“The policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.” — Paul Krugman, New York Times, August 21.
That is rich: a mainstream Keynesian economist accusing someone else of worshiping a false god. It led me to add Keyesian economics to my list of useless and often dangerous pseudosciences and superstitions — alongside management theory, psychology, environmentalism, education science, political science, and sociology. These scams resemble real sciences in that they advance theories, insights, and assumptions that try to explain phenomena, but the resemblance ends there.
Theories in real sciences inspire experiments; if these experiments don’t provide support, then the theories are discarded. As Karl Popper taught us, scientific theories are falsifiable. An outgrowth of all this is that the results of experiments have to be reproducible and so can be used in engineering.
Pseudoscientists usually cite historical or anecdotal events to start forming their theories. We have no notion why they selected some events and not others. Pseudoscientists love numbers and will generate “studies” of internally referential subjects, running the results through statistical analyses that, amazingly, always confirm the hypotheses. So “poof,” they confer upon themselves the title of “scientists.”
I like to think of them as shamans peddling superstitions that appeal to the gullible. What is so dangerous is that many opinion leaders buy into these belief systems, license them, give them authority to run their affairs, and pay them good money, as they would to a good engineer.
Among the economic pseudosciences, Keynesianism (turning gold into paper), which appeals to politicians who want to engineer better societies, is the largest. It has been in charge for about 75 years. Real scientists would have rejected the Keynesian theories decades ago because of their results — numerous embarrassingly false predictions of economic events (“correctly predicting 11 of the last 3 recessions”), not to mention the stagflation of the 1970s. And Keynesian economics dominated policy when the rest of us were plunged into the current financial unpleasantness.
Keynes lived at a time when fiat currencies were created by government printing presses. He did not foresee modern financial practices, in which money supplies or currency are increased by the private use of credit — debts that have to be repaid. He could not have anticipated the shrinkage of the money supply that will occur when folks won’t spend “their” money, either because they are no longer creditworthy or are worried about paying off debts. Belief systems such as Keynesianism “work” as long as most people buy into the entire scheme — witness the glorious example of the medieval Church — but when the facade cracks, all hell breaks loose.
Japan illustrates what can happen. Keynesians were in charge when the Japanese real estate and stock market bubbles burst in 1990 and people lost huge amounts of equity along with the hope of making easy money. The Japanese have had deflation for 20 years now, despite the full Keynesian program of easy credit and fiscal stimulus. Many young people have not been able to find good jobs, and they can’t afford to marry or have children. Keynesian economics is destroying Japan. Keynesian economists have no vocabulary to explain how this happened, and offer only more of the same to rescue the Japanese.
Other schools of economics offer little help. The Chicago school is a kind of squishy, wannabe Keynesian school that prescribes moderate inflation to “help manage” the economy; it’s been tried to some extent in small developing economies with success. Krugman’s editorial mocks “Austerians” who want us to return to a gold-based currency. Austrian economics has been tried only in sepia-colored recollections of the Victorian Age, never in contemporary large-scale economies. Objectively Austrians cannot obtain our loyalty simply by demanding that we choose among superstitions and so ought to pick the one we haven’t tried before.
Nevertheless, we must have currencies, and fiat currencies have led to destabilizing cycles of boom and bust, as the Austrian economists understood. Austrian economics makes few passionate claims, beyond a hope of decency and peace that has earned my respect, for what it’s worth.
As a result of Keynesian economics the western world now faces prolonged low-grade economic depression, diminished prospects for young people, and increasingly desperate measures by democratically elected governments that are expected to do something, anything. Libertarians who value truth should avoid making messianic promises for the success of other economic systems, but constantly emphasize the Keynesian source of our economic problems.