tisdag 8 september 2009

Keynesian economics and its totalitarian consequences

Denna essä handlar om keynesianismen och hur den kan missbrukas för totalitära ändamål - och hur den är dömd att missbrukas just så.

Jag har skrivit den på engelska mest som en övning inför kommande universitetsstudier i nationalekonomi som kommer att bedrivas på det språket. [UPPDATERING: I vår 7:e podcast från juni 2012 pratar John också exklusivt om just keynesianismen]


This essay seeks to bring light to an issue that has been discussed too little in the current debate about how to solve the financial crisis we are all suffering from right now: Could the Keynesian teachings about economics be used to justify a totalitarian state? What parts of the Keynesian ideology is the most dangerous, and what will it mean in the future?

The author of this text sympathizes with the teachings of Ludwig von Mises, Friedrich August von Hayek and the other economists of the so called Austrian school, and would describe himself as something of an Austro-conservative; that is, someone who sympathizes with the Austrian school of economics but holds conservative instead of libertarian views in certain non-economical issues. The reason for the clarification is that the Austrian school mostly is associated with libertarianism and anarcho-capitalism, ideologies which I do not consider myself a supporter of, even though I share many opinions with the former.

However, it is my hope that even people who may not share my overall views on economics, can understand and agree with at least most of the points that I am going to make in this essay.

I feel it’s best to point out early that the point with this essay in no way is to claim or imply that all Keynesians are totalitarians, or even that a majority of them are. Instead, the purpose is to deal with the real world consequences that I fear the recent Keynesian resurgence is likely to have.

Keynesian economics and unexpected events

I do not intend to spend a longer part of this essay explaining what Keynesian economics is; instead, I’ll assume that the reader knows the basic facts about this theory. Instead, in this summary, I’m going to focus on the two things with Keynesian economics that easily can make it a tool in the hands of a totalitarian government. I dare to say that these two things are so essential to the Keynesian theory, that without them, the theory doesn’t exist. And so, anyone who accepts the following argumentation will, as a consequence, have to accept that there is a reasonable risk that Keynesian economics in itself will provide a breeding ground for dictatorships and totalitarian governments.

Government intervention in the economy

According to Keynesian economics, government should intervene to prolong economical booms and shorten the inevitable recessions. This may sound logical, and I am right now not going to discuss the other, non-political consequences it may have (such as inflation caused by an exaggerated increase of the money supply during the recession). Instead, I’m going to look at what the government is supposed to do during the boom years, and compare it to what it is more likely to do (even if it adheres to the Keynesian policy during the recession):

During economical booms, lobbyism is a political reality that we have to deal with. Lobbyists are far from always wrong, and their intentions are almost always good. However, they tend to (as a group) drain the taxpayer’s pockets. Any single one of their demands may seem inexpensive and innocent, but together, they are expensive and, I dare to say, nasty for the taxpayer. It’s hard for the government to argue for spending cuts and tax hikes during a boom; it’s politically risky. Normally, people during a boom feel like there’s no end to it, no need to save for rainy days. We all know that Americans (and people of other nationalities as well) had an extremely low savings rate during the last boom, when they, according to Keynesianism, should have saved (anyone, for that part, can agree on this). People don’t want to think about a recession that is years away, and even if politicians know that it is coming, warning people won’t get you re-elected. Remember, Chris Dodd won his re-election easily in 2004. Today he is famous for ignoring the signs of troubles that there were in Fannie and Freddie Mac. He was an optimist, a guy who wanted to spend both during sunny and rainy days, and he got popular for it. The Keynesian theory, even if we assume that it is theoretically correct, can only work in a dictatorship, where a dictator with good knowledge in economy decides to cut spending during the boom. A dictator can do so, since he do not risk being voted out of office. It’s harder for an elected politician. Granted, there are politicians (and they are not an insignificant number) who support fiscal conservatism during the booms and who carefully watches every sign that a recession might be on the way. However, this doesn’t matter if they are not in majority. And, taking the huge money spent on earmarks in the USA into account… they are not. This, of course, applies to many other countries as well. A government may be able to pay back some of the debt it got during the recession, but rarely all.

