John Maynard Keynes & Theory

I guess I shouldn’t neglect the show the way I did last week. I got caught up in a 5 hour binge and man, did I miss out.  As always, Jason does a fine job at political analysis and picking apart Bernie Sanders in particular. What is curious is that while Jason would no doubt agree with Tom Woods and the rest of us that Bernie is wrong about everything (link is a free book by Woods on that subject), he seems to give the Bernie Sanders of 80 years ago a free pass… “Keynes got a lot of stuff wrong, but he also got some things right too.” I’m sorry, but since we’re so keen at pointing out how Bernie doesn’t answer any questions directly or give any concrete details, I may have to refer to Jason as Jason Bernie Sanders Stapleton. Where did Keynes ever get anything right?

It isn’t a matter of reading a few books from Austrian authors that would cause sane men who adhere to the rules of logic to abhor Keynes, though only a few books would be necessary and would justify it. It is slugging through the General Theory of Employment, Interest, and Money that causes a person to hate Keynes, as would be the natural inclination of any honest man who loves liberty.

There is nothing true and original in the General Theory; it is full of overly technical language, using terms that are never defined and which actually change definitions without notice. It is an anathema to science because it is so unclear. What good is technicality if there is no precision? As for what is true, how can he be given credit for getting things right that Adam Smith got right 150 years before?

As for Milton Friedman making the remark, “We are all Keynesians now.” How are we supposed to answer to this? How does this somehow exonerate Keynes of all his errors? It doesn’t. Keynes’s “General Theory” has been the most destructive piece of literature to mankind’s liberty and well-being ever written, with only Karl Marx excepted.

It isn’t merely a matter of Galbraith and Samuelson misconstruing the teachings of Keynes. To say so is akin to blaming Lenin, Stalin, and Mao for the failures of Marx’s teachings.

Here we can segway into theory and what that means. It is not true the problems were that Keynes was purely theoretical and that we need economics that works in the real world. Jason knows better than this; that is exactly the argument put to us when we criticize some big government work project that is supposed to create jobs, and we come back with the arguments from Bastiat about the seen and the unseen. They say that is all theory, but FDR/Obama is actually creating jobs.

Economics is a purely theoretical science, but Keynes didn’t even use theory. He tried to use mathematics and statistics devoid of logical deduction from the premises of the axioms of human action. He examines wage “levels” from one year to the next, as well as employment “levels” and interest rates, but never bothers to look at why individuals do the things they do as Jason does in his show. Why a person wouldn’t expand his business when the top marginal tax rate is 70%.

But let’s get back to theory. Economics is no less a science than physics, but it cannot be treated in the same way as physics. The physicist has a lab in which he is able to set a control and a variable; he can control the settings and the environment. After the first leg of the experiment is concluded, he is able to reset the control and the variable and run the experiment again, under the same conditions, and then he can change a feature and run it a 3rd time.

With economics, this is an impossibility. There is no lab, and there is no way to control for certain conditions. Everything is a variable. Thus, if we were to attempt to make sense of economics by way of a posteriori reasoning our results would be biased. Paul Krugman looks at the bailouts of the banks and auto makers in ‘08 and ’09, and the sluggish recovery, and breathes a sigh of relief that it wasn’t worse but says it would have been better if only the bailouts were bigger and were done sooner. While Bob Murphy sees the same things (insert protracted recession in place of sluggish recovery) and says things would have been a lot better a lot sooner if only they hadn’t done a bailout at all.

Galileo had a remedy in the question of whether a 10lb ball would fall to the earth faster than a 5lb ball; he climbed to the top of the Tower of Pisa and tested his theory. But what remedy do we have for the question of the recession and recovery since ‘08? We can’t go back in time.

However, that doesn’t mean Economics isn’t scientific. It is much more like Geometry, where by new facts are revealed through deductions that proceed from already accepted truths about the nature of the subject in question, either man or a right triangle.

The Pythagorean Theorem isn’t something that must be proven empirically, but is the product of deductions about the nature of that triangle. Likewise, the theory of supply and demand is also a logical procession based on very simple and widely accepted principles of human action. Each man acts to improve his condition; ceteras paribus a man will prefer more than less, and sooner rather than later. Men act rationally and have an ordered value scale. From this, we understand if the demand for a product increases the supplier will use this as leverage to increase the price asked for the product. The higher prices induce others to enter into the field and compete.

It is true this can be observed, and that this isn’t a contested theory; I use it because of how simple it is, but the fact that economic laws can be observed doesn’t make economics less theoretical.  Theory is only a way of describing the world. Geometry is theoretical, but it is applicable, and can be seen and demonstrated in the world and so can economics, as long as you’re not a Keynesian and would jettison Euclidean geometry in favor of a new way of doing geometry- that’s a reference to what Keynes actually says in the General Theory!

Economics consists not in statistics, equations, quotas and ratios. It involves logical thought about how humans act under different pressures, restrictions, and mandates. Keynes never considers any of this.

And, really, if you want to know what’s wrong with Keynes, if you doubt anything I’ve said here, pick up “Failure of the New Economics” by Henry Hazlitt. He actually goes through the General Theory chapter by chapter, paragraph by paragraph, and in some cases line by line to dismantle the confusions that Keynes has brought to the science.  There is also a free audio version here.

In this case I would recommend obtaining a hardcopy of the General Theory or the Kindle version and listening to the audio version; this is actually the quickest and the easiest way to get a firm grasp of the material.  It sounds daunting, but it really is quite fun. It’s like one big riddle. Read a paragraph of the General Theory, see if you can make sense of it, and determine if it is true or not and then switch over or listen to Hazlitt unpack it and pronounce a verdict.


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