Modern-day macroeconomics -- that's the stuff that justifies government manipulation of money to make booms, busts and regular credit crises like the one the world is in now-- is still infected with the virus of John Maynard Keynes, the man who did more to destroy the value of money than anyone else in any century.
The ghost of this long-dead economist still dominates macroeconomic teaching and thinking today, and can be seen in such nonsensical statements from the likes of Michael Cullen that it's inflationary when we get to use our own money, but not inflationary when governments take it from us and piss it up against the wall.
In the long-run the domination of Keynes the state-worshipper has been all bad both for economics, and for those economies which good Keynesians have been manipulating ever since.
His wisdom may be judged by such "insights" as these, which both common sense and genuine economists had long debunked:
To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. (Keynes, General Theory, Ch. 16).
No wonder Henry Hazlitt, in his thorough book-length destruction of Keynes' tax-and-spend system concluded "all Keynes's recommendations for practical policy are unsound," and that
though I have analyzed [Keynes's General Theory] theorem by theorem, chapter by chapter, and sometimes even sentence by sentence ...I have been unable to find in [Keynes, General Theory] a single important doctrine that is both true and original. What is original in [Keynes's] book is not true; and what is true is not original.
For those unable to take advantage of Hazlitt's brilliant book-length critique, a much shorter introduction to Keynes and his destructive notions can be found at the Mises Institute site: Spotlight on Keynesian Economics.
If you genuinely want to understand how governments destroy our money, and the nostrums that back up the pillage, then this is a great place to start.
 | The Failure of the New Economics by Henry Hazlitt Read more about this book... |
UPDATE 1: The US Federal Reserve is now subsidising failing bankers to the tune of $31 billion, representing a record level of money being printed to prop up the likes of the Maserati-driving bankers who've been writing bad loans. As Steve Forbes points out in a letter to the New York Times,
Last August when the credit crisis hit, the Fed chairman, Ben Bernanke, began flooding the banking system with liquidity, like throwing money out of a helicopter. Since then, the American economy has ground to a halt, and global economic growth rates have slowed. Yet the price of oil since August has zoomed from around $70 a barrel to more than $120.
UPDATE 2: George Reisman has the perfect follow up reading: Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending:
According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere non-spending and thus a “leakage” from the spending stream. This dogma underlies much of government economic policy in the United States, including the so-called economic stimulus package that has just been enacted. In this article, I prove, to the contrary, that consumption is not the main form of spending in the economic system and that the source of most spending is, in fact, saving.
UPDATE 3: Arnold Kling suggests the whole field of modern-day macroeconomics should be abandoned altogether. "In my view, macro seriously undermines sound economics... " I agree with him, and after watching macro majordomos Ben Bernanke and Alan Bollard fumble their respective balls, you might be inclined to agree too.
The whole field is phucked. After the likes of Marshall left the econo-field bare by excessive devotion to his "representative firm" (and von Mises and Hayek's sober and rational analyses of money and credit and trade cycles were ignored as being too close to common sense) Keynes jumped in to fill it with his utterly wrong-headed and destructive notions which essentially found the field, and it's been all downhill ever since. Causes follow their effects; conclusions are the opposite of their premises; and falsification is ignored altogether.
I can't resist posting Ayn Rand's observation of the field, which is, in effect,
a science starting in midstream: it observed that men were producing and trading, it took for granted that they had always done so and always would—it accepted this fact as the given, requiring no further consideration—and it addressed itself to the problem of how to devise the best way for the "community" to dispose of human effort.
And one of Ayn Rand's many observations of Keynes (this from a brilliant article analysing modern-day mainstream economics called 'Egalitarianism & Inflation'):
[P]roject the mentality of a savage, who can grasp nothing but the concretes of the immediate moment, and who finds himself transported into the midst of a modern, industrial civilization. If he is an intelligent savage, he will acquire a smattering of knowledge, but there are two concepts he will not be able to grasp: "credit" and "market."
He observes that people get food, clothes, and all sorts of objects simply by presenting pieces of paper called checks—and he observes that skyscrapers and gigantic factories spring out of the ground at the command of very rich men, whose bookkeepers keep switching magic figures from the ledgers of one to those of another and another and another. This seems to be done faster than he can follow, so he concludes that speed is the secret of the magic power of paper—and that everyone will work and produce and prosper, so long as those checks are passed from hand to hand fast enough. If that savage breaks into print with his discovery, he will find that he has been anticipated by John Maynard Keynes...Perhaps it is harder for us to understand that the mentality of that savage has been ruling Western civilization for almost a century.
Trained in college to believe that to look beyond the immediate moment—to look for causes or to foresee consequences—is impossible, modern men have developed context-dropping as their normal method of cognition. Observing a bad, small-town shopkeeper, the kind who is doomed to fail, they believe—as he does—that lack of customers is his only problem; and that the question of the goods he sells, or where these goods come from, has nothing to do with it. The goods, they believe, are here and will always be here. Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.
But, in fact, consumers qua consumers are not part of anyone's market; qua consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of "consumer"; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market's "supply"; in the role of consumers, they represent a market's "demand." The law of supply and demand has an implicit subclause: that it involves the same people in both capacities.
When this subclause is forgotten, ignored or evaded—you get the economic situation of today.
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