Download The Pied Piper Wore a Suit and Tie

Schwartz 1
Stanley Schwartz
Ms. Laura Edwards
ENG 1400
November 25, 2013
The Pied Piper Wore a Suit and Tie
Macroeconomics, of all the disciplines that could be considered sciences, is by far the
most contentious. Inflation, taxation, and spending are all focal points of the KeynesianismAustrianism debate and battle. Proponents of each side shout the other down, convinced of their
own merits. It makes no sense that this should stem from a field that is based on technical
equations, logical reasoning, and long-winded research papers. Ultimately, for several reasons,
this conflict is unnecessary. There are major flaws in the economic ideas of John Maynard
Keynes and his successors that are revealed through the contemporary criticisms of the Austrian
economists.
Macroeconomics is the science of how national economies should be managed. Its
principles impact the lives of every citizen and steer the fate of nations great and small. One
macroeconomic idea is that “Politics and economics are interrelated,” reminding economists to
remember the consequences of their ideas (Kroon, 9). Another idea in the macroeconomic
framework is that mathematics can be used to determine national economic health. No more
wishy-washy guesswork is necessary when GDP, unemployment rate, and rate of inflation can
be applied. When the number of people who are employed and unemployed in the United States
is converted to a percentage unemployment rate is found. When an increase in prices can be
linked to printing money, inflation is revealed. As a result, statistics can have the final say so that
Schwartz 2
passions do not rule the day. Overall, macroeconomics seeks to solve the problems revealed in
the capitalist system by the Great Depression.
Macroeconomics was developed following the Great Depression by John Maynard
Keynes. He thought that answers could be found to the pressing questions of the time about how
to avoid depressions, if capitalism had a systemic failure, and what the government should do to
prevent economic crises. Since Adam Smith published The Wealth of Nations in 1776,
capitalism had been the dominant economic system in Europe and with it came an idea known as
Say’s Law: eventually, supply and demand would perfectly balance out in an economy to create
full employment if left alone (Galbraith, 222). However, the Great Depression convinced many,
including Keynes, that this was not the case. A new path and a new prescription were needed and
they arrived through Keynes’ theory of investment demand and consumer expectations.
By founding macroeconomics, John Maynard Keynes revolutionized economics itself.
Speaking of previous efforts at macroeconomic principles, economist John Kenneth Galbraith
wrote that “none of this earlier effort ranked in importance with the publication of The General
Theory of Employment, Interest, and Money in 1936,” by Keynes (227). Here, he formulated the
idea that Say’s law would fail because of the underlying motives of businessmen and consumers.
They don’t want to balance out the economy. They want to benefit themselves so “expectations
of future profits are the primary factor in determining investment” (Tucker, 464). The immediate
conclusion to be drawn from this is that there must be managers and overseers for the economy.
The “animal spirits” that go with expectation of profit can lead people to break the law, steal, and
even murder (Tucker, 466). Therefore, government needed to take over economic foundations
and build a kinder, gentler, and fairer system.
Schwartz 3
John Maynard Keynes also laid out some of the tools and causes that government
planning needed to use or address to succeed according to his theories. To properly plan for and
address the dangerous attitudes of consumers, government could use taxation and spending.
When the economy was starting to falter, knowing that a pessimistic spirit would soon take hold,
the government should print money, lower taxes, and increase spending. This would put more
money in the economy and create a bubble that would result in a positive spirit. However, if
optimists started to run wild in their speculation, like in the lead up to a stock market crash, the
government should restrain their optimism by stopping the presses, increasing taxes, and
decreasing spending. This would prevent the roller coaster from going too high and making the
drop disastrous. The result would be like the blue upward line seen below instead of the green
cycle that risked heavy depressions. This plan was hailed worldwide and soon implemented,
though there were contemporary dissenters.
Josephs Schumpeter, a great Austrian economist and finance minister, addressed Keynes’
economic ideas with realistic evaluations of the political consequences. Schumpeter’s work
against Keynesian ideas can be summed up by “the Schumpeterian contradiction: capitalism may
Schwartz 4
be an economic success, but it is not a sociological success” (Heilbroner, 302). Capitalism’s
weakness lies in the fact that those working within it may deny its obvious rights and call them
wrongs. Someone in America’s lower class may denounce capitalism due to their status while
not realizing their immense advantage due to capitalism over the upper class in a nation like
Angola. The unknowing American could vote into office candidates who, given economic
control by Keynesians, would destroy the generally successful capitalist system and seize power
for themselves. To give the government much economic power would create even worse
problems than the Great Depression that Keynes was addressing.
Friedrich Hayek, another Austrian economist and contemporary of Keynes, further
explained the social disaster that Keynesian economics would bring about. Hayek, living in
England with Keynes at Cambridge during World War II, wrote “I wish I could make my
‘progressive’ friends here understand that democracy is possible only under capitalism and that
collectivist experiments lead inevitably to fascism” (Wapshott, 193). Even if Lord Keynes had
correctly diagnosed the modern incompetence of capitalism, as yet unknown, to prevent events
such as the Great Depression, it does not matter. Capitalism must be kept because it prevents
events like the Great Depression from producing dictators like Hitler, Mussolini, Stalin, and
Mao. Hayek was on hand to witness the crippling hyperinflation that destroyed the Austrian
economy and then society when official policies failed (Wapshott, 16). He did not want the same
fate for other Western nations.
