220 David Leonhart wrote in the New York Times, this was a couple weeks ago, August 19th, 57 00:06:56.220 --> 00:07:01.220 the indispensable economist of the moment is clearly John Maynard Keynes. 58 00:07:01.220 --> 00:07:09.220 Keynes's prescription for financial crises, aggressive government action and by definition big budget deficits 59 00:07:09.220 --> 00:07:14.580 has been Washington's basic approach since the collapse of Lehman Brothers in September 60 00:07:14.580 --> 00:07:24.540 2008. Leonhard is clearly right. Keynes is back in the spotlight, at least in the public 61 00:07:24.540 --> 00:07:31.280 eye and among most of the intelligentsia. This is the great Keynesian moment, the great resurrection 62 00:07:31.280 --> 00:07:37.540 of a theory, an approach to the economy that to most professional economists had long since 63 00:07:37.540 --> 00:07:44.420 has been dead and buried. If there are any of you economic students in the crowd, most 64 00:07:44.420 --> 00:07:52.700 of us were taught that the Keynesian approach, which became dominant after World War II through 65 00:07:52.700 --> 00:07:58.700 the 1960s, you know, was sort of beaten back by first the monetarist and then the so-called 66 00:07:58.700 --> 00:08:07.500 rational expectations or new classical counter revolutions in the late 1970s and 1980s. 67 00:08:07.500 --> 00:08:13.340 But it has come back. Keynesian economics has returned with a vengeance. 68 00:08:13.340 --> 00:08:19.620 Now to the Austrian economists, the Keynesian doctrine was in its original form and remains 69 00:08:19.620 --> 00:08:25.700 even in its fancy dressed up form today. Nothing more than a tissue of fallacies, a resurrection 70 00:08:25.700 --> 00:08:35.140 of long discredited under-consumptionist fallacies that no serious economist before 1936 gave 71 00:08:35.140 --> 00:08:55.140 The Mises-Hayek Approach to the Business Cycle 72 00:08:55.140 --> 00:09:11.140 The idea that there had been an unsustainable credit boom in the 1920s that had predictably burst, exposing or revealing a pattern of malinvestments that had to be liquidated for economic recovery to take place. 73 00:09:11.140 --> 00:09:21.140 But that Austrian understanding of the business cycle was swept aside during the Keynesian avalanche in the late 1930s. 74 00:09:21.140 --> 00:09:28.140 Keynes published his great book, The General Theory of Employment, Interest in Money, in 1936 75 00:09:28.140 --> 00:09:32.140 and Keynes told us, no, Mises and Hayek have it completely wrong 76 00:09:32.140 --> 00:09:36.140 the problem is insufficient aggregate demand 77 00:09:36.140 --> 00:09:39.140 which is a fancy way of saying spending 78 00:09:39.140 --> 00:09:42.140 there's not enough total spending in the economy 79 00:09:42.140 --> 00:09:45.140 and this problem is easily solved, according to Keynes 80 00:09:45.140 --> 00:09:49.140 with cheap money and massive government expenditures and budget deficits 81 00:09:49.140 --> 00:09:54.540 Okay? And you know, best of all, it really didn't even matter what the government spent the money on, 82 00:09:54.540 --> 00:09:57.340 as long as the government spent money on something, 83 00:09:57.340 --> 00:10:01.740 because this new spending would have a marvelous sort of miraculous ripple effect, 84 00:10:01.740 --> 00:10:05.340 pulling the private economy back on its feet. 85 00:10:05.340 --> 00:10:09.940 As you can imagine, politicians loved it. 86 00:10:09.940 --> 00:10:16.940 Keynes's younger disciples mathematized it, and mainstream macroeconomics was born. 87 00:10:16.940 --> 00:10:27.940 Now, the Keynesian approach became dominant, especially when it was sort of popularized in the leading textbooks, Paul Samuelson's textbook, for example. 