Red Alert

The Turning Point (III): The Keynesian Resurgence

Posted by on March 25th, 2010

In  the wake of the global financial crisis, the Washington Consensus is dead.

Keynes, however, is alive and well.

Keynesian fiscal intervention helped avoid a second Great Depression in 2008-9, just as it rescued economies from the first one in 1929-35.

Not surprisingly, there has been an explosion of recent writing on the Keynesian Resurgence.

From the Financial Times’ Martin Wolf and IMF Chief Economist Olivier Blanchard to Noel laureate economists Paul Krugman and Joseph Stiglitz, Dani Rodrik and Robert Reich, lessons are being drawn from the crash to answer the question: “what next?”

I am currently reading Paul Krugman’s ‘Return of Depression Economics” and will blog on this shortly. Robert Skidelski’s “Keynes: The Return of the Master” is emerging as a “must read” for social democrats, alongside Wilkinson and Pickett’s “The Spirit Level“.

Here is a quick taste of some common themes that emerge:

  • Neoclassical economics cannot prevent major cyclical crashes crashes and asset bubbles. Its theoretical underpinnings look increasingly shaky. Global financial re-regulation is urgent.
  • The inequality of wealth and income flowing from trickle down economics has been bad for everybody: more equal societies empirically do better. Reducing inequality has a strong economic payoff.
  • Active government is more necessary than ever in the wake of the crash, but will have to be smart and cost effective.  It will learn from both the post-War Keynesian period and the neoclassical consensus that followed it, and be different from both.
  • Counter-cyclical fiscal policy makes sense, and there is potential to automate some of the stabilisers to build the balance and resilience of markets.

Contrast this to the current National government: still preaching trickle down tax cuts for the richest few; ignoring the growing inequality and sense of despair among the many; hidebound by the ideas of an era that has already passed; bereft of leadership as it stares in the rear view missor of focus group entrails and last month’s polls.

The world is changing fast. New Zealand deserves new thinking. Fast.


101 Responses to “The Turning Point (III): The Keynesian Resurgence”

  1. Tracey says:

    Mark, how does survival of the fitest fit into the world under laissez fair?

  2. Falafulu Fisi says:

    Huginn, here is a good read on Keynesian framework & Hayekian framework (hayek from Austrian economics school of thoughts). The paper blamed physicist late John von Neumann for part of today’s inappropriate econometric modeling via the way uncertainty in economics has been treated/interpreted. You can request a free copy from the author himself ( his email is listed on the site) because the journal that it got published, last year (Statistical Mechanics), is a subscription only.

    Abstract:
    =========
    The objective of this paper is to provide a methodological link between econophysics and economics. I will study a key notion of both fields: uncertainty and the ways of thinking about it developed by the two disciplines. After having presented the main economic theories of uncertainty (provided by Knight, Keynes and Hayek), I show how this notion is paradoxically excluded from the economic field. In economics, uncertainty is totally reduced by an a priori Gaussian framework—in contrast to econophysics, which does not use a priori models because it works directly on data. Uncertainty is then not shaped by a specific model, and is partially and temporally reduced as models improve. This way of thinking about uncertainty has echoes in the economic literature. By presenting econophysics as a Knightian method, and a complementary approach to a Hayekian framework, this paper shows that econophysics can be methodologically justified from an economic point of view.

    Title : Economic uncertainty and econophysics

    It is an interesting reading. BTW, the paper has no formula derivations or anything like that in there, so it is descriptive and informative.

  3. Huginn says:

    @ Mark Hubbard
    “[I] couldn’t be further from the truth here.”

    oh really?

    I guess no-one let you in on the dirty little secret of the Washington Consensus

    here’s a little history for you

    Hugo F. Sonnenschein:
    A prominent Walrasian theorist, his various contributions to economics are dominated by one shattering result: the Debreu- Sonnenschein-Mantel Theorem. First explored by Sonnenschein in two papers (1972, 1973) and then followed up by similar papers by Debreu (1972) and Mantel (1974), the DSM Theorem claims that market demand functions, upon which all the “intuitive” results of market-level and macro-level economics rest, are essentially shapeless. It essentially destroyed the “microfoundations” project of economic theory, i.e. to describe demand and supply as a result of the decentralized utility-maximizing agents. The DSM theorem provides the following result: even if everybody has nicely-shaped individual demand functions, we cannot say that the market demand function will possess a nice shape too. Thus, the efforts that have been made in the last century to describe demand as a result of utility-maximization are essentially wasted – for the desired result

    Sonnenschein is presently the President of the University of Chicago. It is unknown whether his decision to move away from academic research and into this administrative post is in any way related to the depressing implications of his famous theorem.

    from the New School history of Economic Thought website
    http://homepage.newschool.edu/het//

  4. ben says:

    David

    Off to meetings so a quick general observation – isn’t it intereting how mention of a Keynesian resurgence stimulates a debate among the Austrian School devotees out there.

    Yes, a fair observation, but only because Keynes ignores what the Austrians say is most important, which is knowledge of time and place. Not all spending is equal. We should not expect public officials, however well-meaning, to know the best place in the economy to allocate the next tonne of steel or fibre or the next entrepreneur. This is why big government hurts growth.

    Enjoyable thread, thanks to contributions from everyone.

  5. Huginn says:

    @ Falafulu Fisi
    Thanks, I’ll have a look.

    btw have you read
    Philip Mirowski?
    here’s a c&p from his WikiP:

    In his book More Heat than Light, Mirowski reveals a history of how physics has drawn inspiration from economics and how economics has sought to emulate physics, especially with regard to the theory of value. He traces the development of the energy concept in Western physics and its subsequent effect on the invention and promulgation of neoclassical economics, the modern orthodox theory.

    In his book Machine Dreams, Mirowski explores the historical influences of the military and the cyborg sciences on neoclassical economics. The neglected influence of John von Neumann and his theory of automata are key themes throughout the book. Mirowski claims that many of the developments in neoclassical economics in the 20th century, from game theory to computational economics, are the unacknowledged result of von Neumann’s plans for economics. The work expands Mirowski’s vision for a computational economics, one in which various market types are constructed in a similar fashion to Noam Chomsky’s Generative grammar. The role of economics is to explore how various market types perform in measures of complexity and efficiency, with more complicated markets being able to incorporate the effects of the less complex. By complexity Mirowski means something analogous to Computational complexity theory in computer science.

