Keynes Embraced Capitalism?

Roger Backhouse and Bradley Batemen think so. Backhouse is a historian of economic thought who I respect, so I am disappointed to see that he and Bateman have written an unfortunate article for the The Guardian. "The Case for Moral Capitalism" makes the case that throughout his career John Maynard Keynes refused to reject capitalism, insisting only that it be made more moral.

Backhouse and Bateman argue that Keynes never fell sway to the different varieties of socialism of his day becasue he thought that capitalism was essential for civilization.

Like many of those who turned to communism and fascism, Keynes had strong moral objections to capitalism – but he consistently repudiated socialism, communism, and fascism, for he believed that capitalism was essential both to create high standards of living and to guarantee personal liberty. In effect he sought a capitalist revolution.

What Keynes wanted, however, was a moral capitalism. One with less avarice, usury, and precaution one supposes.

It is not at all clear, however, that Keynes was as ideologically committed to the capitalist system as he's made out to be. As I and many before me have noted, Keynes was eager to note in the preface to the German edition of his General Theory, that his policy proposals were more suited to the German Nazi economy than a free market. Ralph Raico has also documented that Keynes thought the Soviet experiment "very impressive."

It is also worth noting that Keynes' perspective on the efficacy of capitalism to achieve the "good society" changed over time. He became progressively more statist thoughout the 1930s. On the transformation of Keynes' economic theories, I highly recommend the essential article, "The Development of Keynes' Economics: From Marshall to Millennialism."

It is clear that Backhouse and Bateman are using Keynes as a sort of model for thinking about how to interject morality into our commercial system. They quote Keynes from 1923 in which he warnes that too much business activity is done merely for profit and that in order to bear with his existence, a businessman's profits must be more correlated to some social benefit. Turning to the current scene, Backhouse and Bateman write:

We face the same challenge today – to develop a morally acceptable form of capitalism. As Keynes feared might happen, much business is now seen as no more than profiteering. Many people object to the bonus culture of the banking system because they don't believe those bonuses are earned. We have also learned that inequality not only undermines the legitimacy of capitalism (that was Keynes's concern) but it has corrosive effects: unequal societies are unhappier, less healthy, and have more crime.

There are many things in that paragraph with which we can sympathize. However, feeling sympathy is not the same as sound analysis.

The key to turning our present crony capitalism into a moral capitalism is private property. A society built on private property is a voluntary exchange economy. In such a society, no seller can force anyone to patronize him. When a firm reaps a profit, it must therefore be the happy consequence of his sowing productive services. In a free society there is no distinction between production for profit and production for social benefit. Instead, a firm reaps a profit precisely because he provides a benefit to someone. It would also be a system in which no one gets rich via predation.

Our present system is a long way from a private property society. In our present corporatist crony capitalism, for example, bankers can get rich making profligate mortgages and privatizing their own profit while socializing their risk as they quickly sell the same mortgages to government sponsored entities. And the entire operation is bankrolled by the Federal Reserve.

We could greatly reduce economic inequality by eliminating monetary inflation via fiduciary credit expansion. In our present system, those who get newly created money first tend to be the wealthy. With the new money, they are able to increase their spending first, thereby having wealth directed away from others toward themselves. And all of this wealth redistribution is due to monetary interventionism, not free market capitalism. What the world needs now is more genuine capitalism, not less.

Salerno on the Great Recession of 2008

Joseph Salerno has brought forth his explanation of the economic mess of 2008 and in doing so, refines Austrian Business Cycle. His paper, "A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis," refutes critics who claim that Austrian business cycle cannot explain the most recent recession.

Salerno concludes,

Once we understand the ABCT [Austrian Business Cycle Theory] as a theory of the destruction and renewal of both the capital structure and monetary calculation, we are in a position to fully account for the events of the past decade. Furthermore, given the unprecedented monetary interventions by the Fed and the enormous deficits run by the Obama administration, ABCT also explains the precarious nature of the current recovery and the growing probability of a double-dip recession.

I saw Salerno present this paper at the most recent Austrian Scholars Conference and recommend it highly.

HT: Tom Woods

Economic Law Applies to the Arts: Handel Edition

Georg Friederich Handel

While browsing through Newman Flower's biography of Handel the other day, I came across a passage explaining why his opera Deborah failed and was surprised to see that much of the blame due to entrepreneurial error. In addition to other factors such as the lack of assistance from Court patronage (due to the public's being dissatisfied with its perceived preoccupation with all things German), Handel decided to significantly increase his ticket prices. He was led to do so because of his successes in the immediate past.

Raising prices was a mistake, because as the law of demand implies, many fewer buyers patronized his performances because they refused to pay the higher prices. And he did so at the worst possible time.

