Keynes and Hayek are both dead, and wrong

Despite the fact that both John Maynard Keynes and Friedrich August Hayek are dead, their ideas are very much alive today and form the basis of whether governments chose austerity or stimulus as a way out of our current economic crisis.

Both men were brilliant and arguably had people listened to their opinions before the Great Depression that started in 1929, the Depression and the Second World War would not have happened.  Modern politicians are listening to their opinions now in the hope of preventing our Great Recession from turning into a second Great Depression.  This is a mistake.

Before History Future Now explains why it is a mistake, it would be useful to provide a very quick primer on who these men were and an elevator pitch on their policies.

Friedrich August Hayek

Hayek was born in Vienna in 1899, while is was part of the Austro-Hungarian empire.  He died in Freiburg Germany aged 92, in 1992, having seen the First World War, the rise of communism in Russia, the boom of the 1920s, the Great Depression, the rise of Hitler and the Second World War, the Cold War and the end of the Soviet Union.

After a stint as an artillery spotter on the Italian front in WW1 he ended up in the late 1920s as the founder and director of the Austrian Institute for Business Cycle Research, where he wrote pretty dry papers on economics.  One thing that he did write of note was a prediction of the great Wall Street Crash in late 1929 by arguing that low interest rates fixed by the Federal Reserve Bank (then a relatively new institution) encouraged speculative borrowing on property and on the stock market.  He later joined the LSE in London, became a British citizen, and wrote his classic book “The Road to Serfdom”, which was published in 1944.

Contrary to the belief of many conservatives today, Hayek did think that government had a role to play in the monetary system, how labour laws were governed, freedom of information and that it should provide some form of social safety net – including mandatory universal health care and unemployment insurance.  But that was about it.

He particularly disliked government intervention in anything that would promote one industry over anything else and really disliked the use of interest rates to manipulate a currency. He believed that artificially low interest rates were likely to cause bubbles.  The best way to stop economic crashes was to stop the bubble from emerging in the first place.

Since governments like boom periods, as it makes them more likely to be reelected,  it was always going to be tempting for a government to keep interest rates low to encourage borrowing and thus growth.  It is for this reason that so many conservatives are attracted to his theories today: our boom since the 1990s has been based on generally low interest levels which have fuelled a huge bubble in property and stocks.  Has we listened to Hayek we might not have been in this mess.

John Maynard Keynes

Keynes was older than Hayek and was born in Cambridge in 1883, at the height of the British Empire.  He died young, 62 years later in 1946.  Wildly considered a genius and intimidating to talk with, he generally an optimist, perhaps linked to a happy childhood and thought that all problems could be solved if you worked hard enough at them, something that he picked up from Eton and Cambridge.

At the start of the First World War he joined the British Treasury.  It was his work at the Versailles Conference, however, which really set him apart as a visionary.  He tried, unsuccessfully, to persuade the French and British governments not to impose huge war reparations on Germany and Austria as a punishment for the war.  He argued that this would destabilise the country and would eventually result in a new war.  He wrote in The Economic Consequences of the Peace in 1919 that:

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,–abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.

And that:

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.

Whilst it was his views about reparations that showed him to be a visionary during his lifetime, it was his views about the role of government intervention in an economy that make him so influential today, 66 years after his death.

He argued that to stop the unemployment crisis of the 1920s in Britain the UK should depreciate the pound stirling and go off the gold standard to make British exports more competitive.  He also argued that the government could stimulate the economy by borrowing now to pay for public works today.  He was not particularly bothered where the money was spent – it was the act of spending that would stimulate the economy and get people working again, through the concept of the multiplier effect.

In 1933, as the Great Depression was at its peak, he wrote a book called The Means to Prosperity which detailed his thoughts.  Sweden and Germany picked up on his ideas and Hitler’s use of public spending to get Germans back to work was ultimately very successful and embarrassing at the same time.

The US also underwent stimulus measures, but it was arguably the Second World War which proved that huge government spending could pull an economy out of a recession.  Big government was now popular and many in the UK took on Keynes’ idea of government spending to an extreme that he had not envisaged: spending not to get out of a recession but just spending all the time.

Keynes early death in 1946 meant that his ideas could not be refreshed by the man himself and by the late 1970s he was widely discredited.  Thatcher and Reagan were great lovers of Hayek.  They saw government as the problem, not the solution, and called for the rapid retreat of government from the economy.  Deregulation and privatisation were their calls to arms.

Since the 2008 crisis, however, governments have jumped back onto the Keynes bandwagon with great enthusiasm: the combination of currency devaluation (quantative easing or printing money) and huge public spending are policies that Keynes had advocated in order to get ourselves out of the Great Depression in the 1930s.

Summing up their positions

So, to sum up their two positions:

Hayek thought that government meddling, such as in the form of low interest rates, was the cause of bubbles and that bubbles ultimately resulted in crashes once people, companies and governments realised that they had become unsustainably large.  It is hard to argue with that.

