They’re working on it Peter, they’re working on it. Shall we put you down as a fan of the antidote – Austrian economics, then?
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Peter Foster, The National Post
October 8, 2009
What would those economists suspicious of inventories do, torch our farms and factories?
John Maynard Keynes is frequently described as “the greatest economist of the 20th century.” He might more accurately be called the most influential economist of the 20th century. That was because he provided an intellectual justification for activist government.
It was to be expected in the wake of the recent crisis that market critics such as Paul Krugman and Joseph Stiglitz would be quick to claim that Keynes was “back,” but the most depressing convert to the cause is Richard Posner, a highly-respected U.S. judge and expert in “law and economics” at the University of Chicago.
Professor Posner also recently published a book, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression. But if anything threatens Depression it is the Keynesian policies that Professor Posner has now embraced.
Professor Posner certainly further undermines the notion that Chicago is some kind of free-market hotbed. Milton Friedman, the school’s most famous economist, once explained that the reason Chicago stood out was that it was pretty much the only U.S. school with any market enthusiasts. It isn’t famous for them any more. The best-known Chicago economist at the moment is Richard Thaler, whose field of “behavioural economics” provides allegedly fresh rationales for policy “nudges.” This week, Professor Thaler was appointed a policy advisor to the British Conservative Party. Yes, Conservative Party.
Professor Posner’s hoary claim is that the prevailing view among economists is that individuals are rational and markets are perfect. Perhaps Chicago should adopt a Straw Man as its mascot. Human imperfection doesn’t dilute the enormous power of the Invisible Hand to harness human ingenuity, but it certainly raises serious questions about “macro management.”
The most devastating critique of Keynesian economics – and easiest to understand – came from James Buchanan (an economist at one point chastised and even persecuted for promoting the power of markets). Professor Buchanan pointed out that Keynes seemed to assume that he was giving advice to philosopher kings. Insert real, vote-grubbing politicians into the equation – which was unavoidable – and the Keynesian fiction disintegrated. Professor Posner seems blind to these criticisms and even unaware that Keynesianism proved a bust in the stagflationary 1970s.
He claims that the economist “profession” was blindsided by the crisis, but there is no economics profession. Economics remains a battle ground of ideas, not an objective science. He seems to confuse understanding how an economy works with possessing theories to control it. He seems to believe that it is economists’ job to provide formulae for avoiding the unavoidable consequences of bad decisions. He largely ignores the role of bad policies in influencing those decisions. He also, in his book, seems to have fallen in with the notion that “greed did it” in the form of deliberately reckless decisions by overpaid bankers. This explanation has been enthusiastically promoted by politicians, but evidence for it is thin on the ground.
He notes that Keynes was “suspicious of saving,” the bedrock of capitalist investment. He also reports, apparently without his jaw dropping, Keynes’ support for destroying farming inventories, because that would promote production! On that basis, the surest thing we could do to boost the economy would be to torch all our warehouses and factories!
Keynes believed that an economy could be “stuck” in a high-unemployment “equilibrium.” Professor Posner acknowledges that one of the main reasons for this is downward “stickiness” of wages. But this could only be caused by destructive, government-backed union power, confirming that all unions do is force up their own wages at the expense of other workers. Keynes opposed low wages as destructive of his all-important “demand,” but in a freely operating market, prices would be falling too. Professor Posner claims that such a fall “imperils economic stability,” but he doesn’t say why. It should also be remembered that FDR attempted to force up wages, which in fact merely increased unemployment, as despised “classical” economics said it would.
Like Keynes, Professor Posner dismisses businessmen as “animal spirits,” subject to irrational exuberance one minute, “paralyzed” by fear into “hoarding” the next. This is where wise and competent government steps in to “arrest a downward economic spiral.”
“[T]he government,” writes Professor Posner, “must do everything it can to convince businessmen and consumers that it is resolute in working for economic recovery. An ambitious public-works program can be a confidence builder.”
Has Professor Posner even been living on planet Earth? Robert Lucas won a Nobel Prize for pointing out that people adjust their behaviour to compensate for, and thus negate, this attempted con job. Meanwhile look at the ugly reality of government expenditure, such as Ontario’s disastrous eHealth boondoggle. For a Keynesian, eHealth could be justified as a fine example of economic stimulus. All those consultants obviously spent or invested the money they received, so what’s all the fuss? Just think of the Keynesian “multiplier!”
Back in the real world, however, as Niels Veldhuis and Milagros Palacios of the Fraser Institute pointed out on this page yesterday, to the extent economies are turning around, it has little or nothing to do with artificial stimulus, whose only impact is to crowd out private investment in the short term and/or create a debt burden that will impoverish taxpayers in the long.
Professor Posner, although a legal expert, seems strangely impervious to the impact of regulation in promoting the recent crisis. Jeffrey Friedman, a political scientist at the University of Texas, in a review of Professor Posner’s book for The Weekly Standard, notes that the “rational self-interest” that Professor Posner indicts “follows the tens of thousands of pages of the tax code; it follows the millions of pages of the regulatory code.”
Professor Posner concludes that “we need a more active and intelligent government to keep our model of capitalism from running off the rails.” “Active” we have. “Intelligent,” not so much. But this failure of intelligence lies not in the absence of IQ, but in the conception of an economy as a machine with knobs and levers. This is the flawed Keynesian model that is so appealing to conceited wonks and desperate politicians, but for which the bill always has to be paid. Just like eHealth.
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