March 30, 2015

If the free market can’t be trusted to set the most important price in the economy (the price of credit) and if government intervention can help the economy work better, then total government control of the economy must be the optimum situation. Therefore, if Keynesians were consistent they’d advocate for either Communism or Fascism.

In practical terms, Keynesian economics, which is the type of economics that dominates policy-making throughout the world today, involves using monetary and fiscal policy to ‘manage’ the economy. The overarching idea is that a free market is inherently unstable and that by modulating interest rates and something called “aggregate demand” the government can keep the economy on a smooth upward path. The fact that the results of putting this idea into practice have typically been the opposite of what was predicted doesn’t, according the Keynesians, indicate a major flaw in the underlying concept; it just means that the right people weren’t in charge.

Anyhow, the purpose of this post isn’t to argue against Keynesian economic theories, it’s to make the point that completely logical proponents of these theories would recommend a Communist or a Fascist political system. The reason is that these are the political systems that are most consistent with Keynesian economic theory.

As an aside, I’m applying the word “theory” very loosely to what the Keynesians believe, because what they believe is not encompassed by a coherent set of principles. It is more like an endless stream of anecdotes than a theory. Actually, it is a bit like Elliot Wave (EW) analysis. In the same way that EW analysis can always explain what happened in the past but is not useful when it comes to explaining the present or making predictions, Keynesians are always able to come up with an anecdote that explains why historical performance, while seemingly being totally at odds with their theories, fits perfectly into their theoretical construct after the special set of circumstances associated with the time period in question is taken into account. Since there are special circumstances associated with every period, Keynesians will always be able to come up with anecdotal explanations for why things didn’t pan out as expected. There is never any perceived need to question the underlying ideas.

Getting back to my point, consider the control of interest rates by a central planning agency called the Central Bank. All Keynesians (and pretty much everyone apart from the “Austrians”) believe this price-setting power to be not only legitimate and appropriate, but also necessary to facilitate the smooth running of the economy. OK, but given that the price of credit is influenced by a greater number of variables than any other price and would therefore be the most difficult price for a central planner to get right, if central planners can do a better job of setting interest rates than a free market then it stands to reason that central planners could do a better job than the free market of setting all prices. Therefore, anyone who claims that it is right that a central bank controls interest rates would, if they were being consistent, also claim that similar agencies should be established to control all other prices.

Now consider the Keynesian notion that the government should modulate “aggregate demand” to create a more stable economy. The thinking here is that 1) a free-market-economy periodically gets ahead of itself and then plunges into an abyss, 2) dramatic economic oscillations are caused by largely unfathomable changes in “aggregate demand”, with the devastating downswing the result of a mysterious collapse in “aggregate demand”, and 3) by adding and removing demand via its own spending, the government can smooth the transition from one boom to the next. In effect, the economy is treated as if it were a swimming pool that sometimes, for no well-defined reason, loses a lot of water, while the government is treated as if it were an institution capable of replenishing the water, even though in the real world the government has no water of its own.

If the economy really were like an amorphous mass of liquid that could be manipulated, via changes in government spending, in whatever direction was needed at the time to create the optimum outcome, then total government control of the economy would definitely work.

The upshot is that if uber-Keynesian Paul Krugman went on television and argued in favour of a Soviet-style system, he would be taking his economic principles to their natural political conclusions. In doing so he would be totally logical. He would be totally consistent. And he would be totally discredited.

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