Contrarians And The Keynesian Myth
There is a strange incongruity, observable throughout the intellectual history of man, that never ceases to amaze me. Why is it in the field of ideas that dramatic new visions of truth are so often met with vehement opposition from a society's intellectuals -- the very men of the mind who are most dedicated to the pursuit and demonstration of truth? How can the intellectuals of today's era -- so acutely aware of humanity's bigoted resistance in the past to Galileo, Semmelweis, Pasteur, and other radical discoverers of history -- succumb to the same blind obstinacy in face of the new truths confronting them?
There are several reasons why this propensity for intolerance to new thinking has prevailed throughout history among intellectuals. As the physicist Fred Hoyle tells us, scientists are human. They are, far more often than the lay public perceives, victims of dogmatism and the tendency of all humans to argue from pre-set ideas.
Despite their much-heralded pledge to objective inquiry, scientists are quite capable of bias and suppression in order to preserve their long-standing beliefs. When a large portion of one's life has been passionately devoted to the validation of an idea, it becomes most difficult to accept the invalidity of that idea. Therefore truth, the most highly prized goal of all, is often forsaken to protect fragile egos and support previous convictions.
This tendency of scientists to be obstinate in the face of new truth manifests itself through the paradigm shift. As Thomas S. Kuhn demonstrated in The Structure of Scientific Revolutions, all of science is based upon the establishment of paradigms, or what can be termed an overall "way of viewing things" in a particular field. And once a paradigm is established, it becomes difficult for most thinkers to dispute its basic premises even when that paradigm is found to be in error.
For example, the 1st century Egyptian astronomer, Ptolemy, established the Ptolemaic paradigm of the solar system, which depicted the earth as its center with the sun and planets revolving around the earth. Copernicus and Galileo came along and overthrew this way of thinking with a truer paradigm that depicted the sun as the center of the solar system. Newton established the mechanistic paradigm in physics during the early 18th century, and Einstein followed with a much truer relativity paradigm two hundred years later. Pasteur established the germ paradigm in medicine during the 19th century, while Darwin gave us the evolution paradigm in biology.
A paradigm is thus an all-inclusive Big Picture based upon a fundamental premise in a field of study that undergirds the "why of things" in that particular field. Even when false, a paradigm often prevails as accepted truth for a long period of time because the prevailing minds and methodology of the era are inadequate to grasp reality more clearly. But falsity persists as truth also because humans fall prey to inertia. They seek mental comfort and choose paths of least resistance, which leads them to settle into a certain paradigm as if it is inviolable. For example, even after Copernicus made it obvious around 1500 AD that the Ptolemaic concept of the universe was a fallacy, it still prevailed in intellectual circles for another 180 years until Galileo drove the final nails into its coffin.
Herein lies one of the great human dilemmas: Once a "way of viewing things" is entrenched in any given field, even when new knowledge comes along to refute such a paradigm, it becomes practically impossible (because of the flaws of human nature) for most intellectuals to think outside that paradigm's constraints. They will defend the entrenched view even when its basic conception is shown to be foolish and impossible, especially if they have devoted a vital part of their lives to the teaching and promotion of that "way of viewing things."
This is presently our situation in many intellectual fields. Like the medieval dogmatists, today's academic community also clings to irrational paradigms in face of overwhelming evidence that their views are as untenable as the flat earth theories of old.
The Keynesian Paradigm
Let's take one of the most entrenched paradigms of our day as an example: Keynesian demand theory in economics. Despite severe and demonstrable weaknesses in this economic view, our establishment scholars cling to it like dependent children to stuffed animals. When presented with strong, logical refutations of this paradigm, 80 percent of our academic community reacts with bemused scorn.
Both theoretical and empirical evidence demonstrate that the Keynesian model is not just a false and dangerous way to approach political economy, it is a ludicrous sham, one of the biggest cons in history. Inflating consumer demand with fiat currency is not some kind of "new economics" as Keynes and FDR's brain trust of the 30's claimed. It is not legitimate economics at all, but just another example of powerful governments debasing the currency so as to confiscate their citizens' wealth, and in the process deluding themselves like tribal primitives dancing in front of idols to bring good fortune.
