Keynesian Economics — Storytelling Vs. Problem-Solving

Keynesian economists merrily go about their business of managing the economy with little thought that such action might not do any good or may even be doing great harm. Too many don’t understand that economics is about human behavior and social coordination. Their employers, whether they be universities or political entities, are terribly biased toward the Keynesian meme. Deviation from that meme, for most practitioners, is generally not without pain of some sort.

In an article entitled “Keynesian Stories Do Not Imply Keynesian Policies,” Peter Lewin describes how one does not necessarily follow the other (emboldening added):

That the market economy is inherently prone to cyclical swings is, at best, a necessary condition for policy-intervention to stabilize it. It is not sufficient, not nearly. For sufficiency one needs to show that somehow macroeconomic policy-makers know enough to mitigate the cycles, rather than exacerbating them; and further that they can be trusted to do so. That is to say, pretty much all of the Keynesian policy prescriptions fail to come to grips with the familiar knowledge and incentive problems – with the central ideas of modern Austrian and Public Choice approaches. While the Post-Keynesians and Austrians may share the conviction that economic agents face unavoidable uncertainty, the latter see no reason to exempt policy-makers from that uncertainty. Why should policy-makers know any more about the future than the agents in the field? And why should we trust them to want to mitigate the cycle, rather than exacerbate it to their advantage?

Lewin raises simple questions that few bother to ask or consider. Time is too valuable (and so are economist jobs) to question the very premises upon which the basis of intervention rests. Methinks the Keynesian economist is much like the Emperor who was found to be without clothes. While that story was a fable, the reality of this one is decades of economic stagnation and declining living standards.

Some recent effects of Keynesian mismanagement of the economy as seen by Charles Goyette:

  • The median net worth of American families fell 40 percent between 2007 and 2010. Predictably, the middle class took the biggest hit, while the wealthiest families’ median net worth actually rose.
  • Between 10 to 11 million home mortgages are underwater; Almost seven percent of home mortgages are seriously delinquent, 90 days or more past due.
  • One in seven Americans is on food stamps. The cost of the programs has exploded, up 135 percent from 2007 to 2011.
  • Unemployment persists at depression-era levels.
Mr. Goyette sees these results as the inevitable outcomes of the inflation-deflation (boom-bust) cycle that is produced by government intervention:

The governing classes, those who benefit most from inflation, keep inflating bubbles which in turn must deflate. Most people, once they understand that they are victimized by this process, will long to be freed of it. They will wish to live in an environment of stability. They will want to be free to restore prosperity for themselves and their families.

But this is a barren hope. Like collateral damage in war, ordinary human beings count for nothing. The people will be trampled as long as central banking and fiat money persist.