The Upside-down World of John Maynard Keynes

During his speech at Wake Forest Monday evening, Ron Paul noted that the single person he would blame most for the current economic crisis is none other than the infamous John Maynard Keynes.  How applicable, then, that today mises.org posted a new article about this very man.

The article discusses just how little Keynes actually understood about economics, and also the inherent problems in a system where leaders follow this man’s ideology.

On just how little Keynes understood of economics, the author, Mark Thornton, writes:

John Maynard Keynes often employed flowery language like “animal spirits” and “liquidity trap” to describe things he did not understand. He was, after all, more of a bureaucrat than an economist. In fact, he would best be described as an anti-economist because he eschewed things like supply and demand and held the opinion that government could run the economy.

So, for example, he could not understand why people would invest resources in risky adventures that helped keep the economy growing at full employment. He therefore substituted “animal spirits” for the profit motive. These spirits allow entrepreneurs to proceed with a naïve confidence and to set aside concerns over losses. Similarly, the failure to invest was also a psychological problem that he dubbed the “liquidity trap.” This trap occurs when investors seek liquidity in cash and when monetary policy — in terms of cutting interest rates — no longer produces an increase in investment.

Thornton goes on to show the disaster the Keynesian doctrine has created in our current system.

The problem for us is that Bush, Obama, Geithner, and Summers are all following the Keynesian playbook, with Nobel laureate Paul Krugman serving as head cheerleader. If instead we just allowed the free-market process to work, the economy would likely have already bottomed; companies like AIG would be emerging from bankruptcy and the unemployment rate would be dropping instead of continuing to rise.

The market process was curtailed just a few months into this contraction and — over the last 15 months — has been almost wholly replaced with government intervention. Many of the interventions have been rightly described as “unprecedented” in that they are completely untried. This means that neither market participants nor policy makers have experience with them — and it shows.

This slew of interventions has been disorderly. Many interventions, like the takeover of AIG, were total surprises, causing volatility in stock markets. Moreover, these interventions have been extremely large and wide ranging in scope. Measured in dollar terms, the money “allocated” totals over $12 trillion by one account.

Thornton later goes on to show how an increase in savings, something which Keynesians fear, is actually exactly what a healthy economy needs.  The article can be viewed in its entirety here.

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