Original orthodox Keynesianism may be dead as a viable theory, but just as neo-Ptolemaic theories hung around for 180 years after Copernicus, neo-Keynesian variants still control government policy today after Mises. They are still entrenched as the basis for centralized statism and are the reasons for the exacerbated boom-bust cycles in our economy over the past decades. One observes the exasperating efforts of Austrian economists such as Kurt Richebacher trying to inform the Keynesian pooh-bahs about the falsity of their paradigm, and one is reminded of what Pasteur had to endure when he set out to explain to the ignorant physicians of his day that putting leeches on the skin was not rational medicine.
As everyone knows, Keynesian economics got its start during the Great Depression. In essence, Keynes' message to a bewildered 1936 world was this: What needs to be done is to create vast amounts of government investment so as to stimulate and perpetually maintain consumer demand at a high level. If this is done, the problems of poverty and business cycles will be alleviated. The weakness of free enterprise is that in its mature stage it lacks the ability to produce enough "purchasing power," i.e., demand among the people. The government must step in and take control of the monetary system, for Say's Law of Markets is no longer valid.
Say's Law of Markets is the brainchild of J.B. Say, the 19th century French economist. It states that production is the cause of consumption, or that the people's productivity determines their purchasing power. For example, if a man plants and harvests a ten acre field of corn, his purchasing power in the marketplace will then be whatever that corn is worth in trade to his fellowman. His production of corn has created the level of his demand for clothes, transportation, entertainment, etc.
When Say's Law is considered along with Ludwig von Mises' theory of money and credit, one can easily see the fallacy of Keynes, for no amount of paper money, injected into an economy in excess of the growth of goods and services, will increase the "purchasing power" of the people. This is because the prices of those goods and services rise in response to the increase in the money supply, which negates the effect of the extra paper money in the people's pockets and eventually even creates a situation where overall purchasing power dissipates because of the inevitable runaway aspect of all inflationary economies.
If Say's Law is valid, then the way we should have handled the Great Depression of the 30's would have been to let prices and wages seek their own level and allow Say's Law to operate. If this had been done, the natural productivity of the people would have created the necessary purchasing power to climb out of the Depression. The reason we didn't handle it in this way is because Keynes was supposed to have "refuted" Say's Law showing it to be unworkable under modern day conditions.
But as Steven Kates' demonstrates in Say's Law and the Keynesian Revolution, Keynes gravely distorted Say's Law in order to "refute" it. 1 He created a straw man, and then denounced it. Such intellectual legerdemain allowed Keynes to pose as some sort of super-savant with a brilliant new theoretical insight into how the world works.
Many years ago, Henry Hazlitt also saw the fallacy of Keynes and pointed out that his allegedly "brilliant refutation" consisted of declaring Say's Law invalid because it is invalid. 2 This is akin to a physicist suddenly declaring that the Law of Gravity is no longer applicable to humans because it is no longer applicable, and then expecting men to suddenly be able to flap their arms as wings and fly through the sky upon the utterance of such a declaration.
Why it all sounds absolutely marvelous, one can almost imagine FDR replying to his brain trust when informed of the wonders to be worked with Keynes' "new economics." If capitalism has reached its mature stage and can no longer produce enough purchasing power, then we in Washington must step in and get the system going again. If people don't have enough money, then all we have to do is print up more and our problems will be solved. It's really all very simple, isn't it? Our growth can actually be as great as we want it to be. Our wealth will be unlimited. The power to create that wealth lies with benevolent leaders such as us in Washington. We can usher in an unbounded future of government managed prosperity. Oh, happy day! How could we not have thought of this before?
Stripped of all the eloquent conceptualizations and slick technical jargon, this was the great "innovation," the great "revolutionary insight" of Keynes: If we want to become wealthier as a nation and avoid economic recessions, then all we need to do is print up more money.