88 00:10:27.940 --> 00:10:43.940 The sort of Keynesian idea that the economy was a giant machine that could be fine-tuned by pulling appropriate policy levers with great precision by sort of enlightened bureaucrats and politicians and so on, 89 00:10:43.940 --> 00:10:50.500 always in the interest of course of ensuring full employment and sustained economic growth 90 00:10:50.500 --> 00:10:52.860 and stable markets and so on. 91 00:10:52.860 --> 00:11:02.980 That idea was so deeply ingrained among most of the profession that in 1959 a New Zealand 92 00:11:02.980 --> 00:11:08.780 engineer named Bill Phillips built an actual machine with tubes and pipes and levers and 93 00:11:08.780 --> 00:11:17.780 and Pulleys mainly operated by water to sort of simulate the economy and predict and forecast the economy. 94 00:11:17.780 --> 00:11:22.780 That's what people sometimes refer to hydraulic Keynesianism. 95 00:11:22.780 --> 00:11:27.780 I mean it literally, the idea that you could build a hydraulic machine that would replicate the economy 96 00:11:27.780 --> 00:11:32.780 and would give the experts all the tools they needed to engage in their fine tuning. 97 00:11:32.780 --> 00:11:36.780 Now things, as I mentioned, did get better in the 70s and 80s. 98 00:11:36.780 --> 00:11:43.780 Hayek of course won the Nobel Prize in Economics in 1974, and people began to inquire more 99 00:11:43.780 --> 00:11:52.340 seriously about the older Mises and Hayek approach, the pre-Keynesian Mises and Hayek 100 00:11:52.340 --> 00:11:58.220 approach to the cycle. And there were these other movements within mainstream economics 101 00:11:58.220 --> 00:12:02.620 that sort of shunted Keynes aside, and they were improvements over traditional Keynesianism 102 00:12:02.620 --> 00:12:10.380 I think. And to many of us, these new advances were driving the final nail in the Keynesian 103 00:12:10.380 --> 00:12:15.980 coffin. The Austrians had shown the essential fallacy of the Keynesian doctrine, and finally, 104 00:12:15.980 --> 00:12:21.620 or so we thought in the 1980s, even mainstream economists have realized that Keynesian economics 105 00:12:21.620 --> 00:12:31.420 has hopelessly garbled. It's sort of an incoherent mess without any logical consistency. It doesn't 106 00:12:31.420 --> 00:12:40.180 have any application to the economy of the real world. Now, like one of those movie vampires 107 00:12:40.180 --> 00:12:46.300 or zombies that keeps coming back, you know, you stab it, you kill it, and the hero or 108 00:12:46.300 --> 00:12:50.580 heroine turns around and then you see in the background the zombie rises up again, you 109 00:12:50.580 --> 00:12:58.300 know, with its weapon in hand. This monster has come back to life. You know, economy in 110 00:12:58.300 --> 00:13:04.740 Doldrums? No problem. All it needs is stimulus. It needs some stimulus. Turn on the printing 111 00:13:04.740 --> 00:13:10.300 presses. Flood the bond markets with T-bills. Spend, spend, spend. The free market won't 112 00:13:10.300 --> 00:13:16.100 do it, of course. It won't spend enough because, as Keynes told us, private investors are plagued 113 00:13:16.100 --> 00:13:23.100 by animal spirits. They're motivated by irrationality. Only the enlightened politicians and bureaucrats 114 00:13:23.100 --> 00:13:26.100 can make rational spending decisions. 115 00:13:26.100 --> 00:13:33.100 Now, if you're worried that this extra spending and money creation might lead to some problems down the road, 116 00:13:33.100 --> 00:13:36.100 some inflation perhaps, no problem. 117 00:13:36.100 --> 00:13:42.100 Listen to San Francisco Fed President Janet Yellen, a Berkeley economist by the way, 118 00:13:42.100 --> 00:13:50.100 who recently said, quote, I'll be the first to say that it is always difficult to get monetary policy just right, 119 00:13:50.100 --> 00:13:57.160 Concession, but the Fed's analytical prowess is top-notch and our forecasting record is 120 00:13:57.160 --> 00:14:01.780 second to none. 121 00:14:01.780 --> 00:14:06.220 Some of you have probably seen that little YouTube clip with all the different Bernanke 122 00:14:06.220 --> 00:14:10.940 remarks up through the beginning of the housing crisis about how healthy the housing market 123 00:14:10.940 --> 00:14:15.440 was and how there was no danger of any kind of economic problems associated with the housing 124 00:14:15.440 --> 00:14:16.440 market. 