As Flower relates the story:

The greatest mistake of all was made by Handel himself. He increased the prices of admission all round. The boxes were a guinea: sets in the gallery half a guinea, so that only 120 people paid for admission to the first performance; the others forced themselves in.

Handel could not have made a greater blunder, for increased prices were at that time the principal topic of conversation. Sir Robert Walpole was floundering in a morass of the national excises, and, to save the Government from bankruptcy, he had revived the salt tax the year before, and now was about to impose a tax on tobacco, and two shillings on spirits and wine. The people were flaming. The muddle had been brought about by Walpole's reduction of a shilling off the land tax, which benefited, of course, the moneyed classes. Therefore he was not taxing the multitude to release those who had money enough to sp;are for taxation purposes. National hatred against Walpole surged up once; there should be, the mob declared, no taxation of the commodities of life. For Handel to put up his prices on top of the commotion, meant adding fuel to fire. They could not do without salt, tobacco, or wine, but they could do without Handel. Such was the import of the outcry.

Glory to God in the Highest!

In those days a decree went out from Caesar Augustus that all the world should be registered. This was the first registration when Quirinius was governor of Syria. And all went to be registered, each to his own town. And Joseph also went up from Galilee, from the town of Nazareth, to Judea, to the city of David, which is called Bethlehem, because he was of the house and lineage of David, to be registered with Mary, his betrothed, who was with child. And while they were there, the time came for her to give birth. And she gave birth to her firstborn son and wrapped him in swaddling cloths and laid him in a manger, because there was no place for them in the inn.

Annunciation to the Shepherds, Govaert Flink, 1639

And in the same region there were shepherds out in the field, keeping watch over their flock by night. And an angel of the Lord appeared to them, and the glory of the Lord shone around them, and they were filled with great fear. And the angel said to them, “Fear not, for behold, I bring you good news of great joy that will be for all the people. For unto you is born this day in the city of David a Savior, who is Christ the Lord. And this will be a sign for you: you will find a baby wrapped in swaddling cloths and lying in a manger.” And suddenly there was with the angel a multitude of the heavenly host praising God and saying,

“Glory to God in the highest,
and on earth peace among those with whom he is pleased!”

When the angels went away from them into heaven, the shepherds said to one another, “Let us go over to Bethlehem and see this thing that has happened, which the Lord has made known to us.” And they went with haste and found Mary and Joseph, and the baby lying in a manger. And when they saw it, they made known the saying that had been told them concerning this child. And all who heard it wondered at what the shepherds told them. But Mary treasured up all these things, pondering them in her heart. And the shepherds returned, glorifying and praising God for all they had heard and seen, as it had been told them.

(Luke 2:1-20 ESV)

On this Christmas Day, the day in which we celebrate the Incarnation, I invite you to meditate upon the unique magnitude of the advent of Christ. To this end I commend to you the essay "The Coming of Christ" by John Robbins.

 

Life Inside the North Korean Bubble

I came across this fascinating report by Sue Lloyd-Roberts of the BBC about a year ago and, given the recent events in North Korea, it seems like a good time to post it. Life Inside the North Korean Bubble is a revealing glimpse of the nature of existence in an explicit totalitarian state. The propaganda, lies, and threats are apparent, as is the economic regression that is always the consequence of socialism. One of the most important lessons from the report is that North Korea relies on foreign aid and must allow for pockets of market activity merely in order to feed its people. You can watch the film in two parts below.





If you interested in an introduction to the economics of socialism and why it always fails, I recommend chapter 18 of my book, Foundations of Economics. If you want a full analysis of the economics and sociology of socialism I recommend Socialism by Ludwig von Mises.

Union Threatens to Bring Down City Opera

That's the impression one gets from the latest news on an increasingly bitter labor dispute at New York City Opera. The Opera, facing very difficult financial circumstances. The most recent opening gala was a bitter disappointment, drawing only 250 people. Fundraising has been difficult, due, of all things, to regime uncertainty. George Steel, the opera's general manager, says“The labor strife puts a crimp in our ability to raise money. People are waiting to see what happens.”

In an effort to keep things afloat, the Opera has moved out of its home at Lincoln Center to different, less expensive office space, cut its administrative staff by 43% and is hoping to slash its budget from $31 million down to $13 million. That is serious cutting. In order to accomplish this goal, Steel says the Opera's labor contracts with the musicians must be restructured. Ah, as Hamlet might say, there's the rub. The musicians union is in no way appreciative of this effort and it is easy to understand why. Their present contract pays musicians $40,000 a year plus provides health insurance. The new contract desired by the opera company would reduce their salary to $4,000 a year and take away their health care coverage. The union has threatened a strike that they know full well could bring the Opera down completely.

