June 26, 2017

Institutionalized Inertia of Keynesian Economics

Author: Michael Tabone

Date: April 13, 2014

Institutionalized Inertia of Keynesian Economics: Real Science or Confirming The Bias?

Adam Smith is taught to be the father of Economics. His book Wealth of Nations is widely considered the second most influential book on Western Society, save for the Bible. Considering how the amount of people who have read the Bible dwarfs those who have read Wealth of Nations, we can see how truly powerful the subject of Economics is. If the World’s leading economists are wrong it could mean an entire collapse of our global economy.  This ever present danger should make even those without interest in Economics, personally interested in economic outcomes. Out of Adam Smith’s new science of Economics came hundreds of theories and those theories varied greatly. But why has only one been one theory of economics pushed by the Ivy Leagues?

There is only economic theory perpetuated in the top echelon of academic institutions in America and that theory is Keynesian Economics. Even in the face of evidence by contradictory theories, the bias towards this singular economic viewpoint can have disastrous consequences and all theories and models of economic understanding should be taught. The result of not understanding other economic models and theories is we are open to an entire global economic collapse.

When looking at the top economic schools in the nation, our list not surprisingly comprises of the Ivy League: Harvard University, Massachusetts Institute of Technology, Princeton University, University of Chicago, Stanford University, University of California-Berkeley, Yale University, University of Pennsylvania and Columbia University (US News). These schools all have great programs which prepare their students to be in the top of their fields. But what do they teach? One would assume that in academia all the relevant information on a topic is present to teach from different points of view and perspective to give insight, information and knowledge to the student of a class. As it is higher education’s main goal to teach people how to think, not what to think, the challenge for the student is to judge all the pertinent information and make up their own minds. The main theories taught in today’s Ivy League schools, outlined above, teach from what is called the “Keynesian” perspective.

John Maynard Keynes is a British economist who created what is called the Keynesian economic theory. Keynes central idea is that without market stimulation to affect the price of goods the market will not stabilize itself, so the economy itself must come from central planning with government intervention to help increase aggregate demand. Aggregate demand refers to the money spent on goods and services that make up a country’s gross domestic product (GDP). As an example, the cell phone industry spends a lot of money to have the target consumers purchase the latest and greatest cell phone. When a consumer buys the new cell phone, it is thought to help move the economy along because we have money exchanging hands. This approach to the economy is considered “demand economics” because it is entirely based on the demand of products by private citizens, businesses and the state to “grow” the economy. Keynes first book General Theory of Employment, Interest and Money was published in 1936.

Keynesian Economics was whole heartily embraced by governments all over the world, as it proclaimed the virtues of deficit spending. Deficit spending is defined as: “the spending of public funds raised by borrowing rather than by taxation (Merrian-Webster).” Since governments are attracted to the philosophy of borrowing money to allow spending without raising taxes, governmental agencies called for employees schooled in this form of economic thought. The educational industrial complex simply gave the employers the supply demanded. The employers of economists are mostly government and education (Cowen), and since education feeds new students into government jobs, this bias by the educational industrial complex has perpetuated Keynesian theory to satisfy those looking to employee such specialized individuals.

To laymen unfamiliar with the educational industrial complex (EIC) it is an association of parties connected by ideology and profit for the interest of promoting their viewpoint, concepts and ideas either for self-centered interest or simply because of institutionalized inertia. Institutionalized inertia can be defined here as meaning that something is perpetuated because it is taught to that person as a student, and therefore is passed on without question from one generation to the next.

An old Zen story talks about how at one monastery there was a cat that would make so much noise during the evening mediation the Zen priest ordered that the cat be tied up every evening. Tying up the cat became the daily tradition until one day the Zen priest died, but his students kept the tradition every day. Even to the point where they would go looking for a cat to tie up if the one the one they had in the monastery would die or run away.  Eventually many stories and practices came out of tying up the cat but none of them were what the true reason behind tying up the cat originally had been. The point of the story is the institutionalized inertia that all the students blindly took and regurgitated the traditional practice without questioning it, and even further rationalized it into being more than what it should be.

This “tying up the cat” is the perfect analogy for Keynesian economics being unquestioned as a viable theory. Why are other theories pushed aside? While there are hundreds of theories, there is one which is the perfect antithesis of Keynesian ideology: Austrian Economics.

Austrian economics rejects government intervention in the market and that the market will always find a stabilizing balance. This is considered “supply economics” because it is generally seen that the supply of a good or service will control markets.  Savings is considered a great thing in this school of thought, and debt is seen as an undesirable, though less if it is a serviceable debt (like the mortgage on a house).  In recent years of the housing sector collapse, big bank bailouts and “crony capitalism”, society is seeing the days that are bringing Austrian Economics “back to life” (Keith). The first appearances of Austrian Economics can be said to be in 1883 with Menger’s book Investigations into the Method of the Social Sciences with Special Reference to Economics.