Keynes thought that once you had a recession workers would not willingly reduce their cost of labour (they had fixed costs of their own – like housing and food)  and so the only way you could rapidly pull your country out of a recession was to borrow money to pay for public works that would stimulate demand.  The general feeling of well being that resulted from that would then encourage workers to spend money on other activities (the multiplier effect) which would then generate more demand, and more feelings of well being.  Once demand had been sufficiently primed, the government’s need to stimulate the economy would recede and increased tax revenues from the primed economy would then pay off the debt that had just been accumulated for the stimulus.  It is hard to argue with that either.




So why are they both wrong?

The policies that both Hayek and Keynes proscribed do not work in our historical period and context.  As such, they are wrong and political leaders are wrong to rely on solutions that might have worked when they were thought up over 80 years ago.

Hayek’s problem is that his solution does nothing to get us out of our current predicament.  When the  US investment banking sector imploded in 2008 Hayek’s position would have been to do absolutely nothing.

It is galling to see investment bankers make so much money in good times, and the fact that their losses were taken over by the general public through bailouts makes the system doubly unjust.  Private sector profit and public sector losses.  That seems a prescription for gambling and Hayek would have criticised this and rightly so.

But doing nothing had the real possibility of creating a financial domino effect where even well run, conservatively managed companies would have been forced into bankruptcy as people who owed them money were unable to pay and as banks called in their loans.  The possibility of the entire economy being wrecked was real.

Hayek’s usefulness is in providing us guidance about how to reduce the likelihood of future booms, and thus eventual busts.  But even here he is in a weak position.  Voters like to see their politicians “do something” and solve problems. Politicians like “doing something” as well as it justifies their existence.  In the US, electoral campaign funding by the private sector requires politicians to “do something.”  The chances of a political system allowing little government intervention is thus low.

Keynes’ policies do try to provide a solution to the problem of the Great Recession.  He is offering more than Hayek in that regard.  But while Hayek’s policies might have stopped us from getting into the situation we are now in, Keynes’ solution does not work for the West today.  The main reasons for this is due to demographic, environmental and balance of power changes.

Keynes grew up in a world in which there were just over 1.5 billion people.  By 1930 there were 2 billion people.  Today there are over 7 billion people.  In 38 years there will be 10 billion people.  The good thing about an increase in population normally is that people stimulate the economy, and more people are able to pay of debts faster than fewer people.

But in the West, this demographic bonanza does not exist. Most European countries have birth rates that are well below replacement levels.  The financial crisis is likely to exasperate this as women hold off having children.  In addition, the population of the West is much older than when Keynes was alive.  He died aged 62.  This was not unusual for his time, but is very young today.  What this means is that societies in the West have increasingly large numbers of adults that are retired and of pensionable age.  They contribute little in terms of taxes but take out significant sums from the economy in the form of pensions and medical care.

Simultaneous to this, the number of young people in employment has dropped significantly.  Due to educational aspirations set in the 1980s and onwards, more young people are in higher education.  This means that they contribute little in terms of taxes but take out a significant amount in terms of education and maintenance support.  Theoretically, once they have graduated they should be able to get higher wages, resulting in higher tax receipts.  However, youth unemployment is over 25% across the European Union on average, with rates of over 50% in Greece and Spain and over 30% in 1o EU countries.  Unemployment rates for university graduates are also very high.

So unlike for Keynes, who could count on a growing young population and a small old population, the West today has a shrinking overall population, a growing older population and an economically crippled younger population.  This is a problem for Keynesian macro economic theory.  As the West borrows more money for one stimulus package after another the overall debt level and interest levels rise.  This debt burden then falls onto a population that is demographically unable to pay the debt down.

The second issue is environmental.  Born in 1883, Keynes lived in a world of expanding material wealth with resources that were being unlocked from the earth after being hidden away since creation: coal, oil, gas, minerals, forests and new agricultural land were being opened up.  New technologies expanded productivity of farming on land and new fishing vessels brought in catches from the deep blue oceans.  Had he lived a few more years he would have been able to see a world of passenger jets that could bring cargoes of fresh fruit and flowers from the southern hemisphere to the northern hemisphere.

Today the opposite is true in nearly every respect.  We are living in an environmentally constricting world.  Oil and gas have either peaked or are about to peak, before they enter their long downwards slide.  Farming productivity has shrunk, despite ever increasing amounts of oil and fertiliser inputs.  Grand irrigation programmes that unlocked the great plains of the Mid West in the US are facing extinction as the underground aquifer water runs out over the next 25 years.  Our forests have been cut and ploughed over.  Global fish stocks have dropped over 80%.  Global warming will exasperate and accelerate these environmental problems.

The reason why this is an issue is that it is much harder to grow when your resources are declining.  The adage that “a rising tide lifts all boats” is also true of the economy.  With a resource boom, it is easier to pay off your debts at a later stage.  But as the tide goes down, as our resources decline, the opposite is also true.