The outrageous folly of such a proposal and the willingness of learned men to fall for its lure when encased in sophisticated verbiage, are terribly embarrassing when one thinks through the basic principles involved and projects into the future what the long run ramifications will be. Nevertheless, the most powerful office of the most powerful country in the world accepted such fiscal flimflammery as valid economic theory. And every administration since FDR has been doing the same thing -- printing up more money to make us all more "prosperous." But as any legitimate economist knows, money itself is not wealth. If money was wealth, then the government could just print up a million dollars for everybody and wipe poverty off the face of the earth. Money is just a substitute for wealth. True wealth is the goods and services that we have produced. It can never be created with a printing press.
Contrary to all the technocratic government wizards and advocates of "new economics" that have descended upon us since 1932, Say's Law of Markets has not been refuted, and it will never be refuted as long as there is a universe and a thing called human nature to exist within it.
Actually the Keynesian intellectuals knew all this. They just conned themselves into believing that Say's Law would not work quickly enough to get us out of the Depression, and that they would only print up a little bit of money whenever they needed it (to prime the pump so to say) and always keep the boom of prosperity going whenever it was showing signs of slipping into a recession.
This is the reasoning of the drug addict though. He also cons himself into believing that he will only take a little bit of his drug whenever he needs it (to pep himself up so to say), and always keep the boom of a pleasant high going, whenever it is showing signs of slipping into a depression.
The problem with such self-deception is that neither drug addicts nor federal bankers can ever stop with just a little bit of the drug they have become accustomed to. They always need ever increasing doses to maintain their high, and invariably they continue such injections to the breaking point of either death or massive depression.
Why We Bought into the Keynesian Con
If one wants to know why we got onto the inflation-deflation roller coaster of Keynesian economics, this is the reason. Ideologically warped intellectuals, with grandiose dreams of ushering in a utopian economic order, succeeded in convincing the American people that their economy is dangerous if left alone. Adopting the rationality level of witch doctors, these cerebral parvenus taught two generations of pundits and politicians that all modern economies need the regulatory guidance of government's "benevolent" hand to smooth out the rough spots and continually "increase" the purchasing power of the consumer through inflation of the money supply so as to create a prolonged boom of prosperity.
What has taken place during the past 65 years is a prolonged boom all right -- the most ungodly and unrestrained inflationary spiral that America has ever seen throughout her entire history. Keynesians proclaim that their theories and policies cured us of the Depression of the 1930's and gave us all this beautiful "economic growth." But here's the rub. It's not genuine growth! It's a pseudo-stimulated growth created with excessive paper dollars.
Crashing addicts taking heroin to get rid of their withdrawl symptoms don't delude themselves into the fantasy that they are curing themselves and that everything will be all right the next morning. They know very well that what they are doing is simply consuming more of the very poison that jacked up their body's system in the first place, which can only bring about a deeper addiction and more severe complications later on. They continue their destructive habit because they are hooked, but they don't delude themselves with fantasies of physiological propriety. Keynesians lack even this semblance of rationality.
What we have done to our economy under the name of Keynesian economics is to inject the heroin of paper dollars into its bloodstream, and now we consider ourselves cured from the Depression of the 30's. This is what Keynesians teach in the schools. But the truth is we never did get out of the Depression genuinely, because we didn't produce our way out -- because we didn't have the wherewithal to let Say's Law of Markets operate. Instead, we rid ourselves of our economic malaise with nothing but a giant fix. We stimulated into being a huge economic boom of technological might and false prosperity on a foundation of collapsible paper money and massive debt.
When Keynesian liberals attribute our recovery from the Depression to Roosevelt and his supposedly ingenious New Deal policies, they are speaking the moronic nonsense that communist ideologues utilized to promote their Potemkin villages under Stalin. The New Deal did not cure the Great Depression. In 1939, after seven years of massive government intervention into the marketplace from a phalanx of ABC bureaucracies invented by Roosevelt's planners and a convoluted array of opportunist economic programs, we were as firmly and as deeply mired in the Depression as before.
