Understanding Modern Economics in the USA.

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Most Americans know practically nothing about Economics. The only economic principle most people recall is “supply and demand”. Otherwise, the average level of economic literacy in America is nil.

Most Americans’ exposure to Economics takes place in college classrooms. This is unfortunate, because one of the worst places to learn about economics is in the college classroom. Economic education in modern academia is overwhelmingly dominated by a school of thought known as Keynesianism. The Keynesian School of thought is one of the worst major economic ideas of the past century, second only to Socialism.

Keynesian thought makes economics seem like an intricate high-art, with complex theorems and equations to predict all aspects of the economy. It almost seems like physics or chemistry, with set equations and the ability to tweak variables with wholly predictable results. “Raise interest rates XX% by the Snuffy index coefficient to reduce spending rates by Y and blah-blah-blah…” Such instruction is usually accompanied by nifty graphs with fun wavy lines. It all seems so… scientific. In reality, it is nothing but pretense. Economics, by it’s very nature in dealing with human action and free will, cannot be considered science in the same vein as physics or chemistry. That is why scientists within the hard sciences jokingly say that economists suffer from “physics envy“.

Most students walk out of college economics classes without retaining anything. This is because Keynesian economics runs heavily on obtuse theorems, graphs, and equations. I recall my first Macro-Economics class in school; the instructor was a hardcore Keynesian. The numbers were swirling around my head. It seemed like insanity. I brain-dumped everything after barely passing the class.

For all its complex theorems and equations, the practical conclusion of Keynesian thought is extremely simple: that the government must be the prime spender in the economy, and must retain control over the money supply and banking system. Governments accomplish this through the establishment of what is called a Central Bank. The Central Bank is given a monopoly over the creation of money in the economy and charged with watching over and maintaining the supply of money in the economy. These Central Banks answer to the national government in some form or another.

The American economy is a wholeheartedly Keynesian system. The US government takes it upon itself to steer the economy like a great vehicle. Look at a dollar bill; notice the words “Federal Reserve Note”? Dollars are issued by the Federal Reserve, which is the American central bank. The US government gives full monopoly power to the Federal Reserve over the money supply. Nobody can print what is considered “legal tender” for payment of debts except for the Federal Reserve, under penalty of swift imprisonment. This power over money gives the Federal Reserve a certain degree of influence over aspects of the economy.

The US government has huge amounts of government deficit spending, and a fully-cartelized central banking system with control over the creation of money. This foundation is agreed upon by both major political parties. Despite all the hysterical bickering between Democrats and Republicans, they are really the same in a lot of ways; their agreement over the correctness of Keynesian philosophy is one such way. No American President since the start of the 20th century, whether Democrat or Republican, has completely opposed Keynesian principles at work in the government. That paradigm continues today. That is one of the reasons why I refer to both mainstream establishments as merely two halves of the same institution, the National Fascist Coalition – the tyranny of the Donkey and Elephant.

Keynesian thought is named for British economist John Maynard Keynes, who was the first to lay out modern Keynesian doctrine in his book, The General Theory on Employment, Interest, and Money, written in 1936. However, Keynes was hardly the originator of those ideas; in a seemingly anachronistic fashion, the US economy was Keynesian long before Keynes showed up. The US economy had been operating under Keynesian principles since at least 1913, when the Federal Reserve was first established by Woodrow Wilson, and even longer than that in some other ways.

John Maynard Keynes is celebrated as the genius progenitor of modern economics; but he hardly originated a damn thing. Nothing written in The General Theory was a new idea. Everything described in his book was basically already being done by national governments across the world: abolition of hard money standards (gold, silver) in favor of fiat currency, institution of central banks, massive government spending fueled through borrowing and deficits, easy credit and artificially low interest rates, inflation of the money supply… by 1936, when Keynes released The General Theory, nearly all developed nations were already doing this stuff.

Pre-1936, many economists agreed that many of the aforementioned policies were bad ideas. While politicians and Central Bank bureaucrats were pursuing deficit spending and credit expansion, most worldwide economists (even Marxist economists) were deploring the policies as negative. After all, it’s easy enough to understand that spending money you don’t have and extending credit to people who cannot afford it is a recipe for disaster. These economists were viewed as dour and pessimistic individuals by politicians and bureaucrats, who did not appreciate their bad attitudes.

All of that changed in 1936 with the great Keynesian revolution, when Keynes released The General Theory and was subsequently hailed as an economic genius and guru by governments throughout the West. The key to Keynes’ popularity was this: he was the first major economist to tell politicians what they wanted to hear. Keynes, while not a great genius by any standard, was widely popular in English academia at the time due to his immense personal charisma and affability. According to accounts by those who knew him personally, he was the very embodiment of English aristocratic sophistication, which led to a significant degree of adoration by his students and colleagues.

Keynes was the first major economist to tell national governments that their practices of deficit spending, easy money, and inflation were not only acceptable, but in fact vital and necessary to protect the economic health of the nation. You can see what happened here: Keynes merely baptized what governments were already doing. For that, they adored him and venerated him above all others. All of the dour economists who opposed the new Keynesian doctrine were finally able to be justifiably banished to the fringe as reactionary and old-fashioned.

Keynes died in 1946, but Keynesian thought marches on as dominant throughout nearly all developed nations. It has had its ups-and-downs over the years, with variations on a theme appearing and disappearing in different ways (Milton Friedman’s brainchild of Monetarism, Supply-Side Reaganomics, etc.); but always, the basic Keynesian paradigm of total monetary control and deficit spending by the government has remained.

