A long post in English I wrote in reply to a Martin Wolf column this Christmas. I’m putting it on the blog as my contribution to the FT debate on capitalism. Enjoy, or scroll down to my last post on the right to hire a handyman for sexual services (in swedish).
So we’re all Keynesians now. Well at least Martin Wolf is, and he’s not a lone Wolf. In fact he’s so desperate for company so that in an FT column (23/12) he’s castigating anyone not agreeing with him as some kind of secular religionist and ideologue, oh, and they’re “selfish” on top of that. Mr Wolf himself on the other hand wants us to believe that he’s just a pragmatic sheep, even though he’s howling for world regulation and forced global government spending. This on the meager basis that he admittedly hasn’t got an answer to what needs to be done to combat a financial crisis (to underscore that point he even has a reference to an authority for making that last statement).
This, basically, is supposed to be the chief economics commentator at the Financial Times arguments for Keynesianism. I’d be a Keynesian myself – at least in the sense of writing this off as some madman in authority, “who hear voices in the air”, but who are only “distilling their frenzy from some academic scribbler of a few years back” – if it wasn’t for the embarrassing fact that Mr Wolf doesn’t even get the scribblers right.
Smearing the Austrians
For starters Martin Wolf is totally misrepresenting opposing positions.
“The … most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.”
So Hayek was simply a secular religionist and ideologue, calling for “purging”? Well, no. Hayek got the Nobel price in economics 1974 particularly for “his theory of business cycles and his conception of the effects of monetary and credit policies”. The prize committee wrote:
“He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.
von Hayek showed how monetary expansion, accompanied by lending which exceeded the rate of voluntary saving, could lead to a misallocation of resources, particularly affecting the structure of capital. This type of business cycle theory with links to monetary expansion has fundamental features in common with the postwar monetary discussion.”
Hayeks scholarly work “extended his field of study to embrace such elements as the legal framework of economic systems and issues concerning the way individuals, organizations and various social systems function” on top of forecasting and explaining the crisis of 1929. You may disagree with Hayek on his analysis or his policy conclusions, but by trying to write off a Nobel laureate as a simple dogmatic on his specific subject of research Mr Wolf just shows his profound lack of either basic knowledge, or intellectual honesty, or both.
The same goes for Ludwig von Mises who after all was Hayeks teacher and wrote lengthy and widely read treatises such as The Theory of money and credit as well as trying to prevent the mistake in the 1920s of going back to the old gold exchange rates after the war inflation, which unnecessarily created a short but sharp economic downturn.
Wrong on Keynes
Mr Wolfs idolization of Keynes is equally flawed. He writes:
“Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.”
This is not so much of a genius as plain wrong. As for Keynes himself, what he sets out to do in his General Theory is to address two problems: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” The second problem is a moralistic approach, a bad one at that. Keynes envisioned that creative people would work for the fun of it, even with high and progressive taxes. This was tried both during the great depression and long afterwards, especially in Sweden where income tax levels on the margin in the 1970s in practise was over 100 percent, making even writer Astrid Lindgren protest and film maker Ingmar Bergman to leave the country to escape tax authorities.
For the Keynesian political followers it was obvious that moralism was more important than economics. Franklin D Roosevelt with his New Deal dictated gold prices from his bedside, based on lucky numbers and pure guesses, and tried to force up agricultural prices by mass slaughtering and destruction of pigs in the midst of hunger marches. His view on the cause of depression was thoroughly moralistic. It depended on “an era of selfishness”, the “lack of honor of men in high places”, on national greed. The presidency during the depression was “more than an engineering job, efficient or inefficient. It is pre-eminently a place of moral leadership.” (emphasis added, quotes from Amity Shlaes, The Forgotten Man)
We do see and hear the same things today from the neo-Keynesians. From Henry Paulsons consistent inconsistency in every policy decision and motivation for it, and the consistent result: bigger and bigger bailout-programs (as Times writes he simply bypassed the White House economists who all were critical to bailing out Fannie Mae and Freddie Mac), to the constant slurs against “selfishness” including from Mr Wolf himself.
How not to preserve liberty and markets
So was Keynes out to “preserve as much liberty as possible”? Not at all. In General Theory he is at best described as an agnostic. He does recognize that without some room for economic liberty there is not much space for personal liberty, variety of lifestyle and choice nor an efficiently functioning economy. Yet Keynes thought that totalitarian states had come much closer to fulfilling full employment, for him a much more desired goal than liberty.
After all Keynes famously wrote in his foreword to the German edition of General Theory:
”[T]he theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under the conditions of free competition and a large measure of laissez-faire.”
Keynes himself stops short of outright totalitarianism, but only on the condition that his recipe is followed:
“The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.” (emphasis added)
Keynes was thus ready to give up not some, but each and every liberty for the sake of the security of “full employment” in a totalitarian state, only “it may be” that this won’t be necessary. His analysis was that totalitarian rule from several economic vantage points were preferable. Moreover on Keynes equally faulty but fundamental assumption that capital within two generations should cease to be scarce, the whole economic problem he is addressing is a society where all profitable investments are made, hence not enough to give employment to all. This is why people are needed to be pushed toward consumption by government intervention.
