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Transcript
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.