"[I]n his first two full terms of eight years," writes biographer John T. Flynn, "President Roosevelt never produced any recovery whatever. When he was elected there were 11,586,000 persons unemployed. In 1939 -- seven years later -- when the war struck in Europe, there were still 11,369,000 persons unemployed. These figures are supplied by the American Federation of Labor. In 1932 when he was elected there were 4,155,000 households with 16,620,000 persons on relief. In 1939, seven years later, there were 4,327,000 households with 19,648,000 persons on relief. In the presence of these undisputed facts how can any sober-minded citizen suppose that Mr. Roosevelt brought recovery to the United States?" 3
It is difficult to believe scholars of any stature can continue to claim that Roosevelt and his New Deal legislators got us out of the Depression, for the "undisputed facts" certainly tell a totally different story. None of the policies put forth by these disgruntled collectivist schemers did anything but further confuse an already dismayed business world. In 1939, the country was still floundering deep in the throes of the Depression. Confidence in the economy had failed totally to materialize, for how could businessmen have any confidence to act and plan when they had no idea what the administration in Washington was going to do next. Roosevelt's pervasive interventions into the market to manipulate and suppress its forces through Mussolini style planning bureaucracies shut down the entrepreneurial risk takers that create productivity. Staffed with rabid collectivists like Rexford Tugwell and Alvin Hansen, his brain trust effectively destroyed any hope of recovery that only the free flow of prices, wages, interest rates, and profits could bring.
Roosevelt and his aides had no understanding of this need at all. As a result, every one of their suppressive controls and redistributive programs only made matters worse. The Federal Reserve's previous expansion of the money supply in excess of the growth of goods and services during the 20's was what created the collapse because such fiat money expansion cannot be continued indefinitely. But the severity of the collapse was compounded by FDR's moonshine economics following Hoover's disastrous price, wage, and tariff follies. The primary point to be learned from all this is that excessive monetary expansion and contraction brought on the Depression, which was then intensified by the failure of the government planners to realize that it was their pre-1929 policies that had caused the crash in the first place and their post-1929 policies that were extending it. 4
In end, it was World War II and its accompanying inflation that got us out of the Depression, not any of the New Deal fiascoes that welfare statists are so proud of. It was only after the war with Japan and Germany began that "recovery" took place. Roosevelt did nothing to aid recovery with his economic programs! What he did was what all statists do when their domestic programs are self-destructing -- he maneuvered his country into war, which requires millions of men and armaments to be paid for with massive fiscal deficits that are monetized by the Fed. It is this "monetary drug stimulant" that gave us the appearance of getting America moving in a healthy economic way again. Today's statist meddlers will, of course, attempt the same thing again. Our War on Terrorism will be monetized.
As for our situation today, we have quite simply never come down from that inflationary high generated by World War II. We have pumped massive doses of paper money into the economy for over six decades now at an arbitrary rate decided by federal bankers. Where it will all end is anybody's guess. How long it can be sustained without incurring either runaway inflation or another devastating depression is impossible to say with certainty.
We can say this, however: The distortions and malinvestments over the past 65 years (brought on by Keynesian theory) have become so grotesque that a severe protracted liquidation of the resultant massive debt must now take place before any kind of genuine health can be restored to our economy. Because the Fed is fighting this severe liquidation process at every step along the way, it will take many years to complete, and it will result in far more misery than if it were allowed to take its natural course.
What the grand pooh-bah Greenspan cannot bring himself to face is that our Keynesian "boom-bust" economy will never be improved as long as government (and its corruptible policy makers) try to control and manipulate the financial workings of the marketplace from behind their mahogany desks in Washington. To face this, Greenspan would have to admit that he and his fellow pooh-bahs are not only irrelevant, but actually the primary cause behind our present plight. The chance of such an admission tumbling forth from these bureaucrats is about as good as Bill Clinton making a guest appearance on O'Reilly's "No Spin Zone" to confess how sleazy his life has been.