So we will look at some of the top schools mentioned previously to see what their programs offer in terms of material direction. First on the list is Harvard. A quick search turned up a syllabus from Harvard University: Economics 970 the Economics of Health and Development (Nikolov). After reviewing the required reading list for the class and researching the over one hundred plus authors which were listed, no one could be said to be of the Austrian school of thought. Some of them, like Milton Friedman, are from the Chicago school of economic theory. The Chicago School is a combination of both the Keynesian and Austrian Schools.

Ph.D. Gary North is an historian who is an accomplished author on many topics including economics. In an on-line article titled “Tenured Austrian Economists vs. Murray Rothbard”, Dr. North gives a little insight into the Keynesian academic stronghold. He suggests that anyone in the Austrian economic way of thinking was immediately blackballed and no longer allowed to get published in third-tier academic journals. North also points out that one had to renounce that they were associated with the “founders” of the Austrian perspective to even get into Ivy League schools (North). North is quoted as stating:

“Not one of them [Austrian Economists] ever got onto the faculty of a top-tier university, meaning an Ivy League school or similar institution. To get into one of these schools, you must privately renounce your commitment to Mises [An Austrian Economist]. That was set as unofficial policy of economics departments in the late 1940s and 1950s. ”

So why is it that Keynesian philosophy the only form of thought in the world of academia? In a New York Times Article by leading world renowned economist and professor, Paul Krugmen defended his idol Keynes’s theory and his continued promotion of it by stating:

“First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models…Also, there are some features of the approach that can be tested separately…Also also: there’s plenty of evidence that monetary policy can move output and employment — and it’s very hard to devise a model in which that is true that doesn’t also say that fiscal policy can be effective, especially when you’re up against the zero lower bound.

Second, while we don’t have a lot of postwar experience with fiscal stimulus, we do have a lot of experience with anti-stimulus, that is, austerity — and that turns out to be reliably contractionary. Again, it’s hard to think of a model in which austerity is contractionary but stimulus isn’t expansionary.

Finally, there is evidence from fiscal expansions in the 1930s, which actually did lead to economic expansion too.

Mainly I’d stress the first point. We have a model of the way the world works, and the world does indeed seem to work that way. And an implication of that model is that fiscal stimulus will work under conditions like those we face now. If interest rates had soared, if the rise in base money had led to rising GDP and/or soaring prices despite the zero lower bound, I would have sat down to reconsider what I thought I knew about macroeconomics. In fact, however, my preferred model has passed the test of events with flying colors, while the other guys’ models have been totally wrong.”

Scott Sumner, Professor at Bentley University, describes the bias of Keynesian economics in different situations from around the world. The dynamic nature of bending what Keynesian principles are to adjust for the situational conditions is rampant; as Keynesians often change their stance on stimulus theory whenever the results don’t conform precisely as in Britain and Japan (Sumner).

Keynesian economics would call for a “bubble” in the economy to help stimulate growth. A bubble as described by Bill Conerly, who holds a Ph.D. and a published author, defines a bubble as: “A bubble is a run-up in the price of an asset that is not justified by the fundamental supply and demand factors for the asset (Conerly).”

In 2002, Paul Krugman, quoted earlier in defense of Keynes, stated in a 2002 New York Times editorial:

“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that…Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble.”

This idea of jumping from bubbles seems odd to the Austrian perspective, but it is doubtful that Mr. Krugman teaches from different views at Princeton University.

There have been many Austrian Economists throughout the world that predicted the economic catastrophe of the housing bubble which Krugman did not foresee.

Frank Shotsak, is an Austrian Economist and Professor of Economics in South Africa warned of an economic crisis which directly contradicts Krugman’s stance on this bubble and predicted that it would burst (Shotsak). Mark Thornton is another Austrian Economist who predicted the housing bubble. He calls out Alan Greenspan, a Keynesian Economists, for helping to facilitate the housing bubble, which happened years after his warnings (Thornton, 2004).  Peter Schiff, CEO of the international investment firm Euro Pacific Capital and host of the Peter Schiff radio show, wrote an entire book predicting the financial collapse of the housing sector in America, using his Austrian Economic perspective (Schiff and Downes).

So why should be care? Because Keynesian economists like Krugman could not see the housing bubble as a disastrous policy which could have led to a path in which, like dominos, the entire U.S. economy would collapse. Unfortunately, our fix for this collapse was a remedy born out of Keynesian economics so we may have just “kicked the can down the road” till a time we cannot put the problem off any further (Bootle). It is not that Keynesian Economics should not be taught, but that it should be taught in conjunction with other models, so we don’t have an incomplete education for tomorrows next generation of economists. If we had listened to the ample warning from Austrian economists referenced in this paper, we may have had other avenues to correct the situation.  Keynesian economics, even in the face evidence from other models which can predict situations better, is still touted alone as the model to teach, which may very result in a worse economic collapse down the road.