Keynes thus occupies a lot of political positions, ranging from “central controls necessary to ensure full employment” that “involve a large extension of the traditional functions of government” and “a somewhat comprehensive socialisation of investment” but preserving some room for “efficiency and freedom”, to the outright totalitarian socialism and economic planning. Taking up so many positions at the same time doesn’t exactly require a great mind, only a large bottom. And in practise it’s just giving an open mandate for the policymaker to do what he wishes, the exact opposite of liberty under laws, rights and balance of powers, as Hayek certainly would point out. None of those Keynesian positions is close to “preserving liberty” unless you use Stalin for comparison (which might have been of some relevance in the 1930s, today it’s just plain silly).
This thus gives us the different strategies for crisis management. What Mises and Hayek argued for was simply to let markets work by adapting to the new information after the bubble burst. This, after all, was the strategy in the beginning of the 1920s, making the crisis period short. The great depression by contrast was from the beginning handled by massive political intervention, first by Hoover raising tariffs and taxes and taking corporatist measures to keep salaries high, and the by Roosevelt’s New Deal, making the depression last for over a decade. Just the “pragmatic” approach from the policymakers – being open to any, and often contradictory, measures and programs – created a profound insecurity that hampered the economy. The “pragmatism” of an open mandate for interventions has been tried in times of serious recession, and it didn’t work. (See f e Amity Shlaes, The forgotten man)
To sum up. Keynesianism, at least the practicing Keynesians, are moralistic. And Keynesianism is definitely not a recipe for preserving liberty, on top of being thoroughly misguided in theory and destructive in practice.
We should stop to notice Mr Wolfs double standards in evaluating the different standpoints. Hayek and Mises made a case for extensive liberty, but are brushed off as mere ideologues, while Keynes is hailed as a “genius” for wishing to “preserve as much freedom as possible”. (Why should it in the mixed economy of today where massive regulation has failed, be a question of preserving rather than expanding liberty?)
Hayek and Mises are also ridiculed for the belief “that individual self-seeking behaviour guaranteed a stable economic order” and also implicitly ascribed the position of “believing that laisser faire makes everything for the best in the best of all possible worlds.” Contrast this to Mr Wolfs own modest ambitions: “to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible.”
This is a double standard for evaluation. While free markets must be perfect and problem-free to be proven justified according to the impossible standards of Mr Wolf, his own policy need only preserve some of the present levels of openness and employment. This is but a shameless attempt at rigging the game. In doing this Mr Wolf is again misrepresenting the positions of Mises and Hayek. Far from seeing markets as “perfect” they claimed that markets are needed to handle imperfections and problems, particularly regarding lack of knowledge and information. This is what gives rise to dynamic development under economic liberty.
A totalitarian recipe
So what are Mr Wolfs policy suggestions:
“The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers.
The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.
No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles. As Minsky made clear, no permanent answer exists. But recognition of the systemic frailty of a complex financial system would be a good start.”
First the US should spend and let the government subsidize the financial sector, then governments all over the world should be forced to borrow and spend, and finally a new system of global financial regulation and monetary policy will “curbs credit booms and asset bubbles”. Note at first another inconsistency in that Mr Wolf makes fun of Hayek and Mises for professedly claiming that “individual self-seeking behaviour guaranteed a stable economic order” while himself taking for granted that “a new system of global financial regulation” will guarantee just that. This is indeed a highly ideological dream. The “humbleness” of not knowing what measures will be needed, that “no answers exists”, is not only falsely pretending that the present situation of a recession is some kind of unique situation with no historical precedent and no applicable economic knowledge, thus avoiding lessons from past mistakes. It also serves as an excuse for delegating an open mandate to the executive, that is: discretionary, arbitrary, extensive and uncontrollable power in the hands of an economic leader. At least Mr Wolf in this recommendation is a true Keynesian, but as noted above this has been tried before, not successfully.
Mr Wolfs accusation that Mises and Hayek stand for a secular religion and ideology is not only wrong, it is a projection of his own view. Claiming humble ignorance and putting all your trust in the hands of the leader sounds like a carbon copy secular religion to me. And the howling for world government definitely is an ideological response, if the word means anything. A rather extreme one at that. But you have to admit that Mr Wolf in one sense is extremely pragmatic – in his relation to the truth.
Seriously, Martin Wolf, this must be one of the lamest attempts to mount a bandwagon ever seen. You’re way too old to do it with any dignity, let alone as a frantic attack on economic ‘nonbelievers’ worthy of a moral panic (which always disguises itself as a practical issue of how to address the “problem” on which all decent human beings agree). You couldn’t even get the popular demand right. Whatever motivated the election of Barack Obama, there has never been a popular demand for the bailout measures. And the call for adapters following everyone else to ruin in the banking sector instead of going their own way and investing productively (as if that is what was missing!) is not an “interesting” economic lesson (it’s not new either, the Keynesian analysis is always to trade dynamics, efficiency and competition for the false sense of security and stability under government control) but yet another sorry projection of your own latest performance on the intellectual scene.
Sure, for some time people who like the conclusion will be parroting that “MARTIN WOLF has said that ‘we’re all Keynesians now’”, but on the basis of the embarrassing arguments found in his FT-column the only relevant reply will be: “So who’s Martin Wolf?”