The most important insight to be grasped from this 65-year Keynesian travesty is that there can never be a full-scale depression in any economy without a full-scale deflation of the money supply. But there is never any need for a full-scale deflation of the money supply unless there has first been a full-scale inflation of the money supply. Economies only crash AFTER they have been hyper-stimulated with fiat money inflation. In light of the fact that it is only the federal government and its fascist central banking monopoly that can create a full scale inflation, would it not be prudent to suggest that we get the government and the Federal Reserve out of the money creation business? If we want stability in our economy, providing power seeking bureaucrats and bankers with the means to arbitrarily inflate the dollar is hardly the way to bring it about.
The Modern Rationalization
Here is where our dilemma lies, however. Neo-Keynesians, who control political-economic policy in Washington today for both Republicans and Democrats, justify their relentless monetary inflation over this past century with the claim that such policy is necessary to "create economic growth." Without the steady expansion of paper money throughout the economy, they tell us, our society would never be able to achieve prosperity. This is one of the most egregious self-cons in the history of man! And it is readily seen for the lie that it is by simply investigating our economic history.
I have presented the following figures in previous articles, but they are so important to be aware of, they bear repeating over and over again. As recorded in The Statistical History of the United States, real wages for the workingman tripled in the years 1850-1913, and the GDP increased over 500% averaging 4.3% annual growth from 1870-1913. 5 This was all done without any inflationary infusions of fiat money from the Fed because there was no Fed. This highly productive era, based upon the "barbarous relic" of gold, was accompanied by an actual deflation of prices. From 1800 to 1913, there was an overall 30% reduction in the Consumer Price Index from 43 to 30. 6 That's right, we had 4.3% annual growth amidst gently deflating prices all without government fiat money, all without FOMC pooh-bahs, all without today's Gargantua on the Potomac.
Despite these irrefutable facts, Keynesian statists still maintain that government inflation of the money supply is mandatory for a productive economy. This in face of the total destruction of the dollar since 1913. This in face of the fact that average GDP growth is only 2.5% annually today. This in face of the fact that real wages have been stagnant for the past 30 years because the combine of monetary inflation and government taxes negates the workingman's increased wage income. This in face of the fact that hundreds of thousands of the elderly on fixed incomes have the sunshine ripped from their lives by the insidious theft of inflation.
What is so upsetting is the difficulty involved in getting establishment intellects to focus on these travesties? Teaching the facts of reality to Keynesian statists is like trying to train a cat not to mess up the living room rug with its excretions. You have to rub its nose in its mess repeatedly and then show it the litter box over and over. I fear we have a lot of nose rubbing left to do with Keynesians. They haven't a clue as to what a fetid mess they have created.
It is easy to understand why the Keynesian establishment does not want to face the economic facts of reality regarding this issue. It would mean that its revered paradigm is (and has been for 65 years) theoretically wrong and thus responsible for the financial chaos that plagues us today. Accepting such a truth would mean the same thing that accepting Copernicus' discoveries meant to the Catholic Church in the 16th century -- relinquishment of substantial power and prestige. In this case, Washington's neo-Keynesian bankers and politicians would have to relinquish substantial power to the private sector, which of course is anathema to government establishments.
Therefore, Keynesian and neo-Keynesian irrationality is not dead by any means. The idea that governments can direct their economies for the betterment of the citizenry by manipulating interest rates and injecting relentless rounds of "paper liquidity" into the marketplace continues to hold sway over today's intellectuals, even though such a centralized planning paradigm is slowly evolving into economic fascism. It lives in the minds of statists everywhere as the ruling economic dogma of modern times, and they cannot (or will not) think their way out of it. As a result, mankind continues to suffer needlessly, and is now facing a possible financial apocalypse of unimaginable horror.
Salvation Comes Only from Contrarians
Sadly, this kind of blindness and dogmatism in face of error is the inevitable nature of the discovery of truth. The great majority of a society's intellectual community becomes locked into its established paradigms even when those paradigms are shown to be as moronic as treating disease with leeches and creating wealth with paper money. The great majority sees only what is established, never new truths to be discovered. Only a select few who are contrarian thinkers can see the truth and are willing to endure the inevitable ostracism to promote it.