The world cannot cling to the Dark Age mentality of institutionalized inertia, and there is an important need to start where the divide is the largest, and maybe, the most necessary.

Two economists could be credited for arguing the points brought up in this paper decades ago. F.A. Hayek from the Austrian school sent the letter to none other than J.M. Keynes who responded with a one line post card. These two debated and critiqued each other’s work their entire lives while maintain huge amounts of respect for the other. Their friendship and rivalry can even been seen today in popular culture with YouTube videos of rap battles of these two economists battling it out (“Fear the Boom and the Bust”) (“Fight of the Century”). These two economic opposites spoke to the importance of the study of economics, and both in their own way, speak to the dangerous position of teaching economics incompletely:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

John Maynard Keynes
The General Theory of Employment, Interest and Money, p. 383

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

F. A. Hayek
The Fatal Conceit, p. 76

As Keynes and Hayek pointed out, if we do not heed their warning of the importance of economists to influence the world we are in trouble. If we continue to only produce economists who preach a flawed and biased philosophy even when facing factual evidence contrary to their models, then we truly have a “fatal conceit.”



Work Cited

“Best Programs.” Economics. US News & World Report, 10 Jan. 2014. Web. 9    March, 2014.

Bootle, Roger. “US Default Threat Will Not Go Away, Even If the Can Is Kicked  down the Road.” The Telegraph. Telegraph Media Group, 13 Oct. 2013. Web. 13  Apr. 2014.

Conerly, Bill. “What Is A Bubble?” Forbes. Forbes Magazine, 24 July 2013. Web. 13  Apr. 2014.

Cowen, Tyler. “Should Economists Aspire to Be Academics or to Work in  Government?” Marginal REVOLUTION RSS. Marginal Revolution University, 6  Jan. 2014. Web. 13 Apr. 2014.

“Deficit Spending.” Merriam-Webster. Merriam-Webster, n.d. Web. 13 Apr. 2014.

“”Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem.” YouTube. Econ    Stories, 23 Jan.     2010. Web. 6 March, 2014.

“Fight of the Century: Keynes vs. Hayek Round Two.” YouTube. Econ Stories, 27    Apr. 2011. Web. 6 March, 2014.

Hayek, Friedrich A. Von, and William Warren Bartley. The Fatal Conceit: The  Errors of   Socialism. Chicago: University of Chicago, 1989. Print.

Hayek, Friedrich August Von, and Bruce Caldwell. The Road to Serfdom: Text and  Documents; the Definitive Edition. Chicago, IL: Univ. of Chicago, 2007. Print

Keith, Tamara. “Austrian School Economist Hayek Finds New Fans.” NPR. NPR, 15  Nov. 2011. Web. 13 Apr. 2014.

Keynes, John Maynard. The General Theory of Employment, Interest, and Money.  Basingstoke: Palgrave Macmillan for the Royal Economic Society, 2007. Print

Krugman, Paul. “Dubya’s Double Dip?” The New York Times. The New York Times,  01 Aug. 2002. Web. 9 March, 2014.

Krugman, Paul. “Why Believe In Keynesian Models?” Paul Krugman Why Believe  In Keynesian Models Comments. New York Times, 11 Oct. 2011. Web. 10 Mar.  2014.

Menger, Carl. Investigations into the Method of the Social Sciences. Grove City, PA:  Libertarian, 1996. Print.

Nikolov, Plamen. “Economics 970”  Http://isites.harvard.edu/fs/docs/icb.topic505715.files/NikolovEcon970.pdf.  Harvard University, n.d. Web. 9 March, 2014.

North, Gary. “Tenured Austrian Economists vs. Murray Rothbard.”  Tenured      Austrian Economists vs. Murray Rothbard. Gary North, 13 Mar. 2013. Web. 10      March, 2014

Schiff, Peter D., and John Downes. Crash Proof: How to Profit from the Coming        Economic Collapse. Hoboken, NJ: John Wiley & Sons, 2007. Print.

Shostak, Frank. “Is There a Glut of Saving?” The Ludwig Von Mises   Institute.  Mises Institute, 5   Aug. 2005. Web. 16 March, 2014.

Sumner, Scott. “Keynesian Confirmation Bias.” Library of Economics and Liberty.     EconLog, 30   Jan. 2014. Web. 23 Mar. 2014.

Thornton, Mark. “Housing: Too Good to Be True.”  The Ludwig Von Mises Institute.   Mises Institute, 4 June 2004. Web. 16 March, 2014.


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