Finally, the balance of power of the world is radically different.  When Keynes and Hayek were growing up Western powers utterly dominated the world.  There were struggles, but all the struggles were between Western powers.  The West not only dominated in manufacturing – forcing the non western world to buy their goods – but also dominated in resources – its imperial colonies providing the raw materials for the West’s consumption.  This dominance created great wealth and jobs.

The end of the Cold War opened up the non aligned world to trade.  In the same way that the US had blossomed economically out of the rubble of post Second World War Europe, dominating in a way that it had been unable to before the War, the West blossomed after the end of the Cold War, rushing into markets in Eastern Europe, India and China.  But this opening up also awakened economic spirits that had lain dormant for hundreds of years.

Trillions of dollars of investment flowed into new emerging markets.  New roads, bridges, ports, power stations and factories were built.  New schools and universities churned out thousands of well educated and keen workers.  Western media showed these people of the lives that they could aspire to once they grew economically.

And so they did.  And in doing so they started to pull in the jobs that once had been done by Western workers by the millions.  First they peeled away low end manufacturing jobs.  The West was happy to lose them – they were dirty and undesirable.  Then they peeled away mid level jobs.  The West was still ambivalent, but getting concerned.  Then they peeled away high technology jobs, from aircraft manufacturing and high speed rail to solar photovoltaics and wind turbines.

Which causes an additional problem for Keynesian economics.  Countries borrow today in order to stimulate an economy so that domestic workers feel more confident.  They then spend more money, which makes other domestic workers feel more confident.  Eventually the economy is sufficiently confident that the stimulus can be removed and increased taxes can pay the debt that was incurred in stimulating the economy.

And this is the problem.  The stimulus money may provide more cash.  But will the cash be spent on Western products, or will it be used to buy cheaper products from abroad?  In a recession companies are likely to want to keep costs down, prompting them to buy cheaper products from abroad. That means that the stimulus cash is not making western workers feel more confident.  They then spend less, not more, either because they have no job – it has been outsourced – or they save, wondering if they will lose their job to outsourcing next.  Thus the stimulus package can get bigger and bigger, without any impact on the domestic economy – this is why we are getting a jobless recovery.

At some point, the borrowing has to stop.  The US Congressional Budget Office (CBO) expects that by 2025 US interest payments on debt combined with Medicare, Medicaid and Social Security will be so large that they will theoretically consume 100% of all federal tax income receipts. That is only 13 years from now.

So if Keynes and Hayek are wrong, what should we do?

Future History Now has started to offer solutions and has written about many of them.  Here are three:

To get our debt levels down, we need to go through a period of inflation. That makes the absolute amount of debt relatively easier to pay.  Inflation can be managed by printing money.  Unlike the Germans and Austrians after the First World War who did not really understand the consequences of uncontrolled printing of money and its likelihood of causing destabilising hyperinflation, we do.  We should be able to inflate just enough to speed up the reduction of debts to manageable levels without going into a hyperinflation nightmare.  The advantage of inflation over debt defaults is that the accounts add up and you dont need to take write downs which can have destabilising impacts on the economy. See here for more detail.  

Global free trade should be abandoned, replaced by regional free trade within regions of similar economies.  If you want to sell products into those regions you would need to create factories and jobs in those regions.  Trade between regions should be allowed, encouraged, but controlled.  This achieves two objectives.  First, any stimulus money that is paid for by the government, and thus taxpayers, gets spent in country (or  at least in region).  This means that the jobs that the stimulus funds generate get created in country, contributing to a sense of well being, making citizens spend more, in country, creating more jobs in country and thus increasing the tax base required to pay off any debt.  Second, it forces companies outside the region to relocate their factories and service jobs within your region if they want to be able to sell to you.  This creates jobs in region directly and also jobs indirectly as service jobs are created to support the activities of the factories. China actively pursues this policy already, to the benefit of its citizens.  We should follow their lead.  See here for more detail. 

We should stop exporting cash overseas unnecessarily.  The US has a trade deficit of over $400 billion per year with China, India, Taiwan, Japan and South Korea alone.  It spends an additional $137 billion per year on its Pacific fleet, which is mainly used for ensuring freedom of the seas between the same countries with whom it has a $400 billion trade deficit.  In the Middle East, the US spends $235 billion per year on average on its Persian Gulf fleet and has spent an additional $2.6 trillion between 2001 and 2010 on military involvement in Iraq and Afghanistan. It has done this to support the oil that it imports from the region, which only adds up to 19% of its imports but costs more than 2.5 times the remaining 81% of its imports.  If the US were to spend its budget on the Persian Gulf fleet on solar photovoltaics at home, it could provide free electricity equivalent to the entire electricity consumption of the United States every year.  This would support hundreds of thousands of jobs at in the US.  See here information on the US military budget and here for how the exact calculations were made.

