It’s rare that I take issue with Gary North in matters of economics or history, but his article of July 25 — "'The Bucks Stop Here': Keynesian Economics Will Get Blamed for the Crash” — is one I wish to discuss.
For as long as the present economic system lumbers along, Keynesians will control the levers of power and influence. But when at last the system goes down in a heap, and central banks cannot restore the system, there will be a quest for answers. . . .
When people's retirement plans are smashed, they are going to look for somebody to blame. That means Keynesians. The Keynesians will not be able to transfer this responsibility to somebody else. . .
I can see people blaming specific Keynesians, such as Yellen or Bernanke, but not Keynesianism itself. They will not blame "Keynesian Economics" — unless it’s to update it. Voters will demand reforms. They’ll want heads to roll. Those at the top of the food chain will find a way to exploit their outrage, even if it means starting a major war. But as long as the government hasn't become a failed state Keynesianism itself will still be enthroned.
When the Federal Reserve finally is not in a position to restore economic growth by means of inflating the currency, Keynesians are going to get blamed.
Austrian economists will blame them, as they’ve done since 2007-2008. But who will listen, especially now that economic growth has returned according to the Fed’s Beige Book collection of anecdotal reports that reveal increased consumer spending?
Keynesians tell us the crisis was a result of lax lending standards, limited regulation of non-depository financial institutions, and a glut of savings. Wikipedia:
The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country, as lenders and borrowers put these savings to use, generating bubble after bubble across the globe.
From this, laymen could easily conclude the crisis was beyond anyone's control, or at least not the fault of any economic theory. When the next crash arrives we will be reminded once again that economics is hard, something mere mortals shouldn’t practice at home.
In 2008 Queen Elizabeth II asked Professor Luis Garicano of the London School of Economics how something as big as the financial crisis could strike without warning. His insipid answer: ‘At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.’ Four years later an economist at the Bank of England elaborated: We got complacent. Regulation wasn't necessary. You know how it is, Your Majesty.
Of course she does. This was the Great Moderation: Central bankers had solved the business cycle volatility problem. No wonder they were complacent.
Austrians could have told the Queen that only by closing shop could central bankers begin to solve the business cycle problem. Austrians could have told her sound economics requires unfettered markets. But for most people Austrians are the devil they don't know. Austrians are a devil they've never heard of or care to hear about.
The Great Depression and free markets
The myth still lingers that adherence to the gold standard was a major reason for the Great Depression. Gold was the free market's money. Only after governments abandoned gold did recovery begin, Keynesians tell us. A casual viewing of some charts suggests they might have a point. Never mind that the world was running on a government-rigged gold standard, the free market was holding back recovery. We can't trust the free market ever again.
During the Depression, one of the few defenders of the Austrian viewpoint in the English-speaking world was Lionel Robbins, who published The Great Depression in 1934. Yet he eventually repudiated his position. A biographical note informs us that after the war Robbins published another book in support of “Keynes’s policies of full employment through control of aggregate demand.” To laymen his apostasy could’ve been well-founded or expedient. In either case it didn’t help the cause for free markets.
I certainly hope North is right, that Keynesians will get hammered. Logically, the buck stops with them. But if this means Keynesianism will be tried and convicted, who will do it? Keynesians will write another Wikipedia article that eases any doubts about who or what is to blame. They’ll go on cable shows and point fingers. The Queen will be fed another lame excuse. Though I wish it were otherwise, the working public will not spend their evenings studying Austrian economics or watching Austrian economists on YouTube. They’ll vent on Facebook instead. They’ll be as likely to champion a Bernie Sanders as a Ron Paul. They’ll want redress, not understanding. For understanding they’ll defer to the experts, and the experts will still be Keynesians.
The situation reminds me of government’s checks and balances. It’s government that does the checking and balancing. No matter what atrocities it commits it never seriously finds fault with itself. Somehow it always finds a way to increase its power.
Yet I'm probably at least as optimistic as Dr. North. And there’s no question he’s optimistic. See here for details.
I think the future will be some combination of Rothbard and Kurzweil. Keynesianism will still be around intellectually because it is far too useful to the ruling elite to be abandoned. Yet the institutions that put it in play will be on the ropes. Broke governments will leave us with nearly free markets, while the law of accelerating returns will continue to open up radically new economic opportunities.