The Failures of Keynesianism

An excellent read from Peter Foster that made me proud to admit I’ve never been a Keynesian:

The astonishing aspect of all this — as pointed out numerous times in this space — is that spend-yourself-rich Keynesianism had already been comprehensively refuted in theory and had spectacularly failed in practice by the late 1970s.

The good news is that fettered capitalism has made the world a good deal richer since then, and thus arguably more able to withstand policy incompetence. The bad news that the tax-and-spend interventionist state has grown in parasitical lockstep, if not even faster, thus both hobbling progress and mortgaging people’s future via increasingly unsustainable health and welfare commitments. Few would dare to question the validity of a welfare state; but few could deny that it consistently threatens to grow out of control.

The Obama administration’s solution is more of the same. It wants to up the government’s credit-card limit, which the EU now does on an ongoing basis. Brussels and the European Central Bank are reluctant to acknowledge the obvious need for a Greek restructuring (i.e. default) because the EU banks that were rash enough to take on Greek debt are allegedly not strong enough to take the required “haircut.” They thus require further time at the state spa on the taxpayers’ tab.

All this further weakens institutions and economies and promotes even greater moral hazard. However, if you suggest this to the agents of the regulatory state and its elaborate multinational offshoots such as the IMF, their response would be: What other way is there?

Friedrich Hayek identified the “fatal conceit” of believing that markets are flawed and can always be rectified and/or improved and/or fine tuned by bright people with big brains and good intentions. However, the fatal conceit is not just, or even, a cognitive error; it also inevitably features a good deal of self-interest. People come into government to do good and stay on to do well.

The EU started out as a thrust to reduce trade barriers and enable industrial rationalization across postwar state borders, thus reducing the chances of further intra-European conflict. It was also promoted as a bulwark against Soviet aggression. However, in their inevitable hunger to acquire more power, the agents of the European regulatory state sought monetary union, knowing that monetary union would require central co-ordination of economic policy if it wasn’t to fall apart. However, economic policy remained in the hands of individual states, so the system is falling apart. Some governments inevitably pursued (extra) feckless policies precisely because they knew that Brussels would have to bail them out to keep its expansive dreams alive.

As my colleague Terence Corcoran noted yesterday, Standard & Poor’s warning about a possible downgrade of U.S. government debt should come as no surprise, and certainly no comfort that either ratings agencies or global regulators have a clue about how events will unfold. Indeed, they are in a state of professional denial. In the Borg-like mind of super-bureaucracy, policy failure is merely a temporary glitch, the prelude to more and bigger — and invariably “smarter” — policy. Indeed, policy failure is regarded as synonymous with the acquisition of valuable input that will make the next policy truly potent. The one policy that is rarely countenanced is more reliance on market freedom. Liberals might at this point rage at all the Wall Street malefactors who have dodged the slammer, but that reflects yet another failure of fundamental state responsibility. Any state should deal with the issues that are within its mandate and competence before it seeks to confirm the political Peter Principle that the more expansive the scope of regulation, the more likely it is to fail.

Read the whole thing.

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One Response to The Failures of Keynesianism

  1. Another insightful article; I appreciate the site and your contributions.

    I came accross an article the other day and I thought it was a good fit for the site (Beatles related). Is it possible for me to submit something to you or the site for publication?

    Keep up the good work!


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