125 00:14:16.440 --> 00:14:22.040 Janet Yellen continues, with respect to our tool kit, that's the levers and so on, we 126 00:14:22.040 --> 00:14:29.160 certainly have the means to unwind the stimulus when the time is right. Don't worry about 127 00:14:29.160 --> 00:14:33.720 these things, we put the money in, we'll take it out when the time is right, we have everything 128 00:14:33.720 --> 00:14:39.760 under control. Robert Blumen wrote an entry on the Mises blog where he quoted this, he 129 00:14:39.760 --> 00:14:56.920 We keep killing this Keynesian beast time and time again and it keeps coming back. 130 00:14:56.920 --> 00:14:57.920 What's going on? 131 00:14:57.920 --> 00:15:04.480 Well, to understand why Keynesian economics won't stay dead, we have to detour just briefly 132 00:15:04.480 --> 00:15:08.580 into the history and sociology of science. 133 00:15:08.580 --> 00:15:13.260 Social Science in particular, and realize that science doesn't work the way many of 134 00:15:13.260 --> 00:15:20.420 us were taught in high school. Formulation of hypotheses, testing them against the data, 135 00:15:20.420 --> 00:15:26.380 searching for truth using the scientific method, quote unquote, leaning to these kind of incremental 136 00:15:26.380 --> 00:15:33.260 advances in knowledge with the old falsehoods tossed aside, new truths embraced and incorporated 137 00:15:33.260 --> 00:15:38.460 and so on. That's not the way a scientific discovery actually works. It doesn't work 138 00:15:38.460 --> 00:16:08.460 It's much more complicated and it's much more messy. Errors, once refuted, don't necessarily disappear from the scene. They hang around. Truth doesn't always win out in the battle of ideas, at least not in the short run. There are a lot of reasons why. There are institutional reasons. It has to do with finance, scientific research, financing of scientific research, incentives of researchers, personalities, and so on. It's a complicated problem. 139 00:16:08.460 --> 00:16:14.180 On guard against what Murray Rothbard, in his History of Economic Thought project, called 140 00:16:14.180 --> 00:16:20.660 the Whig Theory of Intellectual History, wrote Rothbard on analogy with the Whig Theory of 141 00:16:20.660 --> 00:16:25.860 History, coined in mid-19th century England, which maintained that things are always getting 142 00:16:25.860 --> 00:16:28.540 and therefore just get better and better. 143 00:16:28.540 --> 00:16:33.900 The Whig Historian of Science, seemingly on firmer grounds than the regular Whig Historian, 144 00:16:33.900 --> 00:16:40.500 implicitly or explicitly asserts that later is always better in any particular scientific discipline. 145 00:16:40.500 --> 00:16:49.500 The Whig historian really maintains that for any period of historical time, whatever was was right or at least better than whatever was earlier. 146 00:16:49.500 --> 00:16:54.900 The result is an infuriating, Panglossian optimism. 147 00:16:54.900 --> 00:17:03.800 In this view, according to Rothbard, there can be no such thing as gross systematic error that deeply flawed or even invalidated an entire school of economic thought. 148 00:17:03.800 --> 00:17:08.000 much less sent the world of economics permanently astray. 149 00:17:08.000 --> 00:17:10.260 But yet that is in fact what we find. 150 00:17:10.260 --> 00:17:12.080 That the Austrian School, for example, 151 00:17:12.080 --> 00:17:15.600 which thrived from the late, from the 1870s 152 00:17:15.600 --> 00:17:19.560 until about the 1920s, faded from the scene 153 00:17:19.560 --> 00:17:22.480 and was replaced by something much, much worse. 