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Volume 19, Number 7
Shaking Off the Keynesian Mentality
Daniel M. Ryan
Back when I was an undergrad, I got an A in Economics 101, and a formal request for me to major in economics. The course was both easy and straightforward, and I was under the impression that a solid knowledge of how the economy worked was soon to be in my grasp.
Then I stumbled onto a copy of Henry Hazlitt's The Failure of the New Economics, and I got a real shock. Like most students, I had learned that one of the pieces of evidence supporting the Keynesian model was that consumption and national income were highly correlated. And here was this Hazlitt, pointing out that this merely "proved" that national income correlated very well with 85 to 90 percent of itself!
That was one heck of an eye-opener. It jarred so much with what I had been taught, that this simple fact was harder to memorize than the equally simple formula for the elasticity of demand.
This is what sent me into the world of Austrian economics. But, after ten years and twenty readings each of both Human Action and Man, Economy, and State, I still find myself slipping into the Keynesian paradigm, despite the Austrians' demolition of it. Obviously, there's some intuitive plausibility, some certitude, to the IS-LM model that years of training doesn't remove from your system.
If you look through the historical record, you could claim that the legitimate grandfather of the Keynesian model is none other than Warren G. Harding. It was under his administration that the President's Council on Public Works, chaired by Herbert Hoover, concluded that the best time for the government to spend on roads, dams, etc., was during a recession. One of the main reasons for this was because it was cheaper.
This, of course, is solid economics by any criterion. When the boom is being liquidated, there will be unemployed resources, and prices will be lower. Surely, it makes sense for the government to build a highway or upgrade the sewage treatment plant during these times. It's the same thing as buying Prince Edward Island potatoes in Canada now that they've been declared officially suspect of smuggling in alien fungi. That's when the cost is lower.
It doesn't require any sophistication to see that this would help bring the economy back to normalcy. Like a speculator going into the hog market when everyone else is afraid that pig farmers are about to be transferred from the supervision of the Department of Agriculture to the Endangered Species Act, this new demand cushions the fall.
And this is good public economics, too. The temptation to splurge on a public work when times are good and new eras are being promulgated is, undoubtedly, the same time for our governing authorities to build monuments to their eternal wisdom and perfect foresight. It's reasonable to assume that government employees are just as prone as the rest of us to buying into the stock market at the top of a boom.
I haven't seen any evidence that they show any counter-cyclical wisdom when it comes to their retirement plans-even though this investment foresight is one of the linchpins of the textbook Keynesian system. How many of Washington's finest bailed out of the NASDAQ in late 1999 or early 2000?
Maybe this explains why the government always finds it easy to spend when times are hard, but difficult to let up when times are good. Politics might only be a part of it-the bureaucrat's job security is supposed to guarantee that his or her elbow won't be joggled by Congressman Greyflannel, when his eyes are more trained on the polls than on the mini-skirted secretaries.
Another reason it is so difficult to liberate your mind from Keynes is, of course, the "pro_employment" demagogy, linked to the implicit threat that publicly disagreeing with it will lead to an all-out assault. But if you paid attention during your third world studies course when Franz Fanon was being assigned, then you discover that what Hazlitt and Rothbard say about labor unions is exactly right.
Another block in your self-liberation program is, of course, freedom from guilt. If you buy into laissez-faire economics, you're held responsible for an economic calamity that happened long before you were born and are accused-seriously-of wanting wages to drop to a dollar an hour. This is the second electric fence that stands between you and enlightenment.
This isn't that much of a hurdle, really, provided you keep your mouth shut about what you are learning. But it does indicate that the first step in learning Austrian economics should be Rothbard's America's Great Depression. It's the best Keynesian ad-buster book on the Austrian shelf.
But even these two acts of intellectual self-assertion aren't enough to shake you free from the Keynesian "model." There's something about your macro textbook that says "intuitively obvious" even when the ghosts have been banished.
To see what it is, consider that the `90s gave birth to something called the "investor class." When you thumb through the macro section of your Econ 101 textbook and come to the national income accounts, do you see "earnings per share"?
That's the Keynesian paradigm- treating the country like a company. No wonder it's so hard to shake off, and no wonder why the Austrian critique of GNP accounting has been such a quixotic sell. It's obvious that the government statistics are structured like an annual report.
To think that all this time I was under the impression that I was learning economics! I had no idea that I was being groomed for a master's in public administration. Or that I was also groomed for a management trainee position in the federal government.
Daniel M. Ryan is the proprietor of www.undergroundmind.com (danielmryan @sprint.ca).