  6. David Cunliffe says:

    @Ben – thanks for your comments. I am enjoying the thread too.

    Just for the record, I agree that not all spending is equal, and expenditure quality really matters- both in the direction or sector of investment, and in the effectiveness of the investment in practice.

    A further pont is the life cycle theory of demand – consumers make judgements abotu the timing of spending and saving over their lifetime (e.g. Investinmg in a home or an education), so by implication policy makers should not assume that all consumption multipliers are equal.

    I would expect both Paul Krugman and JM Keynes would consider these points pretty obvious too.

    So in the Keynes/neoclassical argument, our Austrian friends should not assume that Labour would ignore expenditure quality, fiscal responsibility or sound monetary management.

    Keynes remains highly relevant to the challenges of our age, partly to push back on the assumption a sole reliance on monetary policy will regulate economies in the face of major shocks and bvubbles; and partly as a contributing framework for a more active role for governments in partnering social and economic development.

  7. Falafulu Fisi says:

    Hey David Cunliffe,

    Here is an interesting article for you to buy from Nature journal. I am cutting & pasting only half of page one, but you can view the full article from their site (of course by paying for it online). It’s worth it for policymakers such as yourself to be very well informed.

    The economy needs agent-based modelling

    Here is page one:
    ================

    In today’s high-tech age, one naturally assumes that US President Barack Obama’s economic team and its international counterparts are using sophisticated quantitative computer models to guide us out of the current economic crisis. They are not.

    The best models they have are of two types, both with fatal flaws. Type one is econometric: empirical statistical models that are fitted to past data. These successfully forecast a few quarters ahead as long as things stay more or less the same, but fail in the face of great change.

    Type two goes by the name of ‘dynamic stochastic general equilibrium’. These models assume a perfect world, and by their very nature rule out crises of the type we are experiencing now. As a result, economic policy-makers are basing their decisions on common sense, and on anecdotal analogies to previous crises such as Japan’s ‘lost decade’ or the Great Depression (see Nature 457, 957; 2009). The leaders of the world are flying the economy by the seat of their pants.

    This is hard for most non-economists to believe. Aren’t people on Wall Street using fancy mathematical models? Yes, but for a completely different purpose: modelling the potential profit and risk of individual trades. There is no attempt to assemble the pieces and understand the behaviour of the whole economic system.

    There is a better way: agent-based models. An agent-based model is a computerized simulation of a number of decision-makers (agents) and institutions, which interact through prescribed rules. The agents can be as diverse as needed — from consumers to policy-makers and Wall Street professionals — and the institutional structure can include everything from banks to the government. Such models do not rely on the assumption that the economy will move towards a predetermined equilibrium state, as other models do. Instead, at any given time, each agent acts according to its current situation, the state of the world around it and the rules governing its behaviour. An individual consumer, for example, might decide whether to save or spend based on the rate of inflation, his or her current optimism about the future, and behavioural rules deduced from psychology experiments.

    The computer keeps track of the many agent interactions, to see what happens over time. Agent-based simulations can handle a far wider range of nonlinear behaviour than conventional equilibrium models. Policy-makers can thus simulate an artificial economy under different policy scenarios and quantitatively explore their consequences.

    Why is this type of modelling not well developed in economics? Because of historical choices made to address the complexity of the economy and the importance of human reasoning and adaptability.

    The notion that financial economies are complex systems can be traced at least as far back as Adam Smith in the late 1700s. More recently John Maynard Keynes and his followers attempted to describe and quantify this complexity based on historical patterns. Keynesian economics enjoyed a heyday in the decades after the Second World War, but was forced out of the mainstream after failing a crucial test during the mid-seventies. The Keynesian predictions suggested that inflation could pull society out of a recession; that, as rising prices had historically stimulated supply, producers would respond to the rising prices seen under inflation by increasing production and hiring more workers. But when US policymakers increased the money supply in an attempt to stimulate employment, it didn’t work — they ended up with both high inflation and high unemployment, a miserable state called ‘stagflation’. Robert Lucas and others argued in 1976 that Keynesian models had failed because they neglected the power of human learning and adaptation. Firms and workers learned that inflation is just inflation, and is not the same as a real rise in prices relative to wages.

    ==================================

    I believe that our Treasury Department is using the failed Keynesian equilibrium type model as Dynamic Stochastic General Equilibrium (DSGE). The US Fed also uses DSGE.

    It is time that some politician should tell the Treasury to stop using DSGE in its advisory role to the government because it is useless.

  8. Mark Hubbard says:

    So in the Keynes/neoclassical argument, our Austrian friends should not assume that Labour would ignore expenditure quality, fiscal responsibility or sound monetary management.

    Tell that to Jonathan Hunt who spent $30,000 on taxis. Tell that to Chris Carter now. Tell that to Rodney Hide and his girlfriend.

    The one thing Governments have proven themselves exemplary at, is spending money wastefully, stupidly, and in a way that is offensive to me as a taxpayer. And as for picking winners in the market, you can’t do it, no one can. Indeed, here, Paul Walker explains why governments can’t do so:

    http://antidismal.blogspot.com/2008/02/why-do-governments-back-losers-two.html

    To quote the summation:

    These problems have their roots in the wider economic problems of undertaking quasi-commercial ventures in the public, rather than in the private, sector. This results, argues Myddelton, in well-meaning politicians and government officials wasting huge sums of taxpayers’ money.

    The arguments of both Harford and Myddelton should make us apprehensive when governments start talking of “national champions” and starting want to back these notions with our money. Odds are things will end badly.

    David, you’re still trying to centrally manage the economy. Why can’t you learn from history you can’t do that, and to try is to move away from freedom to planned societies and the West has been the best place to live because we have been free and fought against tyrants who would entrap us in their schemes. And planned societies and economies always fail, but only after much suffering. Stop trying to be my jailer, because that is the role you constantly cast yourself. I want you out of my life and you have no mandate to be in it. And for the sake of all of us, keep out of the economy. You guys don’t know what you’re doing. You don’t have a clue.

    A further pont is the life cycle theory of demand – consumers make judgements abotu the timing of spending and saving over their lifetime (e.g. Investinmg in a home or an education), so by implication policy makers should not assume that all consumption multipliers are equal.