154 00:17:22.480 --> 00:17:25.360 The Keynesian approach to the macro economy, 155 00:17:25.360 --> 00:17:27.960 so-called macro economy, and then later 156 00:17:27.960 --> 00:17:30.640 the sort of contemporary neoclassical approach 157 00:17:30.640 --> 00:17:32.120 to microeconomics. 158 00:17:32.120 --> 00:17:41.120 Any trained historian of science will tell you that this naive wig approach is hopelessly inappropriate. 159 00:17:41.120 --> 00:17:48.120 Thomas Kuhn's famous book on the structure of scientific revolutions introducing the idea of a paradigm, 160 00:17:48.120 --> 00:17:55.120 and a paradigm shift, shows that scientists are not sort of completely disinterested observers of the world around them, 161 00:17:55.120 --> 00:18:06.120 are guided, in some sense blinded if you like, by particular preconceived notions about what is or isn't the right way to do science, the right questions to ask, and so on. 162 00:18:06.120 --> 00:18:14.120 So, knowledge can be lost. The great Austrian truths of the business cycle were largely lost after 1936. 163 00:18:14.120 --> 00:18:23.120 Theories such as Keynes, discredited theories such as Keynes' can hang around, waiting for just the right moment to return. 164 00:18:23.120 --> 00:18:26.120 What exactly is Keynesian economics anyway? 165 00:18:26.120 --> 00:18:34.120 I mean, you hear a lot of people talk about it, we talk about it in a critical way, and its proponents praise it and so on. 166 00:18:34.120 --> 00:18:40.120 I mean, I think you can understand Keynesian economics, you can break it down into just a few simple elements. 167 00:18:40.120 --> 00:18:51.120 First, a very high level of aggregation, a focus on aggregate concepts such as total spending, total income, the unemployment level, and so on. 168 00:18:51.120 --> 00:18:57.020 and so on. Second, the absence of any role for sort of resource allocation within these 169 00:18:57.020 --> 00:19:03.760 aggregates. There's no role for relative prices or the decisions of individual consumers, 170 00:19:03.760 --> 00:19:09.600 individual entrepreneurs, individual investors. These are all ignored. And third, no theory 171 00:19:09.600 --> 00:19:15.520 of capital. The Mises-Hayek approach to the business cycle was built on a particular notion 172 00:19:15.520 --> 00:19:20.560 of the capital structure of an economy developed by Menger and Boehm-Bawerk and their great 173 00:19:20.560 --> 00:19:26.160 Austrian predecessors, and that's completely absent from the Keynesian model. In the Keynesian 174 00:19:26.160 --> 00:19:32.680 story, fluctuations in total spending in the economy, aggregate demand, cause fluctuations 175 00:19:32.680 --> 00:19:39.120 in total output, aggregate output. Forget about capital and relative prices and so on. 176 00:19:39.120 --> 00:19:48.280 Now, you know, supposedly mainstream macroeconomics has moved beyond this very primitive, crude 177 00:19:48.280 --> 00:19:52.920 level of aggregation. But you'd never know it from the discussions of the last year and 178 00:19:52.920 --> 00:20:01.480 a half to two years. People kept saying, banks aren't lending enough. Businesses and consumers 179 00:20:01.480 --> 00:20:08.780 can't get loans. Firms have too many bad assets on their books. The key questions, though, 180 00:20:08.780 --> 00:20:15.480 are which ones? Which banks aren't lending to which consumers? Which firms have made 181 00:20:15.480 --> 00:20:24.560 and Poor Investments. Newsflash to the intelligentsia. A loan isn't a loan isn't a loan. Some people 182 00:20:24.560 --> 00:20:31.200 maybe shouldn't get a loan. Hard to understand. Not every borrower should get a loan. The 183 00:20:31.200 --> 00:20:37.400 relevant question is which loans weren't made to which people and why. The critical issues 184 00:20:37.400 --> 00:20:42.280 in other words revolve around the composition of lending. Critical issues in the housing 185 00:20:42.280 --> 00:20:45.280 and Crisis, the composition of lending, not the total amount. 