Keynesian theory should be removed from our texts



My life, of late, has been submerged under the burden of finishing off a book which I am happy to say has now, finally, been sent off to the publisher. It is, moreover, being co-published by the IEA, which should tell you a great deal about it. Its title is Free Market Economics: an Introduction for the General Reader, and it bundles together into a single text all of the issues that had been on my mind for many years but which reached a peak of intensity when the first stimulus packages began back at the end of 2008.

I have written the following as a short description of what it’s about:

This book is aimed at anyone who wishes to understand how an economy works. It is about entrepreneurs, value added, the nature of the market, radical uncertainty, Say’s Law and the causes of the business cycle. It also explains why Keynesian economics should not be used to manage an economy while outlining in detail what Keynesian economics is. It thus discusses a vast array of issues left out of a traditional text but which anyone who wishes to follow economic events needs to know.

It will be for others to judge how well it has achieved its aim, but the book I have tried to write is intended to be even more than that. It tries to explain economics in relation to what a decision maker can know, and that means it completely excludes all knowledge of the future, about which there are no facts, only conjecture. And it especially emphasises that while no one knows the future, private entrepreneurs have a massive incentive to get things right in a way that no government ever does – which is why private enterprise creates value while governments merely churn through the value created by others.

The book also takes you back to the world of economics before Keynes with this one difference. We now have the insight of hindsight. We have witnessed for ourselves the failure of Keynesian expenditure policies, which up until the 1930s no one had ever attempted to introduce, meaning that up until then no one had ever seen a public sector stimulus in action.

All they then had to go on was the theory that explained why such stimulus packages would not work in practice. Now we have seen for ourselves how such stimulus packages do not work in practice but no longer have the theory available to explain why that is.

There was a time when Keynesian economics was fresh and new, so there might then have been some reason to find its arguments attractive. Now, with the consistent and continuous series of failures it has left in its wake, there is no reason anyone should pay the slightest attention to any of it other than as an historical relic. Keynesian theory should be removed from our texts.

And what should replace it? This, too, the book deals with. It focuses on the classical theory of the business cycle. It explains how in a world in which the future is unknown, decisions made in the present often turn out to be wrong. Recessions are explained by system-wide problems that lead businesses into wholesale investments in areas where no positive returns ultimately take place.

Look at the housing industry in the United States if you would like an example of how classical recessions start. Try to use Keynesian economics to explain why the world’s economies crashed in 2008. Too much saving? Not enough demand? No explanations could be more absurd, yet that is what modern mainstream theory has to offer.

I commend the book to you. It will be available through the IEA sometime in 2011.

14 thoughts on “Keynesian theory should be removed from our texts”

  1. Posted 21/09/2010 at 11:18 | Permalink

    First, congratulations. Second, thank you for your efforts. Third, I look forward to reading it.

    The idea that one can use aggregates to predict the future, when aggregation (and especially the aggregation of schooling and swarming on opportunity-sets) is such a large part of the problem, that it’s frustrating that the Keynesian model was so resistant to criticism. On the other hand, I see it as our fault for nor solving the (admittedly more complex) underlying mechanics.

    Thanks again for your work.

  2. Posted 21/09/2010 at 14:28 | Permalink

    I look forward to reading it.
    As I see it, the problems are essentially:
    1) Keynesianism originated and continues to serve a purpose for governments who wish to be redistributive or who wish to interfere in the economy for their own ends, and for individuals who support such action. Whilst their motives are various and unknowable, there is no doubt that Keynesianism, like totalitarianism, fulfills a powerful desire to reject Popper’s ‘open society’. Whilst we can rubbish the theory and show the empirical failings it continues to meet such a need and therefore continues to be used.
    2) There is still a general belief in the efficacy of Keynesian policies evidenced in the public discourse…

  3. Posted 21/09/2010 at 14:34 | Permalink

    …via such phrases as ‘fiscal tightening will take money out of the economy’ etc. Until this discourse can be changed, there will still be a certain level of popular/electoral desire for Keynesianism. Whilst this may sometimes be merely selfish, in many cases it does express a genuine, if erroneous, belief.
    3) I’m not sure if the book says anything about the monetary side? It’s all very well having sound fiscal policy, but if we allow government to keep hold of monetary policy the underlying situation won’t improve – we’ll still get boom and bust and thus calls for Keynesianism to ‘help’.
    Until we can tackle these effectively, success will elude us. Still, every little helps…

  4. Posted 21/09/2010 at 17:04 | Permalink

    [Economics is] “one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.”