The worst thing, however, from the point of view of the union is that Steel wants the freedom to hire non-union musicians. Gail Kruvand, a double bassist and chairwoman of the orchestra negotiating committee, is quoted in the report that“They want to turn this into a freelance contract and hire whoever they want." That is the crux of unionism. Labor unions ultimately fight for restrictionist wages. They do not wish increase their compensation through restricting their own labor. They hope to do so by restricting the labor of others.

The dispute has most recently went to arbitration where both sides of the dispute met with a federal mediator in an effort to keep the fat lady from singing.

New Book on the Pure Time Preference Theory of Insterest

The Ludwig von Mises Institute has just released The Pure Time Preference Theory of Interest, a book edited by my friend and department chairman, Jeffrey M. Herbener. The volume is a collection of essays devoted to developing the pure time preference theory of interest. That this theory has come under recent attach from various quarters makes this book more timely and interesting than ever (double-pun intended). Included are seminal essays by Rothbard, Mises, Roger Garrison, and Frank Fetter. Herbener wrote a masterful introduction surveying the field as well.

Mises Institute President Doug French contributed the forward which you can read by clicking here. French concludes his forward by summing up the importance of this volume by noting, the link between theory and practice. "The following essays parse through the uniquely Austrian insight of the pure time-preference theory of interest, but more importantly go to the core of why modern central bank monetary engineering leaves the economy further from recovery while at the same time providing a Petri dish for speculation and malinvestment." The entire book can be accessed digitally for free as a pdf document by clicking here.

Thornton on Krugman on Austrian Economics and Ron Paul

My former professor and current friend Mark Thornton has an insightful and concise blog post getting at the heart of Paul Krugman's most recent attack on Austrian economics. He exposes Krugman's faulty economic framework and highlights how, on point after point, his faulty framework leads to faulty conclusions. It is also a passionate piece of writing because, as Thornton says,

Had we not followed the advice of Krugman, Bernanke, Geithner, Summers, Paulson, Goldman Saks, etc. this economic crisis would have been over a long time ago. Instead we are forced to follow the madness of Paul Krugman and Ben Bernanke.

The Problem of Central Planning

If one wants to see how an economy without private property rights performs (or does not perform as the case may be), he does not have to travel to Cuba or North Korea. There are pockets of such systems on America's Indian reservations. In an excellent article on Forbes.com, John Koppish explains "Why Are Indian Reservations So Poor? A Look at the Bottom 1%"

The report highlights a Crow Indian reservation in Montana in which more than a third of the land on the reservation is privately owned, while the rest is owned communally. Koppish references a study co-authored by Terry Anderson, executive director of the Property & Environment Research Center that demonstrates that private agricultural land is 30-90% more productive than the communal land. Without enforcing private property rights, citizens have neither the incentive to be productive nor the incentive to invest in development of a region's natural resources.

The Welfare State's Offspring

My favorite conservative writer, Theodore Dalrymple, has provided a "postmortem" on the past summers riots in the U.K.. His essay is called, appropriately enough, "Barbarians on the Thames."

His piece makes an excellent follow-up to his earlier and compelling, "The Barbarians Inside Britain's Gates," in which he argues that the root causes of the English riots is the welfare state. In both, he explains how a sense of entitlement coupled with little threat of punishment created an environment ripe for social destruction.

The rioters in the news last week had a thwarted sense of entitlement that has been assiduously cultivated by an alliance of intellectuals, governments and bureaucrats. "We're fed up with being broke," one rioter was reported as having said, as if having enough money to satisfy one's desires were a human right rather than something to be earned.

When a culture fosters such values, it is playing with fire.

The culture in which the young unemployed have immersed themselves is not one that is likely to promote virtues such as self-discipline, honesty and diligence. Four lines from the most famous lyric of the late and unlamentable Amy Winehouse should establish the point:

I didn't get a lot in class

But I know it don't come in a shot glass

They tried to make me go to rehab

But I said 'no, no, no'

This message is not quite the same as, for example, "Go to the ant, thou sluggard, consider her ways and be wise."

Cochran on Hayek and the Great Recession

F. A. Hayek

The most recent issue of The Quarterly Journal of Austrian Economics is out and features, among other work, a new article by John P. Cochran, professor of economics at The Metropolitan State College of Denver. Cochran's piece, "Hayek and the 21st Century Boom-Bust and the Recession-Recovery" examines Hayek's thoughts on business cycles in light of our most recent recession. I saw Cochran present this paper at last year's Austrian Scholars Conference and highly recommend it. The article would make helpful instructional reading for Paul Krugman and J. Bradford DeLong. Cochran determines that Hayek was incorrect to abandon his criticism of price stabilization policy in the 1970s. The abstract of the article reads as follows:

ABSTRACT: Hayek’s writings on business cycle theory; the seminal work of the 1930s and 1940s and the modifications he made in the 1970s after he received the Nobel Prize, are useful starting points for understanding the cycle phenomena in the U.S. between 1995 and the present. Hayek in the 1970s abandoned his earlier condemnation of price stabilization as a goal of monetary policy. In his judgment, such a policy might be the best that could be achieved under existing monetary arrangements, and the misdirection of production resulting from such a policy would be minimal. A careful review of the writings, lectures, and interviews by Hayek in this period show that Hayek did not abandon, but consistently retained the basic elements of his “monetary theory of the trade cycle.” The period clearly exhibits a pattern of production over time consistent with the pattern predictions of Austrian business cycle theory, especially as extended by Garrison (and others). The severity of the recent crisis reinforces Hayek’s call for a significant reform of monetary institutions, a denationalization of money, to better prevent future monetary shock caused boom-busts. The current crisis illustrates that Hayek was premature in his assessment that the effects of money creation intended to keep prices stable [inflation targeting] in a growing economy would have impacts on the structure of production “too small to worry about.” Further work, both theoretical and historical, needs to be done to assess his 1970s claim that a monetary authority needs significant discretion in time of crisis to prevent a secondary deflation.

Krugman's Intellectual History is Found Wanting Again

There has been much notice on Paul Krugman's dismissal of the importance of the work of F. A. Hayek in macroeconomics. Excellent responses can by found by Peter Klein and Robert Wenzel. 

When I read of Krugman's non-dealing with Hayek I was reminded of Ronald Reagan's favorite quip against Jimmy Carter in their presidential debate, "Well, there you go again."  The first piece of writing by Krugman I ever read was a column by Krugman, written for Fortune magazine. That was back in 1998 and the piece was "Why Aren't We All Keynesians Yet?" In the piece, Krugman not surprisingly sings the praises of Keynes essentially for being the great prophet and founder of macroeconomics.

Back then, referring to Keynes, he said,

But however eventful his resume, only one item on it really matters: his 1936 publication of The General Theory of Employment, Interest, and Money, which was to depression economics what The Origin of Species was to biology. Before the General Theory, economists could not explain how depressions happen or what to do about them. (I've tried going through the pre-Keynesian business-cycle literature; it's a vast wasteland.) After 1936, they could.

Of course, part of the "vast wasteland" of pre-Keynes business-cycle literature included the work of Hayek. I wrote a letter the the editor of Fortune, which they never published. An extended version was, however, published in The Free Market with the title "Keynes the Great?" To get a picture of Krugman's level of scholarship as a historian of thought, I encourage to you read the whole piece. About pre-Keynesian business cycle theory I said the following:

Additionally, Krugman's claims regarding Keynes' General Theory are repeatedly in error. Krugman states that he "tried going through the pre-Keynesian business-cycle literature" and found it to be "a vast wasteland." If he did, he did not try hard enough. 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 to Krugman's "vast waste-land" were rewarded with a Nobel Prize in economics in 1974.

Law of Demand Applies to Museums

William Grampp in his book Pricing the Priceless, identified what he called the "arts mentality," a subset of the "anti-capitalistic mentality." Grampp was referring to the notion that something as profound as art had no relation to something as tawdry as economic principles.

Well, as reported by the BBC this week, it turns out that the laws of economics apply to art museums as well as other goods. Ten years ago the British government decided to remove admission fees for Britain's national museums and, not surprisingly, attendance went up--way up. As stated by the BBC, "Almost 18 million people visited the 13 attractions in 2010-11, compared with 7 million in 2000-01."

This news item reminds me of a quip made by Sherwin Rosen after presenting a keynote address at the 9th International Congress on Cultural Economics. He was asked a question by a performing arts theater manager who was seeking advice about how to fill the theater. She described her problem of having empty seats in certain sections come performance time. His response was classic, "That's easy. Just lower the price."

Salerno Compares Rothbard and Friedman

And finds Milton Friedman wanting as a monetary theorist. You can watch Joseph Salerno's lecture "Who was the Better Monetary Economist? Rothabard and Friedman Compared" below:




In this provocative lecture, Salerno reminds us that in 2002 Friedman advocated what we now call quantitative easing to prevent deflation after the recession of 2001. He also documents how, throughout the mid-2000s, Friedman utterly failed to see the investment imbalances that were building toward the housing bubble and resulting recession.

While listening, it occurred to me that the Fed did essentially what Friedman suggested. It would be interesting to know, if Friedman was still living, what he would think about his theory and policy now. Pursuing a policy in general agreement with Friedman produced the greatest period of financial upheaval in this country since the Great Depression. Would he, positivist economist that he was, take the Great Recession of 2008 as a giant data point which fails to verify his theory?