A vast majority of the American economic establishment continues to stay true to Keynesian principles. While some are more hardcore than others, and some add unique flavors to their brand of Keynesianism, the basic principles of deficit spending and control over the money supply remain. This has persisted even after Keynesian thought has been flat-out disproven and discredited time and time again. The dreadful Stagflation of the 1970s was one such instance: the inflationary recession. According to classical Keynesian doctrine, a recession is the result of lowering prices (a symptom of deflation), and must be fought by propping up prices (through inflation). This is what the Federal Reserve was doing during the recession of 1973. As they inflated, prices indeed began rising; but the recession was not ending. Businesses and employment were still suffering, in spite of the supposed “inflationary cure”. So not only were people suffering because the recession was making money scarce, but what little money they had was being inflated and devalued by the government. Talk about a bad situation.

Establishment economists were dumbfounded. This was the repudiation of their entire approach. They had to throw up their hands and admit they didn’t know what was going on. The recession fizzled out as capital and resources were eventually acquired by private hands and put to productive and non-wasteful use in the private sector, as what eventually heals all recessions; but the recovery was short-lived, as the same harebrained policies created another severe period of stagflation from 1979 to 1983. Of course, these recessions have been dumped down the memory hole. The Keynesian establishment pretends they never occurred.

A modern example: Keynesian theory dictates that the government can encourage employment by spending money into the economy, thereby creating demand for consumption, production, and employees. Consider the current situation in America: real unemployment is likely somewhere near 11%, at least. A large number of people are unemployed. Yet deficit spending in America is the highest it’s ever been in peacetime history. According to Keynesian doctrine, government spending is proportional to employment. By this theory, employment in America should be booming; but it’s not. And increasing deficits every year seemingly have no impact. The unemployment rate is dropping, but only because many job-seekers are dropping out of the workforce permanently, at which time they are no longer counted as “unemployed”. The Keynesian economists, such as the celebrated Paul Krugman, blame this on not enough government spending. They demand more. More! They don’t question the underlying principles because surely, Keynesian thought is not incorrect (according to them, anyway).

Keynesianism is not dominant because of its great ideological vigor and healthy track record (of which it has neither). Keynesian thought remains dominant amongst politicians, bureaucrats, and academia for one very simple reason: it produces relevancy for government jobs, and prestige for academic economists as “scientists”. Keynesian theory relies on politicians and bureaucrats to function. The advent of respectable Keynesian thought finally gave economists an opportunity to snag high-powered and high-paying jobs with the government, supposedly as esteemed economic scientists and forecasters.

Before the Keynesian Blight descended on America, finding a job outside academia with an economics degree was not easy. The major job openings were as economic forecasters for large banks and corporations; of course, the only economists these banks and corporations wanted to employ were those who could make consistently accurate forecasts, which wasn’t easy. Most economists are lousy forecasters; they understand economic concepts, but are incapable of properly applying them to economic analysis involving human action. If you had an economics degree but couldn’t forecast well and you couldn’t write books or articles that publishers would buy, then your only other option was to go into teaching, which generally did not pay very well (or at least as well as these economists thought they deserved).

With the advent of respectable Keynesianism, all that changed. Now, it was claimed by politicians that brave and visionary economic helmsmen would be necessary to steer the great economic wheel of America. The prospect of snagging a government job was highly desirable for many economists, because they really did not need to actually be a good economist; they only had to be willing to justify and baptize whatever the government was currently doing. This arrangement pleases both politicians and lousy economists: the politicians have a gaggle of “economic scientists” they point at to convince the public that what the government does is correct, and these economists in-turn are granted huge paychecks, admiration and respectability, and the luxury of a cushy tenured career with basically no risk involved (so long as they toe the governmental line).

The late Murray Rothbard, my favorite economist, used to say that modern Keynesianism is “dead from the neck-up”. Even though Keynesian theory has been totally discredited in action, the Keynesian monolith continues to lurch on because the ruling elite finds it preferable to the alternative: less government control over the economy, less control over money, less spending, and less inflation. In my opinion, all of the aforementioned would be made perfect with a “no” in front of them instead of a “less”. This notion, of course, gives politicians and bureaucrats a heart attack. Without control over the economy and money supply, how will lousy economists find cushy, high-paying, tenured jobs? And how will politicians fund their own boneheaded welfare and warfare schemes without having to enrage voters by raising taxes?

The Keynesian Blight is still with us, and still continually screwing the populace; but I am optimistic, in the long run. The ideological tide in America is turning for the better. More and more people are being educated on the failure of Keynesian economics. More and more people are becoming disillusioned with government-dominated economics and are wondering why things are so mucked up even with all the legions of “economic scientists” at the helm. More and more people are seeking answers, and are discovering what is called Austrian Economics: the idea that free trade, free currency, and free people seeking their own self-interest is what produces an economy prosperous for all, not legions of bureaucrats pulling economic strings at the urging of politicians. Personally, I would like to change the name from “Austrian” Economics to Freedom Economics, because I think it helps identify the core principles more clearly. Ron Paul has been the public face of Austrian Economics in America for the past 20 years. He has gained considerable popularity, and has had the opportunity to educate millions of people in America, and billions across the globe. The Internet, the great decentralized tool of communication and information, has enabled this to occur.

More and more people look at the failures of the Keynesian monolith and ask, “Why?” This is a magnificent development. Let freedom ring.

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One Comment on “Understanding Modern Economics in the USA.”

  1. Dan Pedersen June 9, 2014 at 1:39 pm #

    Well said. It’s incredible how little most people understand about economics, myself included, until only a few years ago. The Austrian theory really opened my eyes and made it possible even for me to recognize what’s really going on in the economy.

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