Keynes and Hayek were brilliant men and gifted thinkers.  Their policies, had they been listened to, might have prevented the rise of Hitler (Keynes) and stopped boom and busts (Hayek).  But they are dead.  And the era in which they lived and that they thought about is over as well.  Had they been alive today they would have adapted their thoughts to fit with the new reality.

Our politicians must stop thinking of them as Gods, enlightened beings that they should listen to blindly.  Politicians should understand that the world has changed and that they need to adapt their policies accordingly.









  • Tristan Fischer (@tristanfischer)

    Hayek & Keynes are dead.Had they been alive they would have adapted their ideas.It is time we stopped blindly following

  • Paul Lewis

    price fixing central planning banking/government cartel is the problem same as it ever was

    depressions their cause and their cure

    Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s — a time, just like today, when economists and politicians, armed with a “new economics” of perpetual inflation, and with new “tools” provided by the Federal Reserve System, proclaimed a perpetual “New Era” of permanent prosperity guaranteed by our wise economic doctors in Washington. Ludwig von Mises, alone armed with a correct theory of the business cycle, was one of the very few economists to predict the Great Depression, and hence the economic world was forced to listen to him with respect. F.A. Hayek spread the word in England, and the younger English economists were all, in the early 1930s, beginning to adopt the Misesian cycle theory for their analysis of the depression — and also to adopt, of course, the strictly free-market policy prescription that flowed with this theory. Unfortunately, economists have now adopted the historical notion of Lord Keynes: that no “classical economists” had a theory of the business cycle until Keynes came along in 1936. There was a theory of the depression; it was the classical economic tradition; its prescription was strict hard money and laissez-faire; and it was rapidly being adopted, in England and even in the United States, as the accepted theory of the business cycle. (A particular irony is that the major “Austrian” proponent in the United States in the early and mid-1930s was none other than Professor Alvin Hansen, very soon to make his mark as the outstanding Keynesian disciple in this country.)

    What swamped the growing acceptance of Misesian cycle theory was simply the “Keynesian Revolution” — the amazing sweep that Keynesian theory made of the economic world shortly after the publication of the General Theory in 1936. It is not that Misesian theory was refuted successfully; it was just forgotten in the rush to climb on the suddenly fashionable Keynesian bandwagon. Some of the leading adherents of the Mises theory — who clearly knew better — succumbed to the newly established winds of doctrine, and won leading American university posts as a consequence.
    Posted by Paul Lewis

  • Peter Boyce

    Tristan these are great observations around the manner in which theories can be simultaneously informing and misleading. Your suggestions for alternatives in the West are both interesting and useful, but of course, with qualification. For example, whilst restricting tax payer stimulus to local investment makes short term sense, it will have unintended effects of global trade policies and attitudes. Whilst inflation does deflate debt, it has unintended effects on giving people an inflated sense of their wealth, adjusting their spending patterns accordingly. “Herding the cats” of economic forces in an increasingly complex task for which either / or solutions are probably inadequate in my view. “Both and”, calibrated and timed to stimulate and retard is more likely to provide a road out, with migration, technological advancement and many other forces all making a contribution to navigating a solution.
    Posted by Peter Boyce

  • Simon MW

    That they are ‘dead’ is a curious consideration and an irrelevant one. Ideas are eternal. In what sense is Mozart dead?

    Schumpeter was right. I believe you badly underestimate the usefulness of ‘the entire economy being wrecked’ precisely because it would not be. Gresham’s Law applies. Instead, let the good men come forward. Many of them would be the formerly struggling same men.

    Hayek was wrong, but only in that he thought it could be possible to establish a ‘constitution of liberty’ which would withstand the executive.

    (Jefferson was wrong, but only because he thought the electorate could be educated into making democracy safe.) We should be very aware of these errors by great men who strived to secure liberty.

    To understand what has happened, the essential thing is to study man as a zoological specimen. Of course the specimen strongly resists that. The cause of the current debacle is never discussed for example in the FT (which is infatuated by economists).

    Universal suffrage democracy failed because of two factors: a) the lazy, unproductive majority discovered it lay within their power to live off the busy, productive minority because, b) politicians, for all the well-known reasons of public choice, popularity, electability and self-aggrandisement – allowed them to do so. These are the same reasons why politicians have always debauched the money supply (I understand you to be in favour of this). In all this, politicians have been ably supported by bureaucrats, lobbyists, special interest groups etc., again, with their own interests at heart at the expense of the general interest.

    Unfortunately, you cannot row back from universal suffrage; a sacred cow if ever there was one. Therefore we have coalesced coalitions. (Romney’s words may not have been presidential but they were true in the general sense (above) and I loved the hypocritical raving about it by politicians who spend all their time scrambling for the median voter!) In the UK, socialist party A and B. In America the same. This doleful situation will continue ad infinitum.

