Has Keynes trumped Adam Smith?

In this think piece, Mark Skousen considers Marxist, Keynesian and Smithian economics, and their comparative importance to contemporary academic and political culture.

The problem today is Keynesian-style policy, the darling of the establishment politicos and media giants:  big government solutions, deficit spending, easy money, bailouts. Keynes has suddenly trumped Adam Smith. And that’s dangerous.

One day last week, I walked into the largest Barnes & Noble bookstore in New York and saw a big display table up front with all kinds of books on John Maynard Keynes and Keynesian economics. One book, The Return of Depression Economics, was written by Paul Krugman, the caustic New York Times columnist who just won the Nobel Prize.

Another book was called The Case for Big Government by Jeff Madrick, the editor of Challenge magazine. I can understand writing a book in support of good, efficient, strong, and productive government, but “big” alone? Most Americans prefer the motto “cheaper and better.”

The biggest surprise at Barnes & Noble was to see my own book, The Big Three in Economics, prominently displayed along side all the Keynesian and Marxist books. It has suddenly become my most successful book.

But mine was the only book there that took a dim view of Keynes and Marx and their solutions to the financial crisis (always more government, more taxes, and more regulations). For my money, Adam Smith and his followers (Ludwig von Mises, Friedrich Hayek, Milton Friedman, Murray Rothbard) deserve to be on top of the Totem Pole of Economics.

Unfortunately, Keynes is all the rage now. The British economist became famous in the 1930s for advocating going off the gold standard, running deficits and bailing out troubled banks with easy money as a way to end the Great Depression.

Today’s politicians, from George Bush to Barack Obama, have suddenly become Keynesians during this financial crisis, spending money they don’t have in a vain effort to right the ship. Even Newsweek has gone so far to say, “We are all socialists now.”  Alan Greenspan, the ex-student of Ayn Rand, now favors nationalization of the big American banks Citibank and Bank of America.

Every investor and gold bug should know the enemy: Keynes, the advocate of big government and the welfare state, and Karl Marx, the radical who advocated outright state socialism and total central control of the means of production.

After World War I, Randolph Bourne observed, “War is the health of the state.” Today he might say, “A financial crisis is the health of the state.”

It looks like modern-day statists are getting their wish. We’re getting big government, good and hard. Adam Smith and Milton Friedman are out of favor, while John Maynard Keynes, the patron saint of bailouts, inflation, and the welfare state, is making a comeback with a vengeance.

The tentacles of the leviathan state are growing by leaps and bounds. In 2009, global governments will be the largest shareholders in commercial banks, reversing 20 years of retreat by the state. The costs of entitlements are exploding upwards, and Congress hasn’t had the courage to address future liabilities. Social Security and Medicare are government-sponsored Ponzi schemes that will make Bernie Madoff’s embezzlement look like a picnic.

The late management guru Peter Drucker said, “Government is better at creating problems than solving them.” In fact, wrote a cynical Ducker, government has gotten bigger, not stronger, and can only do three things well — taxation, inflation, and making war. According to Drucker, the state has become a “swollen monstrosity….Indeed, government is sick — and just at a time when we need a strong, healthy, and vigorous government.” (He said all this in 1969.) If you want to solve problems, he counseled, you must turn to business and the private sector.

But where does one get the straight scoop on Keynes, Marx, and their nemesis, Adam Smith and the followers of free-market capitalism?

I have no apologies for where I stand on the issue. In writing The Big Three, I commissioned a Florida woodcarver, James Sagui, to create “The Totem Pole of Economics.” (The Tolem Pole of Economics is shown on the back cover of the book.) Clearly, my hero is Adam Smith, the author of The Wealth of Nations, published in 1776, a declaration of economic independence.

Adam Smith, the 18th century philosopher, is on top of the Totem Pole for his advocacy of a revolutionary new doctrine which he called a “system of natural liberty,” what we might call laissez faire or free-market capitalism. He used the “invisible hand” to symbolized how the private actions of individual entrepreneurs would lead to the public good.

Today’s advocates of Smithian economics have real solutions to the crisis, as I’ve outlined in previous HUMAN EVENTS columns:  suspend “mark to market” accounting rules, make the Bush tax cuts permanent, slash the corporate tax rate, and mostly importantly “do no harm.” Also, it wouldn’t hurt to take a look at the Canadian banking system, ranked #1 in the world in soundness (US is #40) for its conservative reserve requirements and nationwide branching. (Not a single Canadian bank has failed in either the Great Depression or now.)

Keynes is ranked below Adam Smith, because he supported big government and the welfare state as a way to stabilize the crisis-prone capitalist economy, the “middle ground” between laissez faire and totalitarian socialism. But as we have seen, Keynesian activism has led to much mischief in the world today, and countries that have adopted his bureaucratic, regulated mindset have witnessed “slow growth” and “stagflation” style economies.

And Marx is the “low man” on the Totem Pole. His radical solution, government ownership and control of the production, distribution and consumption of goods and services, would be, as Hayek says, “the road to serfdom.”

