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Two Simple Questions Keynesians Can’t Answer

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Let us say that a carpenter wishes to cut fifty boards for the purpose of laying the floor of a house. He has marked his boards. He has set his saw. He begins at one end of the mark on the board. But he does not know that his seven-year old son has tampered with ...

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Let us say that a carpenter wishes to cut fifty boards for the purpose of laying the floor of a house. He has marked his boards. He has set his saw. He begins at one end of the mark on the board. But he does not know that his seven-year old son has tampered with the saw and changed its set. The result is that every board he saws is cut slantwise and thus unusable because [the board is] too short except at the point where the saw first made its contact with the wood. As long as the set of the saw is not changed, the result will always be the same.-- Cornelius Van Til

I first read this in the summer of 1963. I spent the academic year 1963/64 studying under Dr. Van Til. I have never forgotten this analogy. Just as a sharp buzz saw cannot cut straight if it is set at a crooked angle, sharp people cannot think straight if they are set at a crooked angle. You can sharpen a crooked buzz saw ever so precisely. It will still not cut straight. The same is true of intellectual defenders of obvious nonsense. This analogy has served me well ever since.

Over the years, I have become convinced about just how well this analogy applies to Keynesians.

Keynesians have above-average IQs. Sometimes they are mathematically skilled. They graduate from institutions of higher learning with advanced degrees. Yet becoming a Keynesian intellectually incapacitates the person who has chosen this intellectual career path. He must become a defender of obvious nonsense. The more rigorously that a Keynesian trains himself to defend the system, the more crooked he cuts, conceptually speaking.

Keynes's One Big Idea

John Maynard Keynes offered only one central idea: Government spending overcomes recessions by increasing consumption. This was an ancient error in 1936, the year that The General Theory was published. He dressed up this ancient error with incoherent jargon. His disciples then added irrelevant equations and superfluous graphs.

Keynes never bothered to deal with this crucial question: "Where does the government get the money that it spends into the economy?" This remains the crucial question that Keynesians need to answer. Yet for all of their equations, for all of their incomprehensible jargon, and for all of their rhetoric, they never face this question.

It is such a simple question. It has a simple answer. A government can obtain money from only three sources: taxation, lending, and monetary inflation. There are no other sources.

National governments run massive deficits most of the time. They certainly run massive deficits in depressions and recessions. So, they do not get all of their income from taxation. If they did, they would not run deficits. Keynesians understand that raising taxes in a recession would depress the economy. So, Keynesian policy-makers recommend that the national government borrow money. From whom? Either from the private sector or the central bank.

To believe that government borrowing increases wealth is to believe that politicians and salaried bureaucrats are wiser spenders than money-owners are -- people who invest their own money. This is a universal belief among Keynesians. They trust the short-term economic judgment of people with no skin in the game. They trust people who spend other people's money.

In short, they trust people like themselves: salaried anonymous bureaucrats who are immune from public scrutiny. They cannot be fired because of the failure of their recommendations.

I prefer to trust the free market, which is guided by competitive monetary bids of people with skin in the game. If they guess wrong, they lose money -- their own money, not yours and mine.

What about you? Which system do you trust?

Private Investing vs. Government Spending

Here is an obvious question that free market economists should ask Keynesians directly, but they never do: "What would the lender who lends money to the government have done with his money had he not lent to the government?" It is a simple question. It has an obvious answer: he would have invested it. The lender was not going to use his money on consumer goods. He owns lots of goods. He does not need lots more goods.

Furthermore, people in a recession cut back on their consumer spending. This is true of rich people, upper-middle-class people, middle-class people, lower-middle-class people and even poor people. Rich people see investment opportunities: capital goods selling at fire-sale prices. The rest of the population gets scared. So, most people put their money in the bank. What does the bank do with the money? It does not put it in a vault, drawing no interest. It buys investment assets. It may make loans to consumers, but consumers tend to be frightened in recessions. They cut back on debt. Maybe a bank makes loans to consumers who want immediate spending, and therefore who run up their credit card debt at high rates. But, as a group, they borrow too little to make a difference for the overall economy. There are not that many of them.

The Pareto 20/80 distribution curve of wealth tells us that the vast majority of any nation's wealth, approaching 80%, is owned by the top 20% of citizens. This was true when Vilfredo Pareto made the discovery in the 1890's, and it remains true today.

Most productivity comes from about 20% of the population. Therefore, most of a nation's wealth is owned by this same group. Most of a nation's income is directed into the bank accounts of this same group. This should come as no surprise. The reason for this was explained over two centuries ago by J. B. Say in his famous law: "Production creates its own demand [assuming no government-enforced price floors]." Keynes, more than any other economist, rejected Say's law. The General Theory is an incoherent tirade against Say's law.

