No Keynesian Saw It Coming

“No one saw it coming” is one of the great excuses used by the economics profession to rationalize our economic crisis. The statement is convenient, but demonstrably false. It would be correct if it were stated differently: “No Keynesian economist saw it coming.”

Rephrasing the statement in such a fashion makes it true but damning for the charlatans that promulgate Keynesian economics. Keynesianism is a fraud and always has been. It is not economics, but political manipulation of an economy. Politicians love it because its underlying thesis is that the economy, left alone, would stagnate at some level below full employment. This false claim is the basis for Statist government enabling government to grow bigger, take more from its citizens and involve itself into all aspects of peoples’ lives.

It is a convenient excuse to increase political power, plunder wealth and create economic and political dependencies amongst the citizenry. And it is all done out of need. To not expand government with all kinds of wacky programs would be economic malpractice according to Keynesian tenets. Politicians not doing exactly what they have always wanted to do would be doing a disservice to their country and citizens. What hogwash!

Too many trained economists are little more than idiot savants, capable of great statistical legerdemain and mathematical wizardry. They have little common sense and know nothing but what I like to call “Keynesian physics” — useless model building based on erroneous assumptions. Those who refuse to go along with the Keynesian myths are excluded from prestigious teaching positions, research grants, government employment and mainstream media attention. All of these barriers “persuade” honest scholars to become Statist economists because that it the best way to feed their families. Those who refuse are relegated to the minor leagues of economics.

The epistemology and positivism of the Keynesians is incorrect. Economics is a behavioral not a natural science. The basis for understanding is the individual, not some simplified and contradictory collection of aggregates to which causalities are falsely assumed. Ludwig von Mises and Frederich Hayek both understood this. They understood the cause and remedy for business cycles. Neither used “macro economics.” Interestingly, their approach provided reasonable understanding of business cycles while Keynesian economics still has no valid theory.

Human beings are not molecules that can be studied as such. Molecular behavior is simple. Given a few variables, molecules always behave the same way. Human behavior is complex.  There are literally thousands, if not millions, of variables that affect an individual. Most of these are unknown and not measurable.

The notion that the price of an item is determined by only two variables — quantity supplied and quantity demanded — is an example of such simplicity. While these two variables are understandably very important, other variables affect the decision to sell or buy. Further, many key variables in human decisions are not measurable because they reside as expectations and other subjective judgments. Even when an economist believes he has found a “relationship,” it must be fallacious in the sense that he is looking at one or two variables. Human behavior is adaptive. Individual goals change, so past relationships amongst variables are rather meaningless, even if one were able to capture them.

Economists using the incorrect paradigm did not see the economic crisis coming. Now we hear all sorts of post-rationalizations about adding additional variables to their abstract models. This talk is not indicative of a science or a mature field. It is, at best, ad hoc tinkering designed to explain something after the fact. The reality is that these models can never have enough variables to make them proper. The presumption of being able to forecast outcomes is arrogance and beyond the limitations of behavioral science, the foundation of economics.

Virtually every economist who warned of the danger and imbalances in the economy were non-macro economists. Specifically, they were limited almost exclusively to the Austrian School of Economics where focus is on individual behavior and not aggregate variables. There were some non-economists, mostly financial types, that also saw the imbalances developing and warned of the danger.

The late Kurt Richebächer was an economist of the Austrian persuasion who saw the problems very early on. Here is Rick Ackerman’s intro to a reprint of an early interview with Dr. Richebächer:

Dr. Kurt Richebächer was one of the most visible and vocal proponents of Austrian School economics at the time of his death in 2007.  Eight years earlier, at the height of the dot-com bubble, we interviewed him for the Sunday San Francisco Examiner.  In retrospect, the economic problems that he believed threatened the global economy were small and relatively manageable back then. The same problems are of course still with us, and Richebächer undoubtedly would be appalled by the extent to which they have metastasized.

Although he spoke of a deflationary collapse in the interview, a close reading of his monthly newsletter from 1997-2002 reveals that he was conflicted on the subject. He used the word “deflation” only rarely during that period, and when he did, his logic became uncharacteristically muddy. Perhaps this is because, in the Austrian scheme of things, spectacular credit blowouts are not supposed to beget deflation, but rather, inflation. Arguably, if he were around today, he would still be uncertain as to which is likely to prevail when the economy finally collapses, as it must.  The interview below appeared in November 1999 under the flippant headline “Economic Basics Predict Apocalypse”.

Read Mr. Ackerman’s full piece here.