    It is really very simple. Politicians need to study success, not failure, however attractive to their self-interest the latter may be. Here in the UK, the fact that people study Anthony Blair, formerly First Lord of the Treasury (failure) instead of John Cowperthwaite (rip-roaring success) is indicative. (How interesting it is, a aside, that the most successful, prosperous and happy place in the last 100 years was not a democracy; what does that tell us… I digress).

    The disaster is the career politician. Instead, we need politicians (some hope) who say ‘this is what I believe. If you don’t like it, don’t elect me; I have a thousand better things to do.’ And what should that ‘this’ be? It’s pretty simple! I suppose the PM could call a press conference and proudly announce that henceforward the country would be a tax haven, and one of the very best ones. To that end, 50% of government would be abolished over the next 10 years. Then he could take early retirement saying, over his shoulder as he left, ‘I don’t give a damn what you think.’

    Specially for you, Tristan, I have draw up a list of principles of national success (even though I am in no way a nationalist; I like the physical British Isles not the political one! And the Opening Ceremony was a joke. Personally, I thought it had been choreagraphed by North Korea. As for the paeon of praise for sovietised healthcare, I am beyond words. The country is utterly lost. That poor MP, now probably getting death threats, was dead right. Etc.).

    As I say, it’s really dead easy. OK, you have made me think. Here is what government should do:

    1. The free market, always subject to:
    2. Maintenance of competition, and
    3. The Rule of Law, especially applied to:
    4. Property rights, and
    5. Rules of contract and ‘my word is my bond’
    6. Small government, derived from:
    7.Constitutional convictions about individual freedom vs. the state, and
    8. An understanding and teaching of the perverse incentives of the economics of government, ie state expansion, profligacy and self-aggrandisement, and therefore:
    9. Restricted, uninteresting and ill-paid openings for career politicians, and
    10. Probity in public office
    11. Low taxes, enabling:
    12 Ease of starting and running a business because there are also:
    13. Few barriers to business internally, specifically avoiding bureaucratic rent-seeking, big special-interest lobbying, impediments to employment, state monopolies, cartels and onerous or self-interested licensing, and
    14. Few barriers to business externally because global free trade is both practised and fostered internationally as an ideal
    15. The government establishes a reputation for sound money because it
    16 Eschews future liabilities from welfare Ponzi schemes, and
    17. Does not debauch the money for electoral gain
    18. The creation of, and enduring reputation for, the absence of corruption.
    19. An understanding that (owing to our background as small tribal groups on the African savanna where socialism served us well) socialism comes as naturally to humans as preferring the opinions of popular gregarious groups, unwarranted prejudice or leaning in to the hill when ski-ing but must be resisted in a new, globalised world of 9.5B within a few decades or all liberty is lost, and therefore
    20. Socialism does not need to be taught in in higher education but the well-springs of liberty definitely do. In particular, all students should emerge from further education with a working knowledge (even if they profoundly disagree) of Thomas Jefferson, Hayek (Austrian School), Friedman (Chicago School), Bastiat, Henry Hazlitt, von Mises, Rothbard and Rand. Only in that way can a knowledge of what is now ‘the dark side of the moon’ be illuminated.

    Now of course it is tempting to add a welfare state which (in the words of that great historian Conrad Black) is a safety net, not a hammock. But I am in two minds about that. Beveridge was right (and would be appalled at what has happened). But people spend money more wisely than governments (which is why it is both moral and ethical to live in Monaco if you can afford to) on their families, their businesses and philanthropy. I think government input here really should be the safety net.

    Otherwise from the above, the government just applies the greatest self-restraint and gets right out of the way.

    Yesterday I met someone, not a zombie or a parasite, but who actually worked for a company which made things and sold them (United Technologies). I nearly hugged him. It was the first in Gloucestershire in months.

    I am now rather exhausted with this effort. I am going to lie down and read a bit of Jefferson which always brings a sunny feeling: repairs to Monticello. No repairs to the UK or US are possible. No disrespect to Paul Ryan, but I’m afraid he’s too late. We have forgotten how to be free.

    • Tristanfischer

      Points 1-13 I agree with. 14 I do not. Completely unfettered free trade provides advantages to countries with lax environmental standards, employment standards and low cost labour. I don’t want to live in a country where we are forced to create significant social inequality, a terrible environment and bad labour conditions just so I can get a cheaper T-Shirt. 15-20 I can also agree with.

    • vanyam

      Simon, you saved me from writing such a lengthy commentary, as I agree with 95% of what you wrote. What I’d like to add to it is emphasis on a few key points and to expound a little.

      1) Corruption- In business and in government, the larger the entity, the deeper and more systemic the corruption. Example: The Washington Beltway Boys/Girls have a term they like to use for “influence” when writing legislation. Here is America we call it “lobbying”, but in Rome, Moscow, Brussels or Buenos Aires they call in “bribery”. “Lobbying” has been used as a cleansing agent for one the the most anti-business, anti-freedom, anti-progress, anti-peace practices known to man.. CORRUPTION.