The General Theory really is incoherent. If you don't believe me, try to read it. This is why it is rarely quoted except by critics who cannot resist quoting obvious nonsense. No one cites Keynes verbatim in order to win an argument. That is because you can't win an argument by citing incoherent jargon and obvious nonsense.

The man who persuaded the academic world to adopt Keynesianism was not Keynes; it was Paul Samuelson. This began in 1948, when his lower-division college textbook, Economics, was first issued. It has never been out of print. Every edition from 1961 to 1976 sold about 300,000 copies. It is in its 19th edition. It has been the most successful college-level textbook in history. It made Samuelson a multimillionaire from book royalties. It was Samuelson, not Keynes, who became the pied piper of classroom economics. But he was a reverse pied piper. He did not lead the plague-infected conceptual rats out of the afflicted community. He led them in from impoverished villages across the mountains.

Here was Samuelson's assessment of impact of The General Theory. He wrote a laudatory essay in 1946, which was published in the arcane journal, Econometrica. He wrote clearly and forthrightly, which has never been Econometrica's style.

Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation, bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares' nests or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius.

It was not a work of genius. It was a work of conceptual self-deception. It was defended with verbal incoherence. It was Samuelson's self-appointed task to try to make a silk purse out of this sow's ear. He persuaded three generations of academic economists that they have wisely (and profitably) devoted their lives to promoting massive government debt that cannot be paid off and will not be paid off.

Ludwig von Mises correctly characterized Keynesian economics in 1948, the year of Samuelson's textbook: the economics of stones into bread.

Four Questions, Then Two

You don't have to have an IQ above 100 to be able to torpedo Keynesianism. You just ask these questions.

1. "Where did the money come from that the government spends into circulation?"

2. If the government runs a deficit, which is what Keynesians recommend in recessions, it did not get all of its money through tax revenues. "Did the borrowed money come from private lenders or from the central bank?"

3. "If the money came from private lenders, what would the lenders have done with their money if they had not loaned it to the government?"

4. If the money did not come from private lenders, then it must have come from the central bank. "How does money created out of nothing create wealth?"

These are really two questions. (1) "What would lenders to the government have done with their money if the government had not offered the promise of guaranteed repayment?" That money would have been spent either on consumption or production. This raises a second question: (2) "Why would either of these options be worse for the economy than spending by government bureaucrats?"

To understand the fallacies of Keynes, you don't need to understand equations, graphs, and jargon. You just need the ability to follow an argument based on this principle: there is no such thing as a free lunch. Put differently, you cannot get bread out of stones.

Keynesian economists are not skilled in the use of logic, let alone responding coherently to it. They are trained from their Economics 1 course until the day they retire from college teaching not to reason from obvious premises to economic conclusions. They get no tenure consideration for arguing coherently without equations and graphs. They are probably going to be penalized if they attempt to do this. Graduate students in economics learned this fact of academic life no later than their senior year in college. If they did not learn it, their grades would not have been sufficiently high to get them into grad school.

Keynes's War on Thrift

Keynes became famous for his criticism of thrift. What he criticized was thrift in the private sector. Thrift was great as far as he was concerned if the thrifty person bought government bonds, and the government then spent the money on anything. You think I exaggerate? Here is a direct quote from Keynes' General Theory.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing( p. 129).

Here is what he wrote on page 220.

In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies went to live in pyramids to shelter them after death, or, repenting of their sins, erect cathedrals in and down monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. Quote to dig holes in the ground, unquote paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.

Notice that he did not call for millionaires to invest. He called on them to spend. He did not ask them to direct their money toward production: he directed them to spend their money as fast as possible. It is spending by millionaires on consumption, not the savings of millionaires for future consumption by others, that is the key to wealth creation in the mental universe of Keynes and his disciples.

Keynes called on governments to spend on public pyramids and burying bottles of money because he did not trust the millionaires to keep spending on mansions and their own personal pyramids. He knew they would invest in capital goods. He attacked the idea that millionaires could benefit the economy by saving and investing in the private sector. His book is dedicated to a refutation of investing during a recession. The entire Keynesian movement, which dominates academia and policy-making today, rests on this intellectual premise: "Consume, don't invest, during recessions."

Why would millionaires trust the government with their money? Because the government promises to guarantee the return of their money. But why should millionaires believe this promise? Because governments back up this promise with the threat of violence. Governments have the power to send tax collectors into people's homes and stick guns in their bellies. "Hand over your money," says the man with a badge. Governments come before millionaires and say this: "We sell promises to return your money. We can guarantee this because we have the power of taxation. Therefore, you can be certain that you will get your money back. You have our word. What's not to trust?"

Present Orientation and Class Position

Keynes was the defender of present-orientation. He was the defender of "consumption now." He was, in this sense, a defender of lower-class economics. Edward Banfield, a Harvard political theorist in the late 1960's, wrote a section on lower-class and upper-class attitudes in his book, The Unheavenly City (1968). He identified lower-class thinking as present-oriented. The lower-class person thinks little about the future. Lower-class people want to consume now. They borrow at high interest rates in order to get this consumption. Upper-class individuals are the opposite. Keynesian economics is a defense of lower-class economics.