186 00:20:45.280 --> 00:20:49.280 Now, Keynesian economics ignores all of this, right? 187 00:20:49.280 --> 00:20:54.280 It holds that only aggregates like total lending and total spending and so on matter. 188 00:20:54.280 --> 00:20:59.280 Government spending magically transforms into economic wealth, 189 00:20:59.280 --> 00:21:05.280 often at a more than one-for-one ratio, the famous multipliers of Keynesian economics. 190 00:21:05.280 --> 00:21:10.280 Government spending, in that sense, it's kind of free, it's a freebie, right? 191 00:21:10.280 --> 00:21:17.280 Right, the government spends a dollar and it boosts the economy by more than a dollar. Wow. 192 00:21:18.620 --> 00:21:22.820 Of course, the deficits don't matter because, as the 193 00:21:22.820 --> 00:21:26.620 distinguished Keynesian macroeconomist Franklin Delano Roosevelt put it, 194 00:21:26.620 --> 00:21:29.740 we only owe it to ourselves. 195 00:21:33.980 --> 00:21:37.980 What's the, what's the Keynesian critique of all, sorry, what's the Austrian 196 00:21:37.980 --> 00:21:44.600 The Austrian critique of all this, the Austrian critique of Keynes, well, the Austrian approach 197 00:21:44.600 --> 00:21:52.080 begins with the idea that resources are heterogeneous, that investments are not the same, that businesses 198 00:21:52.080 --> 00:21:56.520 are not the same, that consumers are not the same, that there's a great amount of variety 199 00:21:56.520 --> 00:22:02.500 or heterogeneity within an economy, and the critical question is to get resources allocated 200 00:22:02.500 --> 00:22:09.540 in the right patterns to get financial resources and other resources to the right entrepreneurs, 201 00:22:09.540 --> 00:22:14.540 to get entrepreneurs serving the particular consumers who desire those entrepreneurs' 202 00:22:14.540 --> 00:22:16.100 products, and so on. 203 00:22:16.100 --> 00:22:22.220 Now, you know, the sort of sophomoric or even childish Keynesianism of people like Paul 204 00:22:22.220 --> 00:22:29.160 Krugman and Bradford DeLong and so on, like Ben Bernanke, Timothy Geithner, etc., doesn't 205 00:22:29.160 --> 00:22:34.920 doesn't understand any of this but only understands aggregate concepts like national output, total 206 00:22:34.920 --> 00:22:41.960 employment, the price level. When was the last time the price level affected your behavior 207 00:22:41.960 --> 00:22:47.500 when you went out to go shop in the marketplace? No, you're concerned about the prices of the 208 00:22:47.500 --> 00:22:57.500 things that you buy, not some mythical statistical aggregate. When government policy generates 209 00:22:57.500 --> 00:23:01.000 It's an artificial boom in a particular market, such as housing. 210 00:23:01.000 --> 00:23:06.460 It draws resources away from other parts of the economy, and if those investments are 211 00:23:06.460 --> 00:23:12.440 caused by some artificial government stimulus, monetary policy, housing policy, and so on, 212 00:23:12.440 --> 00:23:17.940 the key to recovery is to let those resources flow out of that market and back to the other 213 00:23:17.940 --> 00:23:21.620 sectors or segments of the economy where it belongs. 214 00:23:21.620 --> 00:23:25.240 It's quite simple in terms of the housing market. 215 00:23:25.240 --> 00:23:30.240 House prices should be falling. It's good that home prices are falling. Interest rates 216 00:23:30.240 --> 00:23:36.600 should be rising. Savings rates should be going up. Debt levels should be going down. 217 00:23:36.600 --> 00:23:41.160 The current administration's policies, like that of its predecessor administration, are 218 00:23:41.160 --> 00:23:47.200 designed to do exactly the opposite, to keep the housing market from shrinking, to keep 219 00:23:47.200 --> 00:23:53.040 any prices from falling, to keep any firms from failing, to keep any consumers from reducing 220 00:23:53.040 --> 00:23:59.160 Their Consumption. A child thinks only about what he sees right in front of him. He can't 221 00:23:59.160 --> 00:24:05.760 see the things that don't exist because of his actions. He doesn't see the things outside 222 00:24:05.760 --> 00:24:11.080 his immediate range of vision that are harmed by his decisions. And that's the way many 223 00:24:11.080 --> 00:24:18.480 Keynesian commentators think. That's the mentality that they have. One good example is the so-called 224 00:24:18.480 --> 00:24:21.180 shovel-ready criterion 225 00:24:21.180 --> 00:24:24.380 for the allocation of stimulus spending. 