    Studies are showing already through this crisis that the so-called government multiplier through the stimulunacy (Peter Cresswell’s excellent term) is less that 1. That is, it has destroyed yet more wealth: and of course it has, all transfers to the public sector destroy wealth, as the state sector is a parasite feeding off the productive sector, sapping its vitality.

    And here we get to the crux of the matter, what do you think drives economic growth: consumption or savings?

    (Hint, as an devotee of Keyne’s you’ve got a serious problem here, I’m just wondering if you realise it.)

  9. Mark Hubbard says:

    Addendum: … and do you understand what Keynesian policies have done to saving? (I’ve already demonstrated same earlier in this thread).

  10. Jeremy says:

    @MARK “command necessarily slave society, you can’t separate them.”
    Can think of many combination’s that have been tried – They must be separate forces, from command vs free Market, Govt type, Chief, monarch, Demo, Commie. and also the personal slant of the leader and system. (I mean democracy produced Hitler, Napoleon evolved and changed as did Henry 8th, Robert the Bruce was benevolent dictator, Ancient Greece was free Market, Egypt wasn’t but lasted longer). Russia has always been different including Peter the Great, there is an often quoted line that you need a strong (read bastard) leader to unite the country.

    “And how has China done this? Answer: by converting large parts of its economy over to crony capitalism. Though there is still plenty of central planning there”
    China has done most of this by artificially reducing production costs at home, large scale employment projects, and manipulating the currency. Things not possible in individualized state. Next is the build up of military (and some air quality etc measures). Russia imploded via %50 of GDP on an unproductive military. The British empire suffered the same at %30 military and retrenched. Whats the US running at? How would their debt look without their military (probably close to 0). Part of the problem with the bailout was the lack of wriggle room left as billions of dollars were spent on the invasion (up until Sadam fled) on missiles, and this reduced their stockpile to such a point that it had to be replaced quickly.

    Tracy – Mark “Ignorant question again, can someone point me to pure laissez faire economies in existence right now?” Yes the Libz wont admit it but try Somalia, or USA wild west days, certain parts of economies that are outside police control (outer Mongolia? who knows). And “Why would it cost anything?” If we do not have general taxation then we get a more complex and costly (duplication) system for providing the information and controls and policing that you also seem to be saying is prerequisite.

  11. SPC says:

    Investment leads growth – “consumption or savings” is a silly choice/question.

    I agree with all 4 points made at the start here – despite the subsequent “witnessing” by an economic sect.

  12. Mark Hubbard says:

    Argue the logic SPC, rather than the meaningless emotive nonsense. The logical case against my arguments, please. And think about it, the well respected Austrian School of Economics is different to Keynesian economics only by being right. Resorting to the ‘sect’ piffle is simply a sign of your abject weakness, and lack of your ability to provide any type of substance as an argument.

    Yadda yadda,Jeremy. Somalia, with it’s collectivist politics based on tribal hate, and the initiation of force in the cause of the tribe (and switch your brain off) is the furthermost thing from a libertarian society that could be imagined. In fact the ‘good of the tribe’ ethic is if anything close only to the bloodied ‘altar of the common good’ ethic spouted by all tyrants who are socialist or advocates of democracy. And trying to compare pre-industrial and post-industrial societies is pointless.

    To be honest, reading your post, I’m not too sure what your point is, but, as you can see from my previous paragraph, I agree with you on the evils of democracy, that tyranny of the majority, but by citing this, you contradict the rest of your post. I think, I don’t know, your post doesn’t actually make sense. At least David seems to be trying for that.

    Lets keep the arguments a bit sensible.

    Although one thing I’m finding strange, all you Lefties here trying to argue the might of the USSR. Really, why would you want to do that with such an evil empire? And look how that economy ended. Speaks for itself don’t you think? I reckon you should all watch The Lives of Others (movie) and then see if you want to keep arguing that line. You’re arguing for a lethal system that spurned freedom: why?

    Again, you can’t separate philosophy and economics.

  13. SPC says:

    Mark – I said I agreed with the 4 points made at the beginning. Many economists agree, it is a quite mainstream opinion.

    And I answered your silly question – it is not a choice between consumption – as it is investment that leads growth (and not all investment is funded by savings etc etc).

    I then made the comment about being witnessed by those of an economic sect. That is not an emotive comment, but the gist of it. It is pointless to debate with those who regard a their theory as truth and equally stupid for those on political party blog to discuss economic policy with those who diss democracy and oppose a role for government in economic matters.

    As a general aside, opposites have a lot in common. Thus it is for totalitarians who place trust in the authority of a man and those who place no trust in any government role in the economy. In both systems the people are rendered powerless.

  14. Tracey says:

    Mark where does darwin’s theory of survival of the fitest fit into the laissez faire model?

  15. Mark Hubbard says:

    [I can only make one post today.]

    SPC:

    Many economists agree, it is a quite mainstream opinion.

    And therein lies the problem. Keynes error ridden and dangerous theories are taken as mainstream thus ‘a given’ by politicians and a lazy business press (that should know better) and policy makers who have no idea what they are doing – for example David’s header post. Perhaps because his theories have always supported big government, and bureaucrats and politicians, especially of the Left, love big Nanny State governments, the evidence of history is tuned out in a need to think themselves useful.

    I am showing you it’s wrong, and the current crisis is the further proof of that fact. The Austrian school has a large body of writing showing how it is wrong. The Austrian school was the only grouping that predicted this crisis. Look how men such as Peter Schiff were laughed at for his doomsday prognostications of the perilous position of the US economy ‘before’ it all tipped up. And he was right.

    it is not a choice between consumption – as it is investment that leads growth (and not all investment is funded by savings etc etc).

    Keynes gets the distinction between consumption and savings very wrong, and that has been important because the stimulus programs have been structured on this error. I let Professor George Reisman speak to this:

    http://georgereisman.com/blog/2008/02/standing-keynesian-gdp-on-its-head.html

    Quoting the opening paragraph:

    According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere non-spending and thus a “leakage” from the spending stream. This dogma underlies much of government economic policy in the United States, including the so-called economic stimulus package that has just been enacted. In this article, I prove, to the contrary, that consumption is not the main form of spending in the economic system and that the source of most spending is, in fact, saving. I prove my claims by starting with the very formulations of the expenditure aggregates presented by the Keynesian doctrine itself. …

    those who place no trust in any government role in the economy. In both systems the people are rendered powerless.