Anti-Keynesian economists in universities dare not use this kind of rhetoric against Keynes and Keynesians. They would not get tenure if they used it early in their careers. They would not be published in mainstream, tenure-generating academic journals. They would become pariahs. Fortunately, I am not part of academia. So, I can call a spade a spade. Keynesianism really is best encapsulated in the famous phrase by Keynes: "In the long run, we are all dead." In the meantime, Keynesians give this advice to politicians: "Borrow and spend, inflate and spend, monetize government debt, and never pay it off."

Keynesian economics is the economics of debt-addicted, lower-class spendthrifts: modern governments.

Keynesians are apostles of big government. In his concluding remarks in his 1946 article on Keynes, Samuelson wrote:

With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum. This is the sum and substance of his heresy. Again and again through his writings there is to be found the figure of speech that what is needed are certain "rules of the road" and governmental actions, which will benefit everybody, but which nobody by himself is motivated to establish or follow. Left to themselves during depression, people will try to save and only end up lowering society's level of capital formation and saving; during an inflation, apparent self-interest leads everyone to action which only aggravates the malignant upward spiral.

The message is clear. "Left to themselves," people cannot be trusted with their own money. That would mean resource allocation by the metaphorical invisible hand of the market's process of voluntary exchange. Keynesians prefer to trust the economy to the palsied hands of tenured bureaucrats and the grasping hands of elected politicians, who want access to other people's money in order to buy votes from special-interest groups.

I would rather live in an economy governed by the invisible hand of the free market than in an economy governed by the palsied hands of government bureaucrats and the grasping hands of politicians. I would rather live in an economy in which customers are in authority rather than politicians and bureaucrats. Customers spend their own money. Politicians and bureaucrats want to spend my money. I resent this. I can spend my money more wisely than politicians and bureaucrats can. Keynes did not believe this. Neither did Samuelson.

The free market economy is governed by the sanctions of profit and loss. The Keynesian economy is governed by the sanctions of badges and guns. I recommend the former: greater personal liberty and greater per capita wealth.

Conclusion

Keynesian economics is counter-intuitive. It was answered, line by line, by Henry Hazlitt in his coherent and devastating critique of Keynes: The Failure of the "New Economics." It was published in 1959. It sank without a trace. Why? Because it was hostile to the prevailing climate of academic opinion. Also, it was easy to read. That is always out of fashion in academia. Fortunately, it is available today from the Ludwig von Mises Institute. You can even download it for free. It is 450 pages long. Yet even Hazlitt, for all of his penetrating insights written in the vernacular and devoid of equations and graphs, did not boil down his critique into two simple questions.

This is odd. The heart of his classic book on economics, Economics in One Lesson (1946), was this insight: the fallacy of the thing not seen. The book calls on readers to ask this question: "What would property owners have done with their money if they had not suffered violence?" This is the question that undergirds my two questions.

1. "What would lenders to the government have done with their money if the government had not offered the promise of guaranteed repayment?"

2. "Why would this have been worse for the economy than spending by government bureaucrats?"

Keynesians never answer these two questions in anything resembling common language. That is because they cannot answer it this way without sounding ridiculous.

Keynesianism is a long parade of would-be emperors without clothes. They attempt to cover their conceptual nudity with academic fig leaves: equations, graphs, and jargon. This was Keynes' strategy. It was also Paul Samuelson's.

These men are the wizard of Oz. They are, collectively, the man behind the curtain.

Call me Toto.

Toto did not complete the procedure. Pulling back the curtain was step one. He should have completed the procedure by lifting his leg on the wizard. That is what humbugs deserve whenever they impose economic quackery with deception backed by government power.

In the movie, the now-unemployed wizard departed from Oz by ascending in a hot-air balloon. The junior wizards of Keynesian economics will not find their departure so easy. They hold their tenured positions in governments and universities, isolated and secure from downturns in private labor markets. But the day is coming when governments around the world are going to default on their economic promises to the voters. Keynesians will be called upon by politicians to provide justifications for this default, and also provide explanations showing why it is not really the governments' fault. It is the free market's fault. When they attempt to fulfill their role in public affairs as court prophets, defending massive government failure in the name of Keynes, they will be seen by the enraged public as intellectual laughingstocks and charlatans.

They have always been charlatans. They should have been laughingstocks. I recommend patience. The day of fiscal reckoning draweth nigh.

This essay first appeared here at GaryNorth.com.

Gary North
Gary Kilgore North (born February 1942) is an American Christian Reconstructionist theorist and economic historian. North has authored or coauthored over fifty books on topics including Christian theology, economics, and history. He is an Associated Scholar of the Ludwig von Mises Institute.

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