226 00:24:24.380 --> 00:24:25.380 There's an interesting 227 00:24:25.380 --> 00:24:29.600 piece from an engineering professor at the University of Minnesota named David Levinson. 228 00:24:29.600 --> 00:24:32.880 He pointed out, he said, well in the nineteen thirties when you were 229 00:24:32.880 --> 00:24:35.100 literally building with shovels 230 00:24:35.100 --> 00:24:37.680 maybe this kind of a thing made some sense 231 00:24:37.680 --> 00:24:39.180 uh... 232 00:24:39.180 --> 00:24:42.220 this professor says that was largely unskilled labor. 233 00:24:42.220 --> 00:24:45.600 Today it's blue collar labor but not unskilled. 234 00:24:45.600 --> 00:24:50.080 The guy brushing the asphalt back and forth is unskilled, but the guy operating the steam 235 00:24:50.080 --> 00:24:54.720 roller isn't. And there's an assumption out there that construction workers are interchangeable 236 00:24:54.720 --> 00:24:59.180 between residential and highway projects. But a carpenter isn't a whole lot of help 237 00:24:59.180 --> 00:25:05.200 in building a road. Okay? Modern Keynesian economics, which retains its master's belief 238 00:25:05.200 --> 00:25:11.100 in homogeneous labor and capital, and is focused on macroeconomic aggregates, treats a worker 239 00:25:11.100 --> 00:25:16.100 Lending and spending, that's all that matters. 240 00:25:16.100 --> 00:25:21.100 It doesn't matter what is being lent to whom, it doesn't matter what is being spent on what. 241 00:25:21.100 --> 00:25:28.100 You simply need to lend and spend and that brings so-called idle resources into use. 242 00:25:28.100 --> 00:25:37.100 As Hayek famously put it, John Stuart Mill's profound insight that demand for commodities is not demand for labor. 243 00:25:37.100 --> 00:26:07.100 Hayek's way of saying, quoting Mill, that the total spending in the economy by consumers does not necessarily translate into a particular pattern of employment in resource markets, because consumer preferences are transmitted only indirectly and in a complicated way to particular labor markets, so boosting spending in total may not reduce unemployment in any particular industry. This insight, demand for commodities is not demand for labor, according to Hayek, 244 00:26:07.100 --> 00:26:13.540 Hayek, which was set in 1878 by Leslie Stephen, as the one doctrine whose complete apprehension 245 00:26:13.540 --> 00:26:20.540 is perhaps the best test of a sound economist, remained for Keynes an incomprehensible absurdity. 246 00:26:20.540 --> 00:26:26.800 Okay, so this criterion, this level of understanding that according to Hayek is the sound test, 247 00:26:26.800 --> 00:26:33.480 is the one test of any competent economist remained for Keynes an incomprehensible absurdity. 248 00:26:33.480 --> 00:26:35.260 Keynes just didn't get it. 249 00:26:35.260 --> 00:26:45.260 Why can't we kill this beast? Why can't we kill it? If it's wrong, if it's easily refuted, why does it keep coming back again and again? 250 00:26:45.260 --> 00:26:54.260 One insight comes from a 2008 book by John Wood called The History of Macroeconomic Policy in the United States. 