    Libs still believe in a state, a minarchy or small state. The only role of the state is to protect individual rights via a written constitution, and to enforce the non-initiation of force principle, thus, an army to protect from outside aggression, a police force to protect from inside agreesors, a criminal justice system, a civil justice system to enforce contract. That process doesn’t need politicians, it works on I can do whatever I like, as can you and all consenting adults, so long as we don’t intiate force or fraud on others.

    Unfortunately in our modern nation states, the state, governments, have now become the biggest abusers of individual liberty. They are the biggest bully in the playground.

    Tracy asked for the second time: Mark where does darwin’s theory of survival of the fitest fit into the laissez faire model?

    Really this is infantile – you started pleading ignorance and openness Tracy, but your agenda is becoming obvious, at least be honest about it. Regarding your question, do you think we humans are mere animals, with no rational capacity? Because that is the equation you’re trying to make.

    Ask me if I see a man dying on the street am I going to walk past him? Answer, I’m not.

    And that answers your question.

    Regarding a laissez-faire economy, yes, there are winners and losers in the market in a sense, that is what drives innovation, and where ‘market lessons’ are learned. However, capitalism is not a zero sum game. Both parties to a transaction in a free economy gain value – when I buy a car the vendor makes a profit, and I get a get an advanced piece of technology that will improve my life immensely.

    What makes you think you will find compassion from faceless bureaucrats? Where do you think NZ’s rising wave of youth violence is coming from? What do you think the cause is?

  16. Tracey says:

    Not being infantile and have no agenda.

    Please dont attack me and accuse me of an agenda I dont have because I challenge your theory, at however a low intellectual level.

    People walk past dying or people in trouble all over the world Mark. People choose to pay people as little as possible to ensure the largest gain for them regardless of the impact on the lower paid.

    Who determines what is justice, what is a crime? “We” do, referendum, majority rules?

    You are putting forward your untried theory on the basis of it being a panacea, I have already asked you why you think people will behave well toward each other without regulation, when they dont with it. You answered it by saying current system has no compassion. But that is not an answer.

    Your laissez faire solution, from what I have read here and elsewhere does not seem to address the reality that the strong (wealthy or those with opportunity to create wealth) will thrive those who do not, will not and will rely on the goodness of others. It will still be true that employers of unskilled labour will pay less and less not more and more.

    “Both parties to a transaction in a free economy gain value – when I buy a car the vendor makes a profit,”

    When you employ unskilled labour you get to increase your profit margin the less you have to pay them, is also an example.

    IF you are denying survival of the fittest say so. There is absolutely nothing to suggest this theory will not operate within your laissez faire system. It might even reduce it from where it is today, had you thought of that as your counter argument instead of clinging unswervingly to the idea that your theory is impenetrable and a panacea (always easy to claim when it is untried).

    I understand you have strong belief in your theory, and there certainly seem to be things worthy of consideration. I dont believe any one theory will be perfect, innovation is about taking what we know, and improving/changing.

  17. David Cunliffe says:

    Well this is quite a thread and there is a lot to absorb. Firstly thanks to those who have contributed ideas, suggestions and links for further reading. While I have not yet had time to read all of them, they will not be wasted.

    Less thanks to those who think that name calling is a good substitute for reasoned debate. More confidence in the arguments means less use of pesonal attack I guess.

    Summing up, I opened up by suggesting that a new version of Keynesian economics is on the rise after the GFC. That was a positive statement more than a normative one – i.e. a description of what is based in a hot debate around the global financial institutions and major public online fora (e.g. the FT online for one).

    Without arguing that any school of thought is perfect, I would still hold that there was good reason for governments and central banks to have intervened vigorously to avoid a full scale Depression. Sorry Libertarianz, but but I believe that is beyond question.

    That monetary and fiscal intervention was undertaken no doubt more for pragmatic than ideological reasons, and was done by governments of all political persuasions. It tells us:
    – that the markets left to themselves would have created a bigger disaster (mispriced and magnified risk etc)
    – that asset bubbles can grow big enough to threaten the market suystem and thus logically some oversight appears appropriate. If you disagree with that, go argue withthe entire G20.
    – that there is a compelling rationale for state action.

    Of course there are risks. Those bloggers who tried to paint my post as defending a pure view of any theory simply ascribe things that were not said or intended: there is a massive amount of public debt to be worked off; stagflation is a risk; so is deflation for Japan and inflation for others. Horses for courses folks.

    The counterattack was on two levels it seems to me: those who sought to defend neoclassical economics (as under Reagan, Thatcher, Douglas etc) from the Keynesian ideas; and those who think all economics is bollocks and not even worthy of being called a subject.

    Obviously I disagree with both. But I am going to spend the time going through the arguments and I can be convinced based on logic and evidence.

    Any change of paradigm throws up more questions than answers. But here is the rub: the paradigm is indeed changing – that is why this debate is happening.

  18. Jeremy says:

    Tell me Mark – Where is this church that you so worship?

    You seem to be slipping down to attack the messengers who dare to challenge your views, (must be a consultant).

    Simple point – You are wrong on so many points, notably you seem to lack understanding of human nature and societies. This to a point that you cannot answer any questions and cannot seem to read. When we seek to separate issues you seek to combine and visa versa. You also attribute results to false causes, which happens when you read someone such as P Schiff who seeks to rewrite history to make himself look smart (& turn a buck from his acolytes).

    You want laissez faire, go to Somalia. It is the pure system of laissez faire, without the hippie “cant we all just get along” BS that you see as necessary to discuss this theory without being run out of town .

  19. Peter says:

    A market price generally speaking represents an equilibrium between supply and demand. If the price varies from equilibrium, market forces kick in and equilibrium is restored. In a dynamic market place, this process happens continually through the choices of a large pool of individuals.

    If a price is artificially held below market, then there will be surplus demand and supply will diminish.

    This is what happens when the interest rate (the price for money) is held below the natural market level. The consequence is that borrowing is encouraged and the pool of savings from which loans are granted, diminishes.