Adam Smith and his “system of natural liberty” have come under attack many times by his arch enemies, the Marxists and Keynesians. But Smithian economics has nine lives, and has always managed a comeback. With your help, Adam Smith will return.

Click here for a copy of The Big Three in Economics.

Blog Review 883


You know this huge housing bust in the US? Well, it's not actually nationwide: but all of the remedies are. Some mismatch there, no?

The art of politics is sometimes said to be not letting the right hand know what the left hand is doing. But when left and right are doing mutually exclusive, advocating entirely opposite, things, this might not in fact be all that good an idea.

Is it really a surprise that the more self-confident among us become entrepreneurs? And that the more self-confident in general a society, the more entrepreneurs it has?

Jean Baptiste Say or John Maynard Keynes?

Or perhaps it's all a monetary phenomenon?

What's the real background to this postal dispute?

And finally, explaining British success in radio astronomy.

Ingrained contempt


Over at the ToryDiary on ConservativeHome Tim Montgomerie discusses the predictive powers of William Hague and how he was insightful in seeing the demise of the support for New Labour. William Hague back in 1999 spoke of how support for New Labour would go through certain stages:

"For when I spoke to you in this hall two years ago I said that New Labour would bring first fascination, then admiration, then disillusionment and finally contempt. At that stage the admiration was running high; now the disillusionment is beginning; and mark my words, they are not so far away from contempt."

That was a whole decade ago, and while it has taken time for the contempt to spread, it has finally reached the surface and can now be seen boiling over. Even in the heartland of assured areas of support, e.g. Comments on an article by Gordon Brown, and in the latest polling showing the Prime Minister is an even bigger hindrance. There should be no surprise at politicians being held in contempt, the surprise is in that it ever went away.

The Conservatives between 1992 and 1997 were firmly believed to be incompetent in all that they did, and when we review the reign of Gordon Brown in the future we will no doubt look back comparably. We should always hold politicians in contempt after all it is an exact reflection on how they act. They continually see themselves as being able to operate above the law. Should any of us attempt to do so, by withholding our own property from their clutches, or speaking our minds, then we have to bear the consequences as they legitimately use violence against us. The politician who is humble to us is a rarity, if not an extinct species. Perhaps one day we shall find a way to recreate them, maybe through the institution of a Bill of Rights to protect us. Until then contempt should be our natural emotion when our eyes fall upon a politician.

The Rotten State of Britain


Will Hutton's The State We're In famously shredded the record of the Thatcher-Major governments. Now Eamonn Butler shows how – after a decade of Tony Blair and Gordon Brown – the state of Britain has become very much worse than it ought to be.
Corporate publishers rejected Butler's picture of Britain as too cataclysmic and not worth publishing. But now, as the country slides into its worst recession in 70 years, his book The Rotten State of Britain (Gibson Square Books) shows for the first time exactly why Britain is in a worse state than any of the major world economies, how its democracy has been undermined by stealth, and why today's politicians are incapable of finding honest solutions to the problems that they themselves have created.
As an economist and Westminster insider, Dr Butler initially thought New Labour seemed purposeful and businesslike.  They promised a new, open kind of government to repair Britain. Two years later, though, he had become completely disillusioned. New Labour’s words were not backed up by deeds. From his vantage point at the Adam Smith Institute, he started to gather the material that is the basis of this deeply-researched book.
Gordon Brown's obsessive focus on central targets, and his party's willingness to subvert the apparatus of the state for its own party advantage perverted the state over the course of a decade. By stealth a new form of centralized and authoritarian government has been created that is the worst in Britain’s recent history.
Dr Butler scrutinises all aspects of our society and examines the political system, the sleaze, the justice system, the draconian powers the police and public officials have been given under the New Labour government, the surveillance and nanny state, public service bureaucracy and spending, the economy and how we need checks and balances to restrain our political leaders and the unelected advisors who actually control our lives. 

If you would like to come to the ASI launch party of The Rotten State of Britain, held at the ASI's offices (23 Great Smith Street, London, SW1P 3BL) on the 3rd March (6-8pm), please email andrew@old.adamsmith.org to be put on the guest list.

It does not work

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot.

Henry Morganthau (Roosevelt’s Treasury secretary)

H/T Mona Caren, NRO

Blog Review 882


On self sufficiency in food: bye bye Wales.

Bad enough to be tortured for reading a satire: but one by Barbara Ehrenreich?

This campaign against home education seems to be driven by fear that children will not be "educated" by the State rather than anything else.

No, reviving Northern Rock is not a good idea.

Contrary to received wisdom, most do not regret having had children.

Don't forget that there's a lot more going on in the economy than just the "crisis". Rising productivity, for example.

And finally, where the tax money goes: saving Mr. Harman the cost of flowers for Mrs. Dromey.