      In Washington, our Duopolistic cesspool has regurgitated the same sweet sounding rhetoric for many decades, meant to lull citizens into selecting Meatloaf A candidate over Mystery Meat B candidate on the prescribed electoral menu. Until we call this scam what it is, it does not matter how our economic factors are tweaked or manipulated by economic “geniuses”. Our country has terminal political cancer, and the political parasite will kill the citizen patient until we expose the root of the illness.

      We are run by an oligarchy not much different than Moscow today. We have seen our businesses and jobs transferred to Red Communist China through the “partnership” of corporate leaders and legislators, and considering the fact that I may do jail time for attempting to set up a shoe factory in Cuba, North Korea, etc. BECAUSE they are Communist dictatorships, tells me that our unholy business partnership is treasonous on a grand scale. Cheap shoes made for $3 in Shenyang are being sold in LA for $100
      and enriching multinationals which still paste their American brand name on their products. Pick a retailer in America, look for the traditional brands you have always trusted, and read the label. Hardware, clothing, electronics, foods, etc etc etc… Made in China.

      Bridges being built in America at this exact moment… Chinese contractors. WE have been sold out in America by the very government which promises to provide better services. The only logical solution, in my opinion, is to promote a “Donald Trump” moment in US politics (from the Apprentice) YOU’RE FIRED!!! Top to bottom, R to D, agency to agency. Get the parasites out of the Beltway, remodel the “main office” in DC and install a very large crystal clear picture window for transparency. A mandate for extreme punishment for legislators involved in this corruption.. perhaps long term prison sentences or capital punishment for effecting millions of lives through back handed political schemes.

      There must be severe penalties imposed for manipulating the public lifestyle through the games that have been played. Anything less than a thorough diagnosis of our corruption followed by a systemic removal of the offending polito-parasites will give us nothing more than bandaid upon bandaid, and continuing failure. This global political-industrial-financial infection is killing us.

      • Tristan Fischer

        Dear Vanyam – I fully agree with your points about corruption. Corruption is so endemic in the US political system that they don’t call it corruption anymore, rather “lobbying”. Companies donate to political campaigns on the expectation that they will get something in return. It is not direct, old school style bribery with money in brown envelopes. Rather, it is payment for access, preferential treatment and getting laws passed that will help the corporate. The politician benefits as they get re -elected and can end up in a nice lobbying role when they step down. Fortunately, the money requirement in the UK political system is very low and this helps keep this kind of corruption at bay.

  • Simon MW

    Also I vehemently make the point that to ask a solution of Hayek and the Austrian School after the event is some chutzpah; rather like swimming over to the lifeboat holding the captain and crew of a seaworthy ship where the hands have mutinied, got themselves drunk and capsized the vessel and demanding to know what the hell they propose to do now!

    The crew shakes its head and says ‘Now they ask!’. S.

    • Tristanfischer

      As I mention in my article – Hayek is great at providing solutions before the crisis, but no good after the crisis. He was right – manipulating the currency to allow an uncontrolled debt boom got us into this mess.

  • Simon MW

    I do feel the absolutely critical point about the Austrian School is that it would have prevented not merely the financial catastrophe but also the whole compounding problem of universal suffrage + politicians/public choice + demographics = slow slam into brick wall. None of it could have happened. To say Hayek has no answers now is not legitimate comment (although he does).

    However, the bond markets will take care of it. Now let me see: in the US, $16T at an interest rate of… – well, you get the idea. We’ll be able to watch it play out, unlike Hayek who is, as you have mentioned, is dead. Noticable how politicians refer to the deficit, not the debt. If I was PM, I would insist that any minister who used the word ‘deficit’ must also refer to the debt, including the off balance sheet element, in the same sentence. Let the truth be told. We can’t pay it off, ever. The PM should be on TV explaining this to the electorate who, as I am not a politician, I can accurately describe as wanting in understanding. They, of course, like it that way. Trust the people? No politician now dares to. The soup kitchens are electronic. You cannot see them. Everything’s OK.

    Saving pensioners (they will enjoy your inflation) should amass in Hyde Park in tens of millions with iron bars, march on 10 Downing Street and rip it down, ignoring the tear gas, water cannon, barricades and rubber and real bullets of our new militiarised police. Only by such means do governments learn humility. But politicians know old people don’t do that. Fair game, that’s what they are, to a career politician. S.

    • Tristanfischer

      Undoubtedly inflation is bad for people with retirement cash. But if there is no money to pay for pensions because it is all being spent on interest payments on debt then we are in a similar position.

      I fully agree about your point about the debt – nobody ever talks about paying it off.

  • Edward C D Ingram

    Unlike most scripts that I read today,there is some good sense in much of this. But I am not quite sure about closing down full international trade.