    To expand, it sends a message to the market that there are surplus savings available to be loaned out. This encourages businessmen to invest in enterprises which have a long time horizon – i.e. buildings and infrastructure. In other words, they are encouraged to invest in projects that require significant quantities of capital that will take a long time to become profitable.

    However because the pool of savings was not as large as the artificially low interest rate suggested, sooner or later savings run out and many projects are left incomplete. These incomplete projects represent a mis-allocation of capital which needs to be liquidated and re-allocated to wherever demand dictates.

    Even in a free enterprise system, it is undeniable that businessmen often make mistakes and mis-allocate capital. At the same time however there are many businessmen making wise decisions. Thus there is a smoothing effect. Also, mis-allocated capital is re-directed quickly and efficiently to where it is needed. However, what we have seen is a SYSTEM WIDE mis-allocation of capital on a massive scale. Logically then, we need to look at the system that brought about this catastrophe.

    The market for money starts with government controlled central banks. They artificially control the market for money through setting interest rates and supplying fiat currency – fiat currency being currency that is simply printed and has no tie to value. The banks, operating under “licence” from the government then lend this paper money out on a fractional reserve basis i.e. for every $20 of savings deposited in a bank, the bank is able to lend out say $100. Thus, credit is created literally out of thin air causing inflation.

    The impact of inflation compounds the effects of artificially low interest rates. It does so because it encourages people to take their cash savings and put them into such things as housing. They do so as a hedge against inflation. Thus, compounding the effects of artificially low interest rates. Look no further than America’s current massive oversupply of housing to illustrate.

    This government led fiat money, fractional reserve system with it’s artificial interest rates, and inflationary policies is the FUNDAMENTAL cause of the exaggerated business cycles and massive booms and busts. And we have Keynes to thank.

    The antidote, is no less than a change in the fundamental structure of the monetary market as prescribed by the Austrian school of economic thought. For readings on this subject, I refer you to the Bailout Reader at mises.org. I recommend this especially to those who believe that they know better than the market.

  20. Mark Hubbard says:

    Peter, excellent post.

    If just one member of Labour were to spend time reading the mises bailout reader, and wean them off Keynes, that would be progress.

    Now let me make my last post.

  21. Mark Hubbard says:

    Jeremy, and this broaches most of Tracey’s latest questions. (By the way Jeremy, you’re good at the cheap shots, but not so good at actually supplying other than erroneous simplistic rebuttals to my arguments. It should be evident I live by my rational mind, and am thus no mystic, the opposite in fact, so lets also drop the constant reference to my, according to you, ‘religious’ adherences. Everything I have stated has been explained and backed up with references.)

    Jeremy: You want laissez faire, go to Somalia. It is the pure system of laissez faire

    Jeremy states this for the second time, though I have already disabused him of it once. (Does this lack of comprehension have roots in the state school system?)

    Once more for, and for the last time.

    Characteristics of a humanist based classical liberal society, and it’s corollary economic system of laissez-faire capitalism.

    The basis of this society is the individual, that is the primary focus. In such a minarchy, the rights, starting with property rights, of the individual are protected by a written constitution, that being the only function of the small state. Given this, consenting adults can live in full freedom, pursuing their goals, and what the founding fathers of America would call their pursuit of happiness, which is necessarily possible only unshackled from Nanny State governments.

    Such a state of freedom can further only occur when each individual has nothing to fear from the initiation of force from another individual or group, and the role of state is thus to enforce the non-initiation of force principle. Thus the small state has some basic functions to ensure this:

    An army to protect individuals from outside aggressors.

    A police force to protect individuals from internal aggressors.

    A criminal justice system to try abusers, and punish them.

    The minarchy also has other basic functions such as a civil (precedent setting) and contract law system, and to provide for the rule of law, for a minarchy is certainly, per the above, founded on the rule of law.

    Below all the above, and guiding the rule of law, is human reason.

    Now, let’s look at Somalia.

    The country is in a state of anarchy, where power is wielded solely by force: by the gun. That is, the initiation of force is behind every transaction (compare this with laissez-faire above!)

    The country has no individualistic ethic, it exists solely on tribal allegiance: if you’re from the wrong tribe from in the wrong area, then that is the only reason needed to kill you.

    The country has no rule of law. Again, law comes from the tribe with the biggest gun.

    The affairs of the tribe are more often than not ruled by the opposite of reason: that is, primitive mysticism. And hence the barbarity and brutality we see practiced there, for as Voltaire stated, ‘those who believe in absurdities become capable of atrocities.’

    So, Jeremy, Somalia, and then the classical liberal laissez-faire society – given my analysis above, would you perhaps like to explicate for all of us what you see as the similarities that you can make your heinous and unfounded statement equating the two? I have demonstrated clearly, irrefutably, that clearly they are as different as night from day. One is a state of freedom, the other a living collectivist hell, a form of societal insanity.

    In fact, lets go a bit deeper – here’s an interesting question: does the barbaric, violent tribalism of Somalia have any corollary in the West? Well yes it does.

    The political Left has as it’s basis the ‘common good’ of the collective. According to this life and liberty hating creed, of which David is part of, individualism is seditious, and the individual effort and life must be sacrificed on the altar of the common good of the majority, the tribe. And hundreds of millions of lives over the last century have been sacrificed on this alter, just as the butchery is set to start over again under the Left’s new darling, Chavez (at this stage he is just entering the stage of starving his populace out of resistance).

    Here’s one thing I don’t understand about the Left. Through the last century they have had to wring their hands in anguish as one totalitarian after another slaughtered their populaces, when such tryrants always started out pursuing the common good of those populaces, the ‘common good’ always their catch-cry For the rational mind, there is no confusion in this. Without the individual as the focus and primary unit of society, that individuals life and its pursuit of happiness the only morality, without that, and turning instead the focus on sacrifice for the common good, then why is it any mystery that tyrants are able to sacrifice the lives of individuals en masse in pursuit of the common good, which normally ends up, of course, their very own common good – Labour’s and the social democratic credo, their societies based on need, drip with the blood of the individuals it destroys, always.