An alternative to regulation


Some interesting themes were bubbling under the surface at a seminar organized by the Centre for the Study of Regulated Industries in Westminster this week. The group was a mixture of regulators, government officials and academics, plus me as the lone representative of competition. As you'd expect, there was much quoting of Adam Smith's famous remark about businesspeople never getting together without the talk turning to some new price-fixing conspiracy against the public. If only people would read on – in the next paragraphs, Smith explains that it is regulation that causes businesspeople to behave in this way. Only through the powers of the regulators can they actually make price-fixing stick.

But one underlying theme I picked up was that everyone's finding government intervening more and more in regulation. For example, utility prices are no longer left to some RPI-X formula. Politicians are demanding that prices should be 'fair' - that pre-payment meter customers, say, should pay the same as those who pay by direct debit. Of course, that ignores the commercial basics like cost (direct debits are far, far cheaper to administer). But it's typical of how politicians want to interfere and push the market to follow their agenda, until in the end they have completely destroyed the market.

And of course, ministers are rarely in a post for more than a couple of years, so they have to produce scores of such initiatives just to appear dynamic and so promote their careers. So their interventions come one on top of another until the whole structure becomes very complicated – a world away from RPI-X. And that's the second theme I found coming through, even from these stalwarts of regulation: perhaps it's time to reconsider our regulation system afresh, to find something new without 25 years' worth of barnacles on it.

May I suggest, as an alternative, competition?

The Rotten State of Britain by Eamonn Butler (Gibson Square Books) is published in March.

A compromise on the minimum wage


Assailed by ignorance of sound economic theory and socialism's addiction to government interference, free-market capitalism is seeking to preserve its hard-won legacy. It is only by melding the ideology of the free-market to the public's most prominent worries and concerns that it can regain the initiative and ultimately defeat these threats.

The abolition or reduction of the minimum wage for example, despite being popular with businesses, is often unpopular or even unthinkable for those workers being made redundant, or those living involuntarily off unemployment benefits, even though it is beneficial to them. If free-market capitalism is to survive the ravages of the emerging "conventional wisdom" that it is a failed system, it is imperative that we forge this connection, establishing the minimum wage as an enemy of the unemployed, young workers, and those on low incomes - the very people whom it claims to defend.

It is opposition from Trade Unions along with an unthinking popular consensus that stands in the way. However, this need not be the case. Why not keep the minimum wage, but allow workers to offer their labour for a lower rate if it means they will keep their job? Businesses would then still be unable to harm workers' interests by imposing lower wages on them. It would be an opt-out scheme that can only be initiated by employees or job applicants. This would allow employment to be negotiated in the market between free and consenting adults, but with the safeguard in place that preempts any counter-arguments over exploitation from the entrenched interests of the Unions.

If a liberal free-market ideology is to endure, it must both offer this example and others to further its agenda, both by acceptable compromise, and by melding its policies with those of the vast majority of the public and especially the most dispossessed in society. Free-market capitalism has the means to claim the moral high ground over socialism at a time when it most needs to. It is now a matter of whether it succeeds in doing so or not.

Anton Howes is leader of the Social Liberalist Party.

Genetic profiling while you wait


Well, not quite, but according to a piece in The Times scientists at Oxford Nanopore have developed a new technique which could bring the cost of individual profiling down to $1,000 or less. Knowledge of our individual genetic defects and health risks would, of course, be a mixed blessing. On one hand, medical interventions - and even, before too long, replacement of faulty genes - could not only increase average lifespans but also improve the quality of life for many. On the other hand, there may be little benefit in the knowledge that you have a serious health risk for which there is as yet no cure, and the inner hypondriac in many of us needs little encouragement to flourish.

The point is that the first human genome sequence was published in 2001, at an estimated cost of $4 billion. The rate of technological advance since then has been staggering. It even puts the continual rapid advances in IT in the shade. Technologies such as this come seemingly from nowhere but can soon have a pervasive influence on our lives. The instant availability of information and communications on the move which we now take for granted was the stuff of science fiction only a generation ago. The next generation may also take for granted the availability of personalised preventive healthcare and marvel at the primitive nature of medicine in the noughties.

All this makes a nonsense of the fashionable concept of sustainability, which assumes that what we do today we simply do more of tomorrow. Progess isn't smooth; society is subject to a series of disruptive developments which are unpredictable and change our assumptions about resource use overnight. Rather than routinely predicting catastrophe, we should have more faith in the human race's innovative capacity and adaptability.

Guest author Martin Livermore is the Director of The Scientific Alliance


Blog Review 881


As it is said, a damning indictment of our education system: "The Finns or Dutch would find it incomprehensible that a mother’s dying wish is for her children to avoid the state education system."

Stress testing the banking system right now would not be all that good an idea.

Is this the worst since the Great Depression, well, no, there are a number of qualifications. But that there are qualifications to the qualifications is less reassuring.

The politicians' responses aren't helping, of course.

Thankfully, we don't in fact have a CEO of UK PLC....if we did, this would be his speech.

An interesting nugget revealing the changes in relative prices over the years.

And finally, if we didn't have football, what would they do?