Thursday, January 08, 2009

Keynes' Problem

Tibor R. Machan

From the frying pan into the fire, the saying goes, and it applies well to the way John Maynard Keynes suggested we deal with economic uncertainty and to the advice his followers are now foisting upon Barrack Obama.

An assumption of some prominent economic theorists involves that we can pretty much calculate how the future will turn out and, therefore, tell the difference between very risky and not so risky investments. This, however, does not hold true when arbitrary forces enter the market place. And the most important such force is government action. This is because governments act by way of mandates, or outright force, not voluntary agreements.

Sure, even with a system of voluntary agreements as the foundation of the economy nothing is completely certain--after all, who can tell what the weather will be, or if there will be an earthquake or something else that has serious economic consequences quite apart from human decisions which are, themselves, often unreasonable and, thus, unpredictable. But only government can try to go against widespread human choices that mainly determine the economy since only government can impose its decisions by force, without the consent of the governed. And when it does so, the reasonable, albeit not absolute, certainty of how the future is going to turn out is completely undermined.

In the face of economic upheavals it is widely believed that most people will reduce their spending, including their risk-taking. While this is not a bad assumption, it doesn't tell the full story. After all, those who specialize in wealth management will be aware of the assumption and will often go counter to it so as to gain a bit from the widespread caution. Second guessing human behavior is one skill in which wealth managers specialize. And they will often figure out just what the government is likely to do, too. But then governments will impose their might to counter the effect of the managers' manauverings. And so it goes.

Keynes wanted to put a stop to all the guesswork that goes into economic thinking by advising that government spend when ordinary folks would act cautiously and save. Since Keynes believed that economic prosperity is mainly a function of spending money, of an aggressive consumerism, he found it disturbing that "the possession of actual money lulls our disquietude," so people refuse to do the spending that would keep the economy healthy and instead put their money away for later use (which, by the way, still doesn't mean it will be idle).

One of Keynes's contemporary followers, Robert Skidelsky, wrote that "There was only one sure way to get an increase in spending in the face of an extreme private-sector reluctance to spend, and that was for the government to spend the money itself. Spend on pyramids, spend on hospitals, but spend it must." As Skidelsky noted, "This, in a nutshell, was Keynes's economics." And he added, "His purpose, as he say it, was not to destroy capitalism but to save it from itself."

Capitalism, of course, is not saved by Keynesian economics but contradicted by it. The reason is that capitalism requires full respect for the voluntary exchanges in a free market place. When government prevents this from happening, capitalism is sacrificed. And how might Keynes' proposal prevent the voluntary exchanges of the free market place? By taxing and borrowing--without proper collateral--and similar policies that counter what people would do of their own free choices. The people want to save, so expropriate their money and use it to fund projects the people don't choose to fund. Build pyramids no one wants, spend on hospitals even if most people are healthy, spend like mad even if most people are pleased enough with what they have and therefore choose not to spend so much for the time being.

So the Keynesan remedy to occasional dips in economic activity is to put a gun to people's heads and force them to spend. And it sounds plausible, when you remove from it the criminal factor and one other thing: government stupidity. Even if it were not a blatant violation of peoples' basic rights to expropriate their money, the assumption that governments will know how to spend it so as to boost economic activity is completely off. This is the fallacy of thinking of government as some kind of God, some Supreme Being who knows better than ordinary mortals what to do, how to spend resources, when to save and when not to do so. This monumental--what F. A. Hayek, Keynes's friend and critic called "the fatal"--conceit is the age old idea that the state is supreme. And this is the theory that is now being championed by Barack Obama & Co.

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