    And I also like to see just how the authors might change their thinking and the emphasis if they had studied my lessons in macro-economic dynamics and debt structures.

    The recommendation here,and indeed everywhere where a solution is proposed places the burden of the housing bubble on some sector or other.

    Here it is placed on retirement savings through inflation.

    In my solution it is placed on the people who bought houses at inflated prices because my solution enables them to afford the mortgages and it protects the wealth that is being lent to them – a bit better anyway.

    At the end of the day we need to KNOW more options and that is what I am teaching here:

    Maybe we should all study one another’s work.

    • Tristan Fischer

      Can you post for everyone what your mortgage solution is. I am curious.
      Many thanks.

    • Tristanfischer

      Why do you think we should not close down unfettered global free trade? I want to keep jobs as close to home as possible.

  • @anandvrao

    Hmmm… interesting perspective… but solutions yet unconvincing… “Keynes and Hayek were both wrong”

  • Oliver Sparrow

    The goal of economic policy in not necessarily growth, or full employment, or nil inflation; but a balance set by political priorities. Yours are clearly those of growth, but your methods derive precisely from the attitude that put us in this mess. The old political narrative – of spending our surplus on buying social tranquillity, of papering over the cracks with borrowing – was the cause of the crisis. (The proximal cause was the order to the Fannie Mae Freddie Mac duo to extend mortgages to the disadvantaged. Yes, the banks spread the $4 trillion that they lost in ways so complex that nobody could track it, But the cause was welfare spending.)

    To hoe that we can inflate our way to a happy future where everything is just the way it was is deluded, It is deluded because of the pensions crisis. The OECD has the equivalent of the entire spending of WWII ($19 trillion) of unfunded state pension commitments to handle. Anyone who has destroyed their credibility through inflation and their creditworthiness through debt is not going to surmount that cliff.
    Posted by Oliver Sparrow

    • Tristanfischer

      As with Lambros – I think that inflation as a whole is a bad thing. However, to reduce the impact of debt we will need it. You talk about pension liabilities. But if we have high levels of debt and interest payments there will be no cash available to pay for these pensions. I also think that we will not be able to afford pensions – which I have written about – even if we can reduce the levels of debt. Our demographics dont allow for it.

    • Tristanfischer

      My goal in economic policy is actually not growth, but rather good employment for the citizens of my country and my region. With good employment comes prosperity and social cohesion. That is why I advocate regional free trade, rather than global free trade. I think that the stimulus packages that we have spent has merely increased our debt burdens to greater levels. Had all the money remained in country and in region it would have been far more effective. As it was much of the spending just ended up stimulating the Chinese and Indian economies. Great for them.

      If we can inflate our way out of our current mess (which Hayek’s policies would have avoided in the first place) we can reduce the debt burden on society. That gets us out of the current crisis, but does not fix the long term problems that we have due to demographics and environmental change.

      Our pension crisis is a crisis because it is ultimately unaffordable, no matter how you fiddle the numbers. We change the pension crisis by living in a different way, but something that we have done historically.

  • Lambros Karavis

    Tristan, you advocate three things:
    1: Increase inflation by printing money in order to reduce the “real” level of debt,
    2: Abandon global free trade, realign into regional free trade, and
    3: Stop exporting cash (reduce U.S. military expenditures abroad).

    My initial instinct is to cry out “are you serious?”.

    Let’s assume you are serious about printing money to reduce debt. The government of Country “X” decides to print more money but without recourse to debt in the market i.e. without issuing bonds. Slight problem here because I cannot make a double-entry for government accounting purposes. Normally I would have though we issued bonds and printed money (slightly different than issuing notes against gold reserves, but just a mere detail).

    Where does this money go in the first instance? Let me be a real “radical” (I’m not even trying to be a socialist or communist here) and distribute it equally to all families in the country. (I’m being very careful here not to be a Keynesian and increase government expenditures). Tomorrow morning, in the bank accounts of “y” million families there is a lump sum courtesy of the government.

    Just for the sake of the argument, let’s assume that the amount “z” roughly corresponds to the average family debt for middle and lower income families. My assumption is that lower income families have a lower debt level than middle-class families (because they have lower debt capacity against income and assets). So, the lower income families can pay off their debt while the middle-income families have some residual debt if they choose to pay-off their debt.

    Now let’s see whether we can understand the effects on the financial markets and banks. The financial markets are asking themselves, where did this money come from? Well, it came out of thin air … no debt issued, no relationship to economic activity, no relationship to monetary reserves (gold, silver, forex). Hmmm, that makes our bonds less valuable, which means we effectively increase the interest rate. Some of us may even follow the example of Greece and send money overseas (to Swiss bank accounts and convert to other currencies). Oops, lots of money has gone overseas, draining the country of liquidity.