    Now here’s an interesting fact, to pull this back to economics. Ask a mainstream economist from NZ today what is their guiding ethic and they will ‘all’ answer utilitarianism. The mix of policies that produces the greatest good for the greatest number. Yes, the bloodied altar of the common good again. It is no wonder that mainstream economic thought slavishly takes its starting point in Keynes, as David does, despite the clear evidence of history showing the destructiveness of Keynesian collectivist socialism. Though never named as such, Marx still delivers the lectures from the lectern of every Western tertiary economics course. David’s header post shows why the cause of freedom, a once nascent classical liberal individualist ethic of western civilisation is dead now. The irony is that tyrant of the twentieth century – there were so many, none of them possible in classical liberal minarchy – that National Socialist Adolf Hitler did his best to destroy the beautiful blossoming classical liberalism that was flowing from the Jewish émigré communities of Berlin in the early 1930’s, which if they had been allowed to flourish, rather than killed off in the concentration camps, may well have brought the West to a new level of prosperity and civilisation – I can provide references to some of the brightest members – but fortunately he was beaten. However, the political Left have since largely finished his job for him in a way that was far more effective: brainwashing childrens minds through our state education systems into accepting the altar of the common good of the collective their guiding principle, thus slowly over time turning Western nations away from the road to freedom, and to the barbarity of the tribalism we can see in countries such as Somalia, where the gun and force rules. It’s just that in the West, the initiator of force and coercion, the gangs with the biggest guns, are our governments.

    Note in the above I use the terms ‘classical liberal’ and ‘libertarian’ as interchangeable.

    Anyway, when push has come to shove, David doesn’t seem to have the stomach to argue his case on this forum, to show me how, against the weight of the evidence of myself, Peter, Falafulu and Richard , plus a whole bunch of very well educated and respected Austrian school economists, how he believes he can centrally plan our economy, despite NOT ONE central planner before has been able to, only succeeding in enslaving their populations, as successive governments have done in New Zealand. He is the only one I was interested in trying to influence on this thread, because he is my jailer, so unless he re-enters the fray, answers to the posts demonstrating the menace of Keynes, given he is positing Keynes, ludicrously as our saviour (jeez) I’m off.

  22. David Cunliffe says:

    @Peter, @Mark. I will read the Bailout Reader.

    Peter – good post mate but it wiped itself out when it blamed governments for the GFC.

    “This government led fiat money, fractional reserve system with it’s artificial interest rates, and inflationary policies is the FUNDAMENTAL cause of the exaggerated business cycles and massive booms and busts. And we have Keynes to thank.

    Mate the money markets are largely private. Govts don’t drive the shape of the yield curve, markets do. Govts don’t drive fractional reserve banking – banks do. Actually, some govts prescribe minimum reserve asset ratios to LIMIT the practice.

    Reality check needed by one Austrian.

  23. Mark Hubbard says:

    Mate the money markets are largely private.

    Ahem :)

    von Mises from the first page:

    There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government. Either capitalism or socialism: there exists no middle way.

    And ‘largely’ – get off the grass.

    We do not have a free market, nothing close to it. All planned economies by ‘you guys’, and the central banks, and their artificial interest rate setting, completely, utterly, distort the banking system and interest markets. Indeed the central banks and unsound money – there is the chief problem.

    Again, from the first page, another of my quotations sums this well:

    http://www.telegraph.co.uk/comment/columnists/iainmartin/3563956/Capitalists-get-up-off-your-knees%2C-please.html

    “…genuine capitalism was abandoned long ago in favor of a mixed economy – an unstable combination of economic freedom and economic coercion by government. Today’s crisis, like the 1970s stagflation before it and the Great Depression before it, took place under, and is growing under, a mixed economy – not a free market.
    It is the result of the Government systematically manipulating the market to promote “stability” and “home ownership” – by a massive increase in the Government-controlled money supply, a massive decrease in government-controlled interest rates, an artificial increase in lending by multitrillion-dollar Government agencies, an enormous leveraging sanctioned by government reserve requirements, a “too big to fail” policy, the use of mortgage-bubble-backed securities in every area of the economy endorsed by government approved rating agencies, and years of top economic officials denying there was a housing bubble and promising to keep the good times rolling.

    Today’s events are not unexpected consequences of laissez-faire that Rand, Mises, and others failed to anticipate-they are expected consequences of the mixed economy that they explained decades ago…”

  24. Tracey says:

    Mark, are you suggesting that the founding fathers of America were close to Libertianz thought, or/and laissez faire state?

  25. Peter says:

    David,

    The private sector is undoubtedly a player in the money market. I just pawned my Rolex President for $500 at Mr Money and he’s about as far from the government as you can get.

    I digress…

    I’ll pick just one thing for tonight because my girlfriend wants her laptop and if I’m not off in 2 minutes, I won’t have as much fun tonight.

    “Govts don’t drive fractional reserve banking – banks do.”

    Correction: “Governments sanction fractional reserve banking – and banks take full advantage of this error!”

  26. Tracey says:

    How does corruption in a laissez faire police force get investigated, determined?

  27. Mark Hubbard says:

    [Again, only a chance for the single post today - while David hits the textbooks thinking how he can get out of this thread].

    Tracey said: are you suggesting that the founding fathers of America were close to Libertianz thought, or/and laissez faire state?

    Figure it out for yourself Tracey, I’ll give you a great quotation from one of them – [hattip: Lindsey Perigo on SOLO]:

    “Honor, justice, and humanity, forbid us tamely to surrender that freedom which we received from our gallant ancestors, and which our innocent posterity have a right to receive from us.

    We cannot endure the infamy and guilt of resigning succeeding generations to that wretchedness which inevitably awaits them if we basely entail hereditary bondage on them.”

    —Thomas Jefferson

    Look at the second sentence, then understand the evil of Keynesian government spending that has racked up unimaginable levels of sovereign debt in the West, as advocated again here by David, that now enslaves your children, and their children to the bondage of an horrific tax take. Our current governments, Mr Keynes, are not friends of freedom and the humnist, classical liberal dreams of our Western heroes, they are the ignoble enemies of freedom, grinding us all down to serfdom.

    I’m sad to say, our democracies, our tyrannies of the marjority, when political parties can set policies to breed their own voter base, ours born into the bondage of pointless lives on welfare, have served us badly. And people like David are intelligent men, who should understand what they have done, the damage wrought, and known far, far better.

  28. Mark Hubbard says:

    [There should have been a blockquote end after Jefferson.]

  29. Tracey says:

    Thanks Mark.