The traditional American way of life, freedom, and democracy is especially threatened by
the Keynesian economics of government planning. The Constitution, which established a system
of governance to serve, protect, and defend founding values, reaffirmed this by making clear that
“We, the people” were the decision makers in the United States. Checks and balances were put in
Schwartz 5
place to prevent one group from destroying another or seizing power. However, John Maynard
Keynes’ idea of economic planners, who could determine the price of goods, the levels of wages,
and rationing as they saw fit, upends this system. Leaders with that much ability and skill could
seize total power. Other nations like Italy and Germany after World War II followed Keynes’
economic predictions only to see the rise of Hitler and Mussolini and the incredible destruction
and turmoil that created. To avoid this in America specifically, the dangers and failures of
Keynesianism must continue to be addressed.
The problems of Keynes’ ideas are not theories but rather truths gained from the history
of the economic implementation of Keynesian thought. Following World War II, this was
widespread. There was initial success, reflected by the prosperity of the 1950’s, however, several
problems arose that could not be fit into Keynes’ mathematical formulas. The turmoil of the
1960’s, rioting in the midst of prosperity like Schumpeter predicted, is certainly related to
macroeconomics. When someone proposes that the world’s problems can be solved by a few
simple changes to governmental structure and economic ideas, temporary success leads only to
anger. Utopia had not come as swiftly as proposed, and people were not even happy with the
semblance of its arrival in American prosperity.
The economic ideas behind Keynesianism also began to unravel, though slightly later in
the 1970’s, as a result of things unforeseen by its founder. While governments were willing to
increase the monetary supply in an effort to inflate the economy and cause growth for economic
booms, they were not willing to force the nation to tighten its belt to prevent recessions. This was
something that Keynes, the mathematical economist, had not expected, discounting flesh-andblood humans’ impulses and greed. This problem has been described as “a lack of symmetry…
[in that] federal budget surpluses do not seem to flow so easily from an economy that is doing
Schwartz 6
well” (Levi, 120). Further issues resulted from the nationalization of industry. Economists
wondered, “Shall a nationalized industry be operated for commercial ends- that is, receipts that
cover costs- or shall its operations be directed to serve broad economic and social needs”
(Loucks, 216). Keynes had thought that both would come easily, but this was proven not to be
the case by the economic slump of the 1970’s.
The 1980’s saw a revival of traditional, capitalist, Austrian ideas in mainstream
economics which resulted in prosperity in the Western economies. Milton Friedman, due to his
predictions of several of Keynes’ failures, became the economist of the hour and called for
decreased taxes, less regulation, and less spending. He clearly and concisely put forth two ideas:
the market is more true to freedom than government and government was currently too involved.
He did not attack the core Keynesian principles of some level of government involvement, but he
wished to make limit it so that the American populace had “freedom to choose” (Friedman, 65).
These ideas led to the “reaction” of the 1980’s and 1990’s where taxes were decreased and the
economies of the western nations boomed (Friedman, 283). A return to capitalism had come
about due to contemporary admission of Keynesian failures.
One major part of Keynes’ failure was identified by Friedman as the self-interest
dilemma. Friedman, quoting Adam Smith, notes that “interested sophistry” was and is the cause
of much of the world’s economic woes (38). People acting in their own interest, getting a better
deal, selling high, and not spending, sometimes make a muddle out of the simplest economic
equations unless the collective self-interest balances out. The market can accomplish this. When
two people are left to struggle against each other for a good deal, if they work equally hard, a fair
deal often results. However, this is not so under Keynesian planners according to Friedman.
“Each of us knows that what is good for him is good for the country-so our ‘special interest’ is
Schwartz 7
different’” (38). If given free rein then, the individual planners in a Keynesian system will
establish controls that benefit their personal wants, rather than truly helping the nation. Thus, the
Keynesian system of human economic planning cannot be trusted for a fair and equitable
distribution of resources like the impartial, non-human, and uninterested market can.
Economic tools such as the Phillips demand curve also showed the flaws evident in
Keynesian ideas. The Phillips demand curve is, like Keynes, focused on inflation and
unemployment. While both agree that, in the short term, more inflation means less
unemployment and vice versa, they disagree in the long run. The Phillips curve, as seen below,
shows that, eventually, increasing inflation does not change unemployment, modeled by the
vertical line, “embarrassing” Keynes (Kennedy, 292). The curve shifts (Kennedy, 293). John
Maynard Keynes never got this far along in his arguments and ideas, however, the question of
which is correct was answered in the 1970’s. Unemployment and inflation rose together, which
should have been impossible according to Keynes, but composed the now-familiar stagflation
that crippled Western economies. Thus, printing money to create temporary inflation and end
permanent unemployment, a core Keynesian tenet, simply does not work. This leaves a major
gap in John Maynard Keynes’ ideas that cannot be filled.
