-Caveat Lector-
Joshua forwarded:
The Growth Consensus Unravels
Jonathan Rowe, Dollars and Sense
<snip>
It was John Maynard Keynes, after all, who devised
the growth-boosting mechanisms of macroeconomic
policy to combat the Depression of the 1930s; it
was Keynesians who embraced these strategies after
the War and turned the GDP into a totem.
<snip>
And herein lies the central PROBLEM with the author's
premise.
It was Keynes, after all, who claimed that credit
expansion "performed the miracle...of turning a
stone into bread."
Keynes's Economic Consequences of the Peace, a
book forecasting the economic consequences of
the Versailles Treaty. French Economist Etienne
Mantoux demonstrated in 1944 that Keynes was
wrong in his details as well as his central thesis.
Keynes predicted that, as a result of the Treaty,
iron and steel production in Europe would decline;
it rose. He predicted that German pre-war coal
output could not be sustained; it was. He predicted
that Germany could not export coal; it did. He
predicted that the German merchant marine would be
insufficient for Germany's trade; by 1924 it was
the envy of the world. He predicted that Germany's
amount of savings could not recover to its pre-war
level; it did. In other words, Keynes was wholly
wrong about the strictly economic consequences of
the Versailles Treaty.
It turns out Keynes was not much better in forecasting
the political consequences of the Treaty either.
Keynes predicted that the Treaty would lead to
"anarchy and famine." Krugman's hindsight is such
that, since Hitler rose to power, Keynes was a
prophet. In fact, Europe, and Germany in particular,
saw neither anarchy nor famine. Mantoux reveals that
Hitler's popularity in Germany rose as the treaty
reparations demanded of Germany were repeatedly reduced.
Regarding Keynes's theorizing about German economic
conditions ... Keynes himself recognized that his
own policies were more National Socialist than free
market. In the Preface to the 1936 German language
edition of his General Theory Keynes told his German
readers that his theories were much more suited to a
totalitarian state, like the one the Nazis had in
place, than to a free market.
The stability of the world economy after World War
II, to the extent that it was stable, was maintained
despite the Bretton Woods agreement, not because of it.
Such stability proved to be superficial as the inflation
of the late sixties and early seventies demonstrated.
Richard Nixon's closing the gold window in 1971 was a
direct consequence of the inflationary incentives put
in place under the Bretton Woods agreement.
In 1912, Austrian economist Ludwig von Mises's The Theory
of Money and Credit, was published. Among other things,
Mises did explain, more coherently and correctly than
Keynes did, why depressions occur and what should be
done about about them.
Keynes cited "insufficient aggregate demand" stemming
from unstable business investment as the cause of depression.
He offered no explanation for why an economy should suddenly
experience insufficient aggregate demand. Mises, on the
other hand, explained that the business cycle is due to
credit expansion stimulated by the central banking
authority. Such expansion lowers the interest rate below
the market rate, encouraging investment that will not be
met by future demand. Such investments are bound to fail.
The only way back to economic prosperity is to allow market
forces to liquidate unwise investments. Further credit
injections will only start the process over again.
Keynes wrote a generally favorable review of Mises's book
but criticized it for being unoriginal. He later admitted
that he could not understand German well enough to understand
original ideas. Such was the integrity of Mr. Keynes.
Mises followed his first great work with two monographs
and an article in 1923, 1928, and 1931, respectively, that
more fully described the cause and nature of, and the remedy
for, economic crises. In 1931 his student F.A. Hayek published
his Prices and Production outlining and developing Mises's
theory. Hayek then followed in 1941 with The Pure Theory of
Capital. Hayek's contributions were rewarded with a Nobel
Prize in economics in 1974.
Mises's The Theory of Money and Credit had already provided
a general explanation for the stages of hyper-inflation
experienced by Germany in the 1920s. In 1923,
Mises applied his general theory to the case of Germany in
a book on monetary stability submitted to the printer more
than eight months before the final breakdown of the German
Mark. And Mises was able to explain Germany's monetary breakdown
without referring to anything like the chimera "too much
aggregate demand."
The reason that Keynes is not and should not become a cultural
icon is that Keynes was wrong. The problems that Japan is
facing now are not due to consumers and investors suddenly
"spending too little." They are the necessary outcome of massive,
state-sponsored credit expansion coming home to roost. For a
better understanding of today's economic crises, we should look
back not to Keynes, but to Mises.
Regard$,
--MJ
Progress is precisely that which the rules and regulations
did not foresee. -- Ludwig von Mises
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