251 00:26:54.260 --> 00:27:03.260 Wood notes that in the US, fiscal and monetary policy has been more or less the same over a long period, 252 00:27:03.260 --> 00:27:17.860 The theory is largely uninfluenced by theory. In fact, would suggest the direction of influence 253 00:27:17.860 --> 00:27:23.860 between theory and practice is largely from practice to theory. In other words, scholars 254 00:27:23.860 --> 00:27:29.380 are coming up with theories to justify the policies that already exist. And of course, 255 00:27:29.380 --> 00:27:34.340 That's the classic explanation for the spread of the Keynesian doctrine in the 1930s, that 256 00:27:34.340 --> 00:27:39.880 rather than proposing some sort of new theory of macroeconomic policy, it simply provided 257 00:27:39.880 --> 00:27:46.420 intellectual cover, rationalization or justification for the massive deficit spending and easy 258 00:27:46.420 --> 00:27:50.580 money policies that were already in place. 259 00:27:50.580 --> 00:27:56.140 The University of Chicago economist Luigi Zingales put it nicely in a recent article. 260 00:27:56.140 --> 00:28:00.940 He said, Keynesianism has conquered the hearts and minds of politicians and ordinary people 261 00:28:00.940 --> 00:28:10.420 alike because it provides a theoretical justification for irresponsible behavior. Medical science 262 00:28:10.420 --> 00:28:14.900 has established that one or two glasses of wine per day are good for your long-term health, 263 00:28:14.900 --> 00:28:20.500 but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, 264 00:28:20.500 --> 00:28:25.760 Keynesian economists do exactly this. They tell politicians who are addicted to spending 265 00:28:25.760 --> 00:28:40.260 He says, in medicine such behavior would get you expelled from the medical profession. In 266 00:28:40.260 --> 00:28:49.520 economics it gets you a job in Washington. By the way, this Keynesian delusion doesn't 267 00:28:49.520 --> 00:28:55.400 just affect policy makers, it affects professional economists as well, and you know, I've long 268 00:28:55.400 --> 00:29:00.400 suspected, I can't prove this, so caveat for those of you who are watching on the internet, 269 00:29:00.400 --> 00:29:06.040 this is just a conjecture on my part, I suspect that people like Paul Krugman for example 270 00:29:06.040 --> 00:29:12.040 and Brad DeLong, I suspect that for them the appeal of the Keynesian doctrine is ultimately 271 00:29:12.040 --> 00:29:18.640 based not really on scientific grounds, but on some kind of aesthetic grounds, they just 272 00:29:18.640 --> 00:29:28.640 People just like it. Deep down in their hearts, they aren't really comfortable with private property, free markets, individual choice. 273 00:29:28.640 --> 00:29:38.640 They don't think ordinary people are capable of making wise decisions. They think that they and people like them, the elites, should be in charge, should be running the system. 274 00:29:38.640 --> 00:29:47.640 They resent the fact that most people don't want their lives controlled by Berkeley intellectuals, or Seattle intellectuals, right? 275 00:29:47.640 --> 00:29:55.640 They resent the fact that most, sorry, all these technical arguments about the effectiveness of monetary and fiscal policy, 276 00:29:55.640 --> 00:30:02.640 the relationship between aggregate demand and output, what really went on in the 1920s and 1930s and so on. 277 00:30:02.640 --> 00:30:06.640 I think to a lot of Keynesian economists these discussions are really beside the point. 278 00:30:06.640 --> 00:30:17.640 It doesn't really matter. I think for people like Krugman and DeLong, the belief that markets are naturally unstable in the absence of government planning is an article of faith. 279 00:30:17.640 --> 00:30:30.640 It's a deeply held personal belief that no amount of argument or evidence or statistical analysis will resolve, will challenge. 