    ““Honor, justice, and humanity, forbid us tamely to surrender that freedom which we received from our gallant ancestors, and which our innocent posterity have a right to receive from us.”

    One problem I see is that when they declared this they wouldn’t allow women, black people or working people to take part in their decision-making, nor indeed in decision-making therafter. Can we conclude that honor justice and humanity is very much in the ye of the beholder, and accordingly inequity and disparities will follow, even this sytem?

    I have NO Problem with the philosophy espoused by mr Jefferson et al.

  30. Mark Hubbard says:

    One problem I see is that when they declared this they wouldn’t allow women, black people or working people to take part in their decision-making, nor indeed in decision-making therafter.

    Obviously you can never drop context, and this great statement must be read in the historical context of the times.

    Can we conclude that honor justice and humanity is very much in the ye of the beholder, and accordingly inequity and disparities will follow, even this sytem?

    No. If a classical liberal society is structured around the primary focus of the single (redundancy to make a point) individual, with all rights flowing to that individual, bounded by the non-initiation of force, and morality governed by that individual’s pursuit of happiness, then that is the ‘cure’ for all the ‘isms. Sexism, racism, et al.

    We treat each individual on their own terms, and rejoicing in their difference (not to get this mixed up,note, with the Left’s disastrous notion of mult-culturalism which is also destroying Western classical liberal humanism).

    Of course, if we adopt the pathology of the tyranny of the majority, of treating people in groups, of ‘advancing’ one group through positive discrimination policies, for example, or channeling my tax money to other certain groups because they show badly in this statistic or that, of even, for example through the insanity of Working for Families, punishing those couples who choose not to have children by redistributing their efforts to those that do, then we are delivered straight back to the barbarity of the ‘isms and society dominated by dependency and wasted lives. The very existence of the Ministry of Women Affairs, Tracey, is a sexist slap in the face for ‘you’. Note, every strand of political thought outside of Libertarianz is a promoter of group think. For a start, just look at Labour and National policies.

  31. Tracey says:

    “No. If a classical liberal society is structured around the primary focus of the single (redundancy to make a point) individual, with all rights flowing to that individual, bounded by the non-initiation of force, and morality governed by that individual’s pursuit of happiness, then that is the ‘cure’ for all the ‘isms. Sexism, racism, et al.”

    Thank you.

    “We treat each individual on their own terms, and rejoicing in their difference (not to get this mixed up,note, with the Left’s disastrous notion of mult-culturalism which is also destroying Western classical liberal humanism).”

    Ok, so Thomas Jefferson and his colleagues were not Libertarianz based on the above because they clearly DID see certain individuals as different to themselves, or they werelibertarianz, but those around them abused the Libertarian system they established. Therein lies the rub I guess, that your system requires something from many individuals they have no notion of how to give?

  32. Tracey says:

    Despite your earlier suggestions, I am enjoying this Mark, and I do absolutely see the value of the individualist approach of Libertarianism. Our education systems, for example, both public and private, imo, promote collectiveness at the expense of individualism. We train our children out of individualism very early on, and promote Teamness as though individualism is a bad thing (uness you win a gold medal in shotput – and then we say we love individualism).

    I guess in the end you have to start somewhere and your debate does just that. I suspect where it all gets put in the “too hard basket” is the generations it would take to unravel the influences of the current thinking.

    With respect to sexism. How does Libertarianism mve people from prejudice, using their pwoer/money to shut out others, or does it not, leaving those groups starting in a position of weakness to find strength from somehwere, and that somewhere is?

  33. Mark Hubbard says:

    Therein lies the rub I guess, that your system requires something from many individuals they have no notion of how to give?

    That agenda of yours just can’t be constrained, can it Tracey.

    The classical liberal ethic requires nothing of an individual other than they do not initiate force against another, and that they be responsible for themselves, and their children until they are adults.

    It’s a wonder, freedom filled simplicity, don’t you think. (I course you don’t, you are from the cynical, dependency addicted Left).

    My argument in explicated above in the matters covered in detail, all of which stand up pursuant to the fact of reality.

    You have offered no argument in return, Tracey: your statement I have quoted above is an unfounded statement, nothing more than a ‘leap of faith’. A civilised, free society, is based on reason.

    Ta ta.

  34. Mark Hubbard says:

    Again, I’m working, thus my posts have become typo ridden. I am only concerned here to debate David on the economic issues, and he seems to have disappeared again :)

    Once I wrap up the work on my desk, this Thursday I am off on six weeks holiday. So, it’s been interesting, edifying, and a little scary. Keynes has been a disaster, it is frighting our political masters put their faith in him, despite the weight of evidence of the harm his socialist theories have delivered the world to.

  35. Tracey says:

    You spend alot of time reading between lines in my posts and see much more than the space which is acually there.

    What “argument”, do you expect? I am merely trying to think of the things which could be obstacles to your theory.

    You even seem to disagree with me writing “Therein lies the rub I guess, that your system requires something from many individuals they have no notion of how to give?” which is in support of WHY people will oobject to Libertarianism, precisely because our systems have undermined most people’s ability to think in terms other than “groups”.

    Given your own admission that no country or society (that you have been able to name – I am sure there are societies based on this however) has ever tried your theory, economic or otherwsie, the leap of faith could be argued to be yours. At this stage what you have invested your time and energy in, is a theory, unproven until tried. I can see the inherent connundrum for you in that btw.

    You do make alot of assumptions, about me and others, and the sometimes antagonoistic and pugilistic stance you take here seems a little askew from your humanitarian based stance at times.

    Enjoy your six week break.

  36. Mark Hubbard says:

    humanitarian

    I said humanist :) There’s a bit difference – try the dictionary. As a freedom lover I can be an ornery as the next freedom lover living in a state next to slavery by a bunch of do-gooding, tragically misguided politicians. As with all freedom lovers, I am very frustrated, and over the 6.00pm news every night, normally enraged. The non-initiation of force principle by no means precludes attack in the face of such initiation on me, I am no pacifist: I will always argue my position vigorously, because freedom is a matter that we all should be very passionate about – it’s just such a shame, indeed, criminal, our political masters don’t share this passion, indeed, practice the reverse for they are all enslavers, as is Keynes and his Big Nanny State supporting economic policies.

  37. Tracey says:

    Nothing wrong with arguing your position, I admire the energy with which you pursue your beliefs. I dont enjoy that you see no possible way that your proposed system could err.

