Loyal readers of Dave’s humble blog have seen many an article pointing out the many flaws in Keynesian Economics. [Just do a search here].
My pesky imaginary friend, Devil’s Advocate, [who by the way has been under attack himself lately by the redditors], has told me he found a fatal flaw in all my anti-Keynesian arguments, one that will require me to erase them all. Here he comes now.
OK, Devil, why do I have to erase all my Keynes articles?
DA: Simple. You are attacking Stone Age Keynes. The fellow who actually wrote the book. But the dignified science of economics has moved on since then. We now have Neo-Keynesians, Post-Keynesians, and Neo-Classical Keynesians, who all disagree with one another on the basics. Chop down one head of the Hydra, and three more appear in its place. And you have never talked about them! So there.
SD: Devil, I’m one step ahead of you. I’ve researched that stuff, mainly by listening to this audio: https://mises.org/sites/default/files/Keynesians%20and%20Neo-Keynesians%20Don%20Bellante.mp3
SD: For the amusement of my loyal readers, and based on that audio, but way more sarcastically, I am going to explain what those three flavors are.
DA: This I gotta see.
SD: Basically, what happened was that as time rolled on, all the Keynesian predictions fell apart. For example, they used to all say that you can’t have inflation plus unemployment at the same time. Well, we did, in the Nixon days. This started a mad scramble to rewrite the whole Keynesian canon, keeping the essentials, but modifying them so they fit reality.
First, we have the Neo-Classical Keynesians. They are the guys who will not be confused by the facts. Despite everything, they insist Keynes is right, and reality is wrong. No changes need be made in the Keynesian portrayal of the world. They insist that stagflation is impossible, even though we’ve already had plenty. Their cure for unemployment is to print plenty of money, raising prices. This tricks workers into thinking they are getting well paid, and so they will get out there and work, instead of proudly refusing to take low wages.
They mock the Austrians for not being mathy enough, but when other schools of Keynesians out-mathed the Neo Classicals, their reply was, “Math shmath, who cares about math, I mean seriously.”
These guys are dinosaurs, a dying breed. They are being replaced by the two other flavors, the Post Keynesians, and the Neo Keynesians [not to be confused with Neo-Classical Keynesians, the dinosaurs].
The Post Keynesians, seeing how the Classicals foolishly deny reality, decided not to make that mistake. They chose instead to deny the most basic laws of economics. Things like the Laws of Supply and Demand, and the Law of Diminishing returns. If they were mathematicians, it would be like denying that 2+2=4. But hey, it’s a step up from the Classicals, I say. Better to deny theory than deny reality, right? More power to them. They are mainly concentrated in England, and whether they know it or not, they are heavily influenced by Marx.
DA: Marx? How did he get into this picture?
SD: Marx taught the Post Keynesians that it’s all about the Material Productive Forces, that mythical Marxian animal, now renamed Technology. It is the One True God that determines everything. You can print all the money you want, and nothing will change, not prices, not wages, nothing, because the God called Technology does not care about money. You have not changed Him by printing money.
The next Marxian thing they inherited was actual Socialism. They think the govt should set wage and price controls, and that the govt should decide what we should invest in.
DA: But that’s not Socialism. Socialism is when the govt actually owns everything.
They are saying that you get to own what you own, which is not Socialist at all. They are just putting in a few limitations. If you own a product, you have to sell it at a price the govt determines. If you have money you want to invest, you have to invest it where the govt tells you. If you own a company and want to hire workers, you have to pay them what the govt says. And if you own your very body and want to work for someone, you have to accept the wage the govt tells you.
SD: Oops, sorry. So they aren’t Socialist, are they? In any case, we need not waste more time on these guys. Everyone thinks they are a joke and a farce, even the other flavors of Keynesianism. Which doesn’t discourage them in the least. They say they are the “real Keynesians”, all others just foolish blunderers who misunderstood the great man’s message.
DA: So the winner is Neo Keynesianism, since the other two are ridiculous, right?
SD: You might say that. But woe to the winner of a contest like that, the Least Ridiculous Prize. Like the sanest patient in the nuthouse.
The Neo Keynesians got off on the right foot. They noticed, finally, what Henry Hazlitt pointed out right from the start, that it’s pretty ridiculous to think, as Stone Age Keynes did, that workers have never heard of the Consumer Price Index. [As an aside, the critics of Austrianism are always harping on the claim that businessmen should have figured out the Austrian Theory of the Business Cycle, so why do they keep getting fooled, but somehow kept quiet for years about Keynes’s absurd notion that workers will never figure out price inflation.]
Once they were forced to acknowledge that Keynes had it all wrong, they decided to start from scratch. Clean the slate, make a new beginning. Nothing is sacred, everything is open to question. Well, except for Keynes’s conclusions, that the govt is the cure for all economic ills. [Is it merely a coincidence that they all get big money from the Fed, down to the last man? Of course it is.] The govt must get in there and spend, otherwise there will be chronic unemployment. That is self evidently true, and all we have to do now is work backwards to prove it.
So they came up with a bunch of absurd assumptions, totally divorced from reality and common sense. For example, a worker would rather be unemployed at a high wage than be employed at a low wage. Give me dignity or give me death. Employers are also eager to pay high wages, and hate paying low wages. “If I pay a low wage, I will go bankrupt somehow.”
DA: Well, now you have educated yourself about the New Age Keynesians, I’m sure you realize it’s time to erase all your articles mocking them.
SD: Yeah, right.