    The banks have suddenly faced a new reality. The government deposited all this cash in family accounts. Some of that money leaked overseas, some it reduced debt. (Too intimidated to explain this in terms of bank liabilities and assets). As a bank, we were worried that customers (families) had debt levels that were too high (in terms of capacity to repay) so we are happy they have reduced the number of non-performing loans. It means we now have a more creditworthy bank with a smaller toxic assets list.

    Can’t quite understand how the money will now lead to higher inflation (unless you count higher government interest rates on existing bonds as inflationary).

    Tristan, help! You and I must be working on different models of household behaviour in the economy.
    Posted by Lambros Karavis

    • Tristan Fischer

      Hi Labros.
      On the whole, the concept of debasing your currency and having high levels of inflation is a bad thing. It makes investment decisions very difficult. These are not normal conditions, however. Printing money increases the money supply and so the value of the money decreases. What was once one pound remains one pound, but while it could buy a loaf of bread it can now only buy half a loaf of bread. If you have £100billion of government debt and you did the same thing you would still have £100 billion of government debt but the relative value would be only 50% of that, making it easier to repay.

  • Keith Borgholthaus

    The paper seems well prepared, but slowly the conclusions don’t meet out at the end. It seems more like nationalism and regionalism trying to beat out globalization.
    Posted by Keith Borgholthaus

  • Tristan Fischer (@tristanfischer)

    Saturday Read: Blind following of dead men’s ideas is not helpful.We need to think for ourselves about economic policy.

  • Paul Blok

    An interesting article! I fear that solutions, which were good a hundred years ago, are not necessarily right nowadays.
    The biggest problem, I believe, is the ridiculous low interest rate. This encourages more lending and less saving, both private and public (government). The whole Western world has spent tomorrows wealth yesterday. Buy now, pay later is the worst advice one could ever get. It should be replaced by Save first, buy later.
    Posted by Paul Blok

  • Keith Borgholthaus

    I think globalization already has power, and that this is an attempt to stop it. Regionalism doesn’t work if everyone already knows and uses globalization. The clothes you are wearing, this social website, and many other things demand a global approach to making things. Most attempts I have seen at regionalism end badly end tend to emphasize a specific culture only. So, Hawaiians for Hawaii, but no one else is allowed in. Wrather silly when you see how bad off Western Samoa is compared to US held parts of Samoa.

    Meanwhile the author forgets other economists who look at the subjects today, and have answers that are not based on Keynes, Hayek, or others work.

    For instance, Clayton Christiansen and his theories of Disruption have come up with the idea that todays modern problem is that many of the ideas and companies we have been relying on are being replaced by new innovations. For example the iPod changed the way we view music, the iPhone changed the way we view phones and even computers. As the idea of the iPhone comes to power, the use of older systems, like the laptop I am using right now, get replaced. The same can be said about education, health issues, and even war. New ideas are being used and are replacing the old ones.

    Christiansen is incredibly important today because Mitt Romney proposes many of his ideas for school systems, healthcare, and how businesses should run.

    The article assumes that economists are only using Keynes and Hanek and have not moved forward at all in the last 60 years.
    Posted by Keith Borgholthaus

    • Tristan Fischer

      The author loves Clayton Christensen’s ideas and thinks that they provide great lessons for companies. Politicians, however, do primarily rely on Hayek and the Austrian School or Keynes to form the basis of their economic policies. You seem to imply, like the author, that this reliance is misplaced.

      Regarding globalisation, the author is not advocating autarchy and isolationism, rather regional free trade that encompasses many economies that share similar economic, environmental and social values. A global free for all provides short term benefits in the form of cheap products but sows the seeds of the eventual hollowing out of more expensive countries with higher standard of living, workers rights and environmental legislation.

  • Dr James Nemo

    If people had listened……….. Ha. That is a very big ‘if’. In 1928 and in 2007 many people in banking forecast the problems that were looming but they were cast out as heretics.
    Posted by Dr James Nemo

  • Gulnara Tohtahun

    glad you posted this article, thank you! Regional economies, not global and sooner, please.
    Posted by Gulnara Tohtahun

  • @JPatts25

    Not 100% sure about proffered solutions, but an interesting piece anyway. [Keynes and Hayek are both dead, and wrong.

  • Majda Annalena Jaroš Gilding

    John Maynard Keynes is not ‘wrong’ until proven wrong. Best wishes:)
    Posted by Majda Annalena Jaroš Gilding Dip.Oec.

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  • Paul Blok

    Globalisation brings more equality: production flows to (former) third world countries because their products are cheaper. The results are: more wealth in coutries like China, India, Brazil etc. and less wealth in Europa and America. The debt problems are a symtom of the decreasing wealth in the EU and the US. In the long run China, India and Brazil will become more expensive because of the increased wealth there and some industrial activity will return to the western world.
    Posted by Paul Blok

  • Tristan Fischer (@tristanfischer)

    Saturday Read: Hayek is loved by conservatives and Keynes by liberals. Both of their policies are now wrong. Read why.


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