  38. Tracey says:

    Do you agree that slavery in all its forms inluding economic has been around alot longer than Governments?

  39. RS says:

    Austrian Economic theory largely consigned to the dustbin of crack pots along idiot-logues libertarian mates… although I could see a return of the gold standard; but that will see Mark preaching the Koran and tossing about his Gold Dinar. The libertarian philosophy will never get the year Zero they crave.

    I find the intellectual grand standing corrupt, your Nietzsche self belief must be frustrating as a mainland bean counter.

  40. SPC says:

    Oh it’s about people having an ideology witnessing their truth to unbelievers. And how their truth is the only reason determining a free society based on their reason ….

  41. Iain Parker says:

    Was John Maynard Keynes advocating a Public Credit Monetary System complete with a warning on exceeding the boundaries of sustainable natural resources?

    Did the Monetarists adopt only the parts of Keynes thesis that suited their plan of economic dominance and then set out to make him a scapegoat?:

    “Poor old Lord Keynes. The world’s press has spent the past week blackening his name. Not intentionally: most of the dunderheads reporting the G20 summit which took place over the weekend really do believe that he proposed and founded the International Monetary Fund. It’s one of those stories that passes unchecked from one journalist to another.

    The truth is more interesting. At the Bretton Woods conference in 1944, John Maynard Keynes put forward a much better idea. After it was thrown out, Geoffrey Crowther – then the editor of the Economist magazine – warned that “Lord Keynes was right … the world will bitterly regret the fact that his arguments were rejected.”(1) But the world does not regret it, for almost everyone – the Economist included – has forgotten what he proposed.”

    http://publiccreditorbust.blog.com/2009/12/13/keynes-post-war-public-credit-to-be-mortgage-backed/

  42. Iain Parker says:

    What Keynes proposed in 1945 was the very same as the long forgotten founding ideals of the international Labour movement, late 1800′s, the very same reforms of monetary, banking and credit systems sought by Labour then are even more required today for the very same reasons. Perhaps the only hope this nation has of fending off the relentless foreign corporate raiders and their locally recruited co-operatives is to put the Labour back into Labour.
    http://publiccreditorbust.blog.com/2008/07/28/labours-original-ideals-were-social-credit/

  43. Iain Parker says:

    To gain a detailed insight into the role that Government Bonds play in our economy and the few favoured privately owned foreign incorporated investment banks that are allowed to give us their created credit in exchange for our pledges to repay their debt book entry loans out of future taxes of the nation via the Government Debt Bond contract, please read my submission presented to the Unofficial Banking Inquiry, a submission that most every MP are doing their very best to ever admit to having read it, because to do so would see them compelled to act because of the irrefutable facts it contains from the very mouths of the major players
    http://publiccreditorbust.blog.com/2009/08/31/iain-parkers-submission- to-unofficial-government-banking-inquiry/

  44. Iain Parker says:

    Awaiting moderation again, No Iain all five of your inarticulate off thread comments have been deleted. And if you keep doing them you will go straight to spam so we don’t have to waste our time reading your moderated comments. Trevor

  45. Iain Parker says:

    Iain. Happy for you to keep commenting. Stick with the commenting rules on Red Alert and you’ll be fine. We welcome debate. Just not offensive comments and lies and general trolling behaviour. If you’re a genuine commenter then you’ll be fine. Clare
    http://blog.labour.org.nz/index.php/2009/11/09/good-things-in-moderation/

  46. Iain Parker says:

    My posts never contain abuse, only ammicable debate supported by factual evidence from the very mouths of major players of the events I present, research I have spent 10+ arduous years assembling to be ready to enter the political frey. Sadly censorship is is all to often the easy defence used by those who control the buttons to avoid having to debate using facts.
    So just as in the case of white collar criminals in this country, they don’t get hassled until the nasty deed has been done, will I still suffer pre-emptive censorship, or will I get a fair hearing on the soapbox and let the active Labour Party supporters judge my writings?

    You will get a fair hearing. But you are now in moderation which means we read what you write before it’s approved. Clare

  47. Iain Parker says:

    And, surely remaining on thread would and should contain evidence of precedence(past) in order to understand the present, to cherry pick what worked, what didn’t, in order to have any show of improving the future, unless of course you feel the present is all dandy?
    Sounds about right. Clare

  48. Iain Parker says:

    Iain. You’ve been given a hearing. If you are going to continue to complain you’ll receive a ban. Stick to the issues. Clare

  49. Iain Parker says:

    Exactly my point, wait till everyones gone to bed before giving me the courtesy of a reply.
    I have no problem having posts censored or removed if they break your clearly defined guidelines, In my opinion I have thus far breached none of them, in the case above by removing my defence from public scrutiny although it breached not one guideline, you would claim its off topic, but where else do you have a freedom of speech dabate other than on the thread the censorship occured, your approach was underhanded and an abuse of your powers.
    What is your fear, I am on holiday at present from my realsector job of truck driving 10-12 hrs a day six days a week in an attempt to support my young family and save a little for the day I can’t any longer physically work, an effort that has become something akin to a hamster on a hamster wheel due to current monetary policy that is inflationary by mathematical formula, you can be rest assured I mean the Labour movement no harm, I in-fact believe that a return to Labours very founding ideals is the only road to economic sovereignty for citizen and nation.
    If you gate keepers disagree, then debate me in open fact for fact, then let the active supporters decide.
    Be rest assured I am not a CH Douglas fundamentalist, I have studied all ideas and systems of public credit used throughout history, including that Labour to kick off the State Housing project, I have learned what worked and was non-inflationary(US Colonial, scrip etc) and what didn’t(Zimbabwe style)it all comes down to how you introduce your own money supply into circulation
    http://publiccreditorbust.blog.com/2009/03/09/successful-debt-free-based-monetary-systems-links/

    http://publiccreditorbust.blog.com/2008/07/28/labours-original-ideals-were-public-credit/

    Trust me I mean the Labour movement no harm, I am a public creditor of the ideals of one of Labours greatest John A Lee, not those of CH Douglas or Richard Cook.

  50. Junior Lade says:

    Individual debt that can be given back from income but isn’t being paid back may be obtained via garnishment or attachment of earnings, which usually deduct debt service from wages.