280 00:30:30.640 --> 00:30:36.800 I should mention by the way, some of my free market and Austrian colleagues think that 281 00:30:36.800 --> 00:30:42.840 the Austrian approach hasn't won, hasn't won out in the marketplace of ideas because 282 00:30:42.840 --> 00:30:48.880 our arguments aren't good enough, because we aren't persuasive enough, our historical 283 00:30:48.880 --> 00:30:52.740 and empirical work isn't sophisticated enough and so on. 284 00:30:52.740 --> 00:30:58.400 But I strongly reject this view, not that of course our arguments can't be better, 285 00:30:58.400 --> 00:31:28.400 It's not that our work can't be more sophisticated, that our evidence can't be stronger. Of course, we can always do better in making our arguments, in doing our analysis, but the truth is in an interventionist economy, there will always be a strong demand for interventionist economists, interventionist theories, rationalizations of interventionist policies and so on, because they provide intellectual and moral cover for interventionism. It's as simple as that. 286 00:31:28.400 --> 00:31:34.280 Government officials and their supporters want to increase the size and power of the state. 287 00:31:34.280 --> 00:31:39.260 The enabling class of what you might call court intellectuals wants its piece of the 288 00:31:39.260 --> 00:31:41.320 action too. 289 00:31:41.320 --> 00:31:47.680 To groups like this, you know, so the allure of the Keynesian elixir, if you like, is just 290 00:31:47.680 --> 00:31:49.720 overwhelmingly strong. 291 00:31:49.720 --> 00:31:52.560 No amount of theory or evidence will persuade them otherwise. 292 00:31:52.560 --> 00:31:56.520 Now, of course, I'm generalizing. 293 00:31:56.520 --> 00:32:06.520 There are always exceptions. I'm not claiming that every economist or policymaker who subscribes to Keynesian economics is corrupt in this fashion. 294 00:32:06.520 --> 00:32:11.520 But I think there is a lot of truth in this. 295 00:32:11.520 --> 00:32:23.520 Now, one silver lining in the late unpleasantness is that there has been a rebirth of interest in the Austrian critique of Keynes. 296 00:32:23.520 --> 00:32:53.520 Even mainstream journalists, some mainstream economists, even government economists at places like the IMF, the World Bank, the European Commission, are going back and re-reading Mises and Hayek and saying, you know, well, since Keynes is sort of now the dominant explanation for things, maybe we ought to go back and look at some of the alternatives to Keynes. What were some of the critiques of Keynes? Did Keynes really answer them? Did Keynesian economics really address these critiques? And people are realizing that 297 00:32:53.520 --> 00:32:55.600 that the Keynesians didn't, okay? 298 00:32:55.600 --> 00:32:57.920 So there's some resurgence of interest 299 00:32:57.920 --> 00:32:59.080 in the Austrian tradition, 300 00:32:59.080 --> 00:33:01.380 which of course is a wonderful thing. 301 00:33:01.380 --> 00:33:04.560 Among the educated layperson, 302 00:33:04.560 --> 00:33:06.920 books like Tom Wood's Meltdown, 303 00:33:06.920 --> 00:33:08.520 and of course Ron Paul's books, 304 00:33:08.520 --> 00:33:10.120 and the Ron Paul Movement, 305 00:33:10.120 --> 00:33:12.560 Ron Paul's book on the Fed and so on, 306 00:33:12.560 --> 00:33:14.640 I mean the phenomenal success 307 00:33:14.640 --> 00:33:16.920 of these publications as a testament 308 00:33:16.920 --> 00:33:20.400 to how intriguing the Austrian critique 309 00:33:20.400 --> 00:33:22.480 of the Keynesian model really is. 310 00:33:23.520 --> 00:33:36.520 So, can we kill this beast once and for all? Is there a silver bullet or a dagger through the heart that will finally bring it into the grave? I don't know. 311 00:33:36.520 --> 00:33:43.520 But we have to try. We have to keep fighting it. We have to try to kill the beast, even if we don't succeed. 312 00:33:43.520 --> 00:33:47.520 Remember the words of Virgil that were adopted by Mises as his personal motto, 313 00:33:47.520 --> 00:33:52.520 and its little motto, do not give in to evil, but proceed ever more boldly against it. 314 00:33:52.520 --> 00:33:56.520 Well, now is the time for that kind of boldness. Thank you.