    So what gives?

  5. Posted 21/09/2010 at 21:42 | Permalink

    On the question of Keynesianism and ‘hindsight’—or the lack thereof—Niall Ferguson commented on the persuasiveness of this form of ‘cognitive dissonance’ during a recent speech he gave in Australia:

  6. Posted 22/09/2010 at 04:06 | Permalink

    Stephen, you evidently haven’t read Skidelsky.

  7. Posted 22/09/2010 at 13:48 | Permalink

    @Michael Petek – Skidelsky’s work may make great biography but it is economic nonsense! The idea that the high growth rates of the ‘golden age’ post war were caused by Keynesian policies is wholly unsustainable. On the hand, Skidelsky is correct that Keynesian policies have been used in recent years – but to no greater success than in the past. So whether he’s read Skidelsky or not makes no real difference – Keynesianism is still a fallacious economic theory and a pretext for political interference in economies.

  8. Posted 22/09/2010 at 14:48 | Permalink

    If you read Skidelsky’s “Return of the Master” you will find a comment that Keynes was neither a nationaliser, nor a regulator, and he believed that government finances should normally be in surplus. And you will find that, what is masterly about Keynes is his treatment of probability, risk and uncertainty.

    His agenda was to attack the neo-classical orthodoxy of his day. I don’t know that he had a particular animus against Austrianism.

    The trouble is that he had a heart attack in 1937 and wasn’t able to contribute to the debate his “General Theory” had unleashed, in particular because he died in 1946.

  9. Posted 22/09/2010 at 15:06 | Permalink

    I did thanks, and I still found it to offer a case for government intervention in the economy; he had no real awareness of Austrianism largely because he didn’t read German. Even if Keynes himself wasn’t a nationaliser or a regulator (although he was certainly an interventionist – I don’t think one can deny that!) ‘Keynesianism’ in whatever form has rarely been about nationalisation or regulation but the intervention of government to ‘pump prime’ an economy in times of ‘low aggregate demand’. That the cause of such problems is invariably the intervention of government in the economy in the first place is what is frequently overlooked! More intervention is not the solution…

  10. Posted 22/09/2010 at 16:39 | Permalink

    Pump priming of an economy could be done as easily by the private sector as by the government, if only there were some reason for it to do so. Why, when people are afraid for their jobs and incomes, should they go out and consume? Why, when businesses see few opportunities for future sales and expanding markets, should they invest in new plant and equipment?

  11. Posted 22/09/2010 at 16:54 | Permalink

    How do you know consumption is what is necessary? You’re just misallocating resources. The Austrian theory is far more satisfactory – busts are the necessary attempts of the economy to correct itself after the malinvestments of the booms (prompted by goverment misdirecting investment). Only by saving and signalling to investors that there is capital available can the economy really expand. Keynes had no theory of capital – which is something of a lacuna! His only goal was to promote consumption at the expense of anything else, and based on a conviction that government can know the unknowable.

  12. Posted 22/09/2010 at 17:59 | Permalink

    Keynes had no theory of capital presumably because he lived for only ten years after his General Theory was publiched and spend six of them working for his country as part of the war effort.

    I don’t think he was under any illusion that governments were an exception to the rule that “we know very little about the future”. His remit was to find a cure for persistent mass unemployment in free societies, which was the problem of his day which Hitler and Stalin were proving very good at solving.

  13. Posted 23/09/2010 at 09:09 | Permalink

    Well that’s convenient! But how can you have a ‘general theory’ of economics without understanding capital? The answer is that his theory is not general and not correct!
    The ‘persistent mass unemployment’ was, as we can all see, caused by government and Keynesian policies merely prolonged the persistence of mass unemployment. The solution to problems caused by government intervention is not further intervention – it is to remove the source of the problems in the first place; that entails eliminating government fiscal distortions and elminating government manipulation of the money supply.
    The Hitler/Stalin solution – shoot some of the mass and pay others to do it – is nicely Keynesian!

  14. Posted 23/09/2010 at 11:31 | Permalink

    It was a “General Theory of Employment, Interest and Money”. Not capital.

    One man’s gereal theory is another man’s special case. And vice-versa.

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