“Keynes wrote an apology for the prevailing policies of governments. Keynesians blithely assume that the state has unlimited means at its disposal.” — Ludwig von Mises
William F. Buckley had a shortcut way to know what a long book was all about. Just read the first and last words of the book, and that would summarize its content.
So I tried it on John Maynard Keynes’ 416-page magnum opus, “The General Theory.” Buckley was right. The first and last words describe perfectly what Keynesian economics is all about: “This… evil”!
The debt-ceiling debate going on in Washington right now is a direct result of Keynesian economics, the doctrine that government can live beyond its means and get away with it.
Prior to the Great Depression of the 1930s, the classical economics of Adam Smith taught that government should live within its means, except during times of war.
But that all changed with the British economist John Maynard Keynes in his 1936 book, “The General Theory of Employment, Interest and Money.”
Keynes argued that capitalism is inherently unstable due to the “animal spirits” and requires government intervention. He proposed progressive taxes to stimulate consumption and discourage saving. And worst of all, he advocated deliberate deficit spending during a slump in the economy.
So now whenever there’s a crisis, the solution is simple: “Inject liquidity, spend more money! Run deficits!”
The following chart demonstrates how Keynesian economics resulted in a permanent era of deficit spending:
The title of a recent book is telling: “Limitless.” The author refers to the Federal Reserve’s ability to buy up all the assets they need to stimulate the economy and restore prosperity during a pandemic or banking crisis. But it could equally apply to Washington’s out-of-control spending.
There’s no free lunch. The Keynesian economics of big government and deficit spending comes at a cost. We are paying a high price for candy Keynes through higher inflation, a boom-bust cycle, higher taxation and slower growth (countries with higher levels of government tend to grow at a slower pace).
Next week, I’ll be giving several lectures in London and Edinburgh for the 300th anniversary of Adam Smith’s birth. The most popular request is for my talk, “Who’s Winning the Battle of Ideas: Adam Smith, Karl Marx or John Maynard Keynes?”
Adam Smith, the 18th-century professor of moral philosophy, came up with an ingenious model that promises economic freedom, individual improvement and public benefit.
There are five sources of prosperity under the Adam Smith “system of natural liberty.”
- Supply-side growth: pro-saving, entrepreneurship and technological advancement.
- Limited government and low taxes (laissez-faire).
- Sound money (the gold standard).
- System of justice (independent judiciary, rule of law).
- Free trade.
Adam Smith promised in his famous 1776 book, “The Wealth of Nations”, that his model would result in “universal opulence which extends to the lowest ranks of the people.”
The Adam Smith model has enjoyed some successes, such as free trade and the rejection of socialist ownership of the means of production.
But now that prosperity is being threatened. Keynesian economics has turned Adam Smith’s classical model on its head. Its five policies are diametrically opposed to Adam Smith:
- Demand-side growth: anti-saving, pro-consumer and pro-debt.
- Big government (welfare state) and progressive taxation.
- Easy money (replace gold with paper money).
- High level of business regulations in the name of social justice.
- Fair trade.
Keynesian economics is anti-saving and promotes the myth that consumer spending, not capital investment, drives the economy.
The following chart shows the effect of Keynesian economics:
And this: an unsustainable growth in the national debt:
In sum, we are addicted to Keynesian economics and its destructive effects.
How to Break the Candy Keynes Habit
There are two ways to fight Keynesian economics. One is political – voting for sanity on Capitol Hill.
In his work, “Democracy in Deficit,” Nobel prize economist James Buchanan argued for a balanced budget amendment and a tax limitation amendment to keep the government from going bankrupt. It’s vital to put some shackles on Leviathan.
Tragically, Congress has not acted on these two bills. I knew Senator Orrin Hatch during his entire 42 years in the Senate. He is rated the #1 most effective senator since World War II. He passed all kinds of legislation, but despite all his efforts, he was never able to push through a balanced budget amendment. He tried every year, but couldn’t make it happen. Not a good sign!
The second approach is education, my specialty. For the past 40 years, I’ve been teaching free-market economics in major colleges and universities, and writing books to educate the general public.
‘The most devastating critique of Keynesian economics ever written’
Murray Rothbard warned free-market supporters that “it is a mistake to dismiss Keynesianism brusquely. Failure to deal with its fallacies in detail and in depth has left the field of ideas open for Keynesianism to conquer.”
That’s why I devote two whole chapters of my book “The Making of Modern Economics” to debunking Keynesian economics, which one reviewer called “the most devastating critique of Keynesian economics ever written.” I also have a whole chapter destroying the arguments of Marxism. Not surprisingly, my book has been banned by some universities.