It is to such contrarian minds that the world owes its advances (i.e., its paradigm shifts) -- socially, politically, morally and scientifically -- for the contrarian is possessed of the vision to see beyond his fellows and the courage to challenge firmly entrenched error. He has the ability to mentally encompass wider vistas and integrate more profoundly the vast conceptualizations necessary to get at the truth in any given field of inquiry.
Most importantly the contrarian mind is not plagued with the desire to be popular and acclaimed in his own time. He cares little for establishment acceptance. Not that he will shun acclaim if it happens to come to him, but it is not the primary motivation driving him. Truth is what compels him. Herein lies his strength and one of the important reasons for his acute clarity. The contrarian is not obsessed with popularity, and therefore does not delude himself with the entrenched dogmas of the herd as the more common minds do.
There is a law of life that is identifiable here, and it can be stated thusly: Truth will always reveal itself only to the contrarian, for his is the only mind open enough and creative enough to see it. Not that all contrarians speak truth, for the world is chock full of nuts wading in delirium. But the truth will always come to us only through contrarian minds -- thinkers like Socrates, Galileo, Adam Smith, Pasteur, Einstein, Ludwig von Mises. Establishment intellectuals are needed to solidify and disseminate already confirmed truths, but they are not capable of promoting new truths (or they are not willing to). And because of the flaws in human nature, they invariably become roadblocks to those contrarians that are capable and willing.
Such is the condition of our intellectual fields today. As always, the contrarians are at war with the establishment, and there are profound revolutions going on. Old established paradigms are being shattered. New discoveries and visions in economics, physics, philosophy, biology, medicine, etc. are pouring forth to stir up elemental debates presumed to be settled by those who argue from pre-set ideas.
Every advance that mankind makes throughout history is accomplished because small groups of contrarian thinkers are willing to challenge the old order. In doing so, they foment a mental revolution and teach their fellow men a new way of thinking.
This is the paradigmatic nature of intellectual progress; the great majority of thinkers in any given era is forever imprisoned in the old order and need to be enlightened. If one wishes to know truth, he must understand that the established order will seldom provide it for him. He must possess the power to think for himself, or as Ayn Rand put it, "see through his own eyes." He must cultivate a totally independent curiosity, and he must be desirous of whatever the truth turns out to be -- even when it spoils his fondest, previous convictions. The reason why human civilization advances so haltingly and laboriously is because there are only a few intellects capable of such independence in any given generation.
Our great danger today is that the Keynesian paradigm is not relegated to just one specific academic discipline such as medicine or astronomy. Because Keynesians control money and economic policy, they also control political policy, which means they link up with the State. Because they control these three all-important areas of our lives, they possess the power of Samson to pull the entire house down around us. Because their poisonous ideas have become so entrenched over the decades and have extended the debt pyramid to such stratospheric levels, we are now faced with a choice like Ulysses between the monsters Scylla and Charybdis. We can go cold turkey by cutting off the "fiat money stimulant," which would bring several hard years of deflationary misery, but would allow us to rebuild our economy on freedom and gold. Or we can succumb to illusory hope by trying to reinflate a comatose economy and pray that somehow the laws of reality can be suspended, which will compound our addiction and stretch the crisis out over a far longer time span with far more misery. The grand witch doctor Greenspan is obviously bent on doing the latter. Heaven help us.Notes:
1. Steven Kates, Say's Law and the Keynesian Revolution, Edward Elgar, 1998.
2. Henry Hazlitt, The Failure of the "New Economics": An Analysis of the Keynesian Fallacies,
D. Van Nostrand, 1960.
3. John T. Flynn, The Roosevelt Myth, Revised Edition, Devin-Adair, 1956, p. 426.
4. See Murray N. Rothbard, America's Great Depression, Mises Institute, 2000. For a less technical
treatment of the subject, see Gene Smiley, Rethinking the Great Depression, Ivan R. Dee, 2002.
5. The Statistical History of the United States from Colonial Times to the Present, Fairfield
Publishers, 1960, pp. 91, 141, 409, 413.
6. The World Almanac 2002, World Almanac Books, 2002, p. 103.
(A previous shorter version of this article appeared in Ideas On Liberty, November 2002.)