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.