Schwartz 8
The prosperity of the 1980’s and 1990’s was ended due to an onslaught of renewed
Keynesian ideas that can be clearly seen as failures. The Federal Reserve let loose a wild period
of inflating the monetary supply. They saw no reason to end the good times that conservative
ideas had brought about, so they pumped more money into the system. It was thought that the
bubble could continue unendingly and the human greed of upper level planners desired it to be
so. However, the crash inevitably came, just like what has followed every booming economic
period in American history. Unfortunately, as though not realizing their failure, the planners
increased inflation to try and prevent the economy from going too deep in depression. Ben
Bernanke’s Quantitative Easing programs were the main force behind this. The plan increased
national debt, allowed unemployment to remain high, and has not stimulated the economy
extraordinarily. The Austrian ideas of low taxation and regulation, allowing the market to
operate, were abandoned for quick and temporary bubbles, resulting in downturn followed by
stagnation.
Some new trends arose out of the most recent national and international economic
struggles that defy Keynesian theories. Another major part of Keynes’ original General Theory
of Employment, Interest, and Money, was the “marginal propensity to consume” (Tucker, 456).
Put simply, if someone’s income rises beyond a certain level necessary for sustenance, they will
begin to save larger and larger percentages. Two supposed results are that money is kept out of
the economy, eventually stopping progress and causing a crash, and that the rich waste or save
extremely damaging amounts of money. The two necessary actions are to inflate the money
supply and tax the rich heavily. Inflation means that money saved is worth less, since there is
more overall money tomorrow than today, making a fixed amount of money proportionally
smaller and decreasing savings. Taxing the rich also should make sense since it only takes from
Schwartz 9
their surplus in theory. However, “For the first time in many years, the U.S. national savings rate
was negative in 2005” (Kroon, 8). In other words, people spent more than they earned, saving
none. Yet, depression continued. Thus, Keynes was proven wrong once more.
After analyzing the failures of John Maynard Keynes, it is important to remember the
successes of Schumpeter and Hayek to see that macroeconomics is not worthless. Schumpeter
diagnosed the future of the Western mind perfectly. “Capitalism creates a critical frame of mind
which, after having destroyed the moral authority of so many other institutions, in the end turns
against its own; the [businessman] finds to his amazement that the rationalist attitude does not
stop at the credentials of kings and popes but goes on to attack private property and the whole
scheme of [middle class] values” (Heilbroner, 302). These crusades against tradition can be seen
today in America coming from all directions and prove the Austrian correct. So too is it with
Hayek. His greatest work, The Road to Serfdom, outlined how excessive planning could lead to
tyranny. Today, in the politically democratic but economically Keynesian nation of France,
ketchup is outlawed. This is possible when Keynesian planners are given extensive powers to
regulate, tax, and control. They impose their personalities on the state, with harsh and silly
consequences. The Austrian social and economic predictions have proven true in nearly all cases.
The debate over macroeconomics is an unfortunate example of the acceptance of utopian
and optimistic predictions over rational ideas and good sense. John Maynard Keynes wrote “I
believe myself to be writing a book on economic theory that will largely revolutionize…the way
the world thinks about economic problems” (Wapshott, 146). Despite being proven wrong many
times, and putting forth theories that have resulted in many dictatorships around the world, there
are still those that would agree with Keynes. They want to believe that their economic situation,
nation, and personal life can be perfected by a few tweaks on a faraway, perfect machine of
Schwartz 10
economics. The vast majority do not want to be told that their own foolishness will destroy
prosperity or lead to tyranny, as Schumpeter and Hayek lay forth. While logic and evidence
show the folly of dancing to Keynes’ pied piper, utopian theories, many are the mice, men, and
economists that have and continue to do so.
\
Schwartz 11
Works Cited
Friedman, Milton and Rose Friedman. Free To Choose. New York City: Harcourt Brace
Jovanovich, 1980. Print.
Galbraith, John Kenneth. Economics in Perspective: A Critical History. Boston: Houghton
Mifflin Company, 1987. Print.
Heilbroner, Robert. The Worldly Philosophers. New York City: Simon and Schuster, 1999. Print.
Kennedy, Peter. Macroeconomics. Boston: Allyn and Bacon Inc., 1979. Print.
Kroon, George. Macroeconomics the Easy Way. New York City: Barron’s, 2007. Print.
Levi, Maurice. Economics Deciphered: A Layman’s Survival Guide. New York City: Basic
Books Inc., 1981. Print.
Loucks, William and William Withey. Comparative Economic Systems, Ninth Edition. New
York City: Harper and Row, 1973. Print.
Tucker, Irvin. Economics For Today. Mason: Cengage Learning, 2010. Print.
Wapshott, Nicholas. Keynes-Hayek: The Clash That Defined Modern Economics. New York
City: W.W. Norton and Company, 2011. Print.