I make Adam Smith and his “system of natural liberty” the hero of my book, which is now in its fourth edition and published by Routledge. Every economist is judged by whether they sought to improve upon the House that Adam Smith Built (French laissez-faire, Austrian, Chicago and Supply-Side schools) or wanted to tear it down and build their own new model (Marxists, Keynesians, socialists). I have chapters on each school of thought.
To find out what’s in each chapter, go here.
John Mackey, CEO of Whole Foods Market, says, “Mark’s book is fun to read on every page. I’ve read it three times, and recommend it to all my friends.”
Greg Feirman, manager of Top Gun Financial writes: “Skousen is a brilliant and prolific economist as well as writer of a popular financial newsletter, Forecasts & Strategies, for decades now. Because of his interest in financial markets, Skousen is an economist obsessed with the real-world applicability of his economic ideas. He has written over 20 books, including “The Making of Modern Economics”, the best history of modern economics around.”
The late great William F. Buckley, Jr., wrote, “I champion Skousen’s book to everyone. I keep it by my bedside and refer to it often. An absolutely ideal gift for college students.”
And Richard Rahn states, “Mark Skousen has produced the single best book on virtually all of those who have had a significant impact in economics. It’s a delight to read cover to cover.”
Routledge and Amazon charge over $50 for my book, “The Making of Modern Economics.” But I offer a major discount — only $35 — at my website, www.skousenbooks.com. I autograph each copy and will date it June 5, 2023, the 300th birthday of Adam Smith. I will mail it for no additional charge if mailed inside the United States.
Yesterday, National Review’s David Bahnsen interviewed me on the revolutionary nature of Adam Smith and his “system of natural liberty.” You can listen to his podcast here: David Bahnsen & Mark Skousen Discuss the Legacy of Adam Smith | National Review.
Good investing, AEIOU,
You Nailed It!
Robert Lucas, Jr., Nobel Prize Winner, Slays the Keynesian Dragon
Another free-market economist has passed away. Robert Lucas, Jr. (1937-2023) died last month at the age of 85. He was one of the many Chicago economists who won the Nobel Prize in 1995 for popularizing the “rational expectations” school of economics. He suggested that Keynesian stimulus and deficit spending may no longer be effective when people anticipate the impact of their policies by raising prices and interest rates.
Unfortunately, he was premature in his prediction in 1979, “Keynesian economics is dead.” Like Mark Twain, reports of Keynes’s death have been greatly exaggerated.
On a personal note, his winning the prize in 1995 created some notoriety. His ex-wife had put into their divorce agreement a clause that required him to share half the $1 million prize if he won the Nobel prize within six years. The clause was due to expire at the end of October 1995, and he was awarded the prize in early October 1995. She did not attend the Nobel ceremonies in December.
I made a point of visiting Bob Lucas at the University of Chicago from time to time. I toured the new business/economics center there last year and stopped by to see him, but he was away.
Bob Lucas and the rational expectations school seems to have lost some popularity. In San Diego in January 2013, I attended and spoke at the American Economic Association (AEA) meetings, where I met with several top economists, including Bob Lucas. Here is my report:
Keynesians vs. Monetarists: Who Won?
A telling sign at the AEA meetings was the fact that the sessions with Keynesian Paul Krugman were standing room only, while monetarists including Michael Bordo, Allan Meltzer and Nobel laureate Bob Lucas had a small turnout.
Both sessions were held at the same time on a Sunday morning. Speaking before a packed crowd, Krugman made his case for greater deficits, more inflation and higher taxes. Along with Robert Shiller and other Keynesians, he argued that “monetarism” has been discredited. In their book “Animal Spirits,” Shiller and George Akerlof don’t even mention Milton Friedman’s monetary explanation of the Great Depression.
The other session celebrated the 50th anniversary of Milton Freidman and Anna Schwartz’s monetary bible, “A Monetary History of the United States,” published in 1963. Bob Lucas and the other speakers in that session praised the work as a classic. University of California-Berkeley Professor Christina Romer, former chair of the Council of Economic Advisors under President Obama, called it “one of the greatest economics books ever written.” But the panelists contended that the 2008 financial crisis had little to do with monetary aggregates (M2 rose 10% in 2008) but rather bad regulatory policies in homeownership and government-guaranteed mortgages (Fannie Mae and Freddie Mac). But Friedman and Schwartz are still relevant, they said, because their work demonstrated that “monetary shocks” such as bank failures can have serious adverse effects on the global economy.
Meanwhile, I noted, M2 was growing at a 10% rate in 2013, taxes were rising and the government was expanding. Alas, Krugman was winning!