Then we have another threat to the Keynesian formula: Unexpected events. This may sound silly, since no-one can predict unexpected events (that’s what makes them unexpected), but when deciding which economic theories to support, it is important to take into account how sensitive they are for unexpected events. First; let’s analyse war. Granted, they are not always unexpected, but cannot always be planned for years in advance (especially not if you are the one who’s attacked). The government is supposed to be fiscally conservative during a boom, but even if it intends to be so, and even if the voters support those policies, a war will mean high costs and an artificial boom. Right after coming out of a recession, a Keynesian country is extremely vulnerable, considering that it is heavily indebted. It will be remarkably harder for such a country to get its voice heard, since we all know that military power and global political power usually comes more or less hand in hand. My point is; you don’t know how long a boom is going to be (and so, you don’t know how fast you will have to pay of the debt), you don’t know when a war will occur, you don’t know when the next pandemic will reach your country, and you cannot plan for things such as Tsunamis. Extreme events, yes, but as painful as it is, they are facts. I do not think that I am the only one who fears that most politicians will have an optimistic view of the economy, thinking that the booms will last longer than they do and so assume they have more years to pay down the debt than they have.

On the other hand, at the same time as politicians cannot know exactly when there will be a war, Keynesian economics also provide an excuse for war: It’s good for the economy. It’s the classical broken window fallacy, which always shows up in new shapes. Keynesians however, seriously believe that in some cases, breaking a window can bring a positive economical effect. Certainly no politician (other than in extremely rare cases) would go to war to save the economy as the official reason, but lower unemployment can be used to make the people feel everything is going well, which will help the politicians in their re-election campaigns. After all, Roosevelt was re-elected twice in 1940 and 1944, despite national debt rising to an astounding level of 122 % of GDP at the end of the war. Granted, he was a war president, and maybe his victories were caused partly by a feeling among the people that they had to stand united, and that they couldn’t “change horses in the middle of the race” as Lincoln once said. However, had they knew that windows were in fact being broken in Pearl Harbour, and that this had no positive effect at all to the economy, and also that building bombs meant wasting resources that could have been used for something else. I am in no way saying that the US abandoning their isolationist position in the World War II was a negative thing; only that the public should be have been given the facts.

Keynesianism, in this, provides a totalitarian government with an excuse for war, at the same time as an unexpected war destroys the Keynesian model.

The paradox of thrift and related fairy tales

In December 2008, a Latvian professor named Dmitrijs Smirnovs was arrested and questioned by the Secret Police of his country, simply for predicting that times were getting worst, that the lat was going to lose values, and that many banks would go bankrupt.

The state probably feared that if he predicted an economic downturn, the downturn may come as a result of the prediction (it would be a self-fulfilling prophecy).

So what does this have to do with Keynesianism? Seemingly nothing, until we realize that Keynesians largely shares the thinking of the Latvian Secret Police: We have to stop people from expecting bad things.

Let’s take a look at the paradox of thrift: If we all save, we will save ourselves to death. We save more, consume less, prices drop, we begin to save more since we expect prices to drop even more (making it more profitable to postpone spending), and prices drop more. Those who are working in shops get fired, unemployment rises, and people save more because they are afraid of becoming unemployed. If you can stop people from thinking something bad is about to happen, the risk that it will happen goes down significantly – that’s how the Latvian state thought, and that’s the reason a professor became an enemy of the state for telling the truth.

A society that sincerely believes that this paradox exists is only a small step away from the tyranny of a totalitarian state.

A totalitarian state would, in this situation, probably create price floors or simply force the banks to stop accepting more money into the saving accounts or cut the interest rate on savings to zero or below. Does this mean that a state which believes in the paradox of thrift will use any of those means, which without doubt are radical? The answer is that in the long run, the temptation is likely to be too big for the government. Normally, stopping people from saving means printing more money to make it less profitable to save, and more profitable to spend. To understand why a government would be tempted to use more radical means, and how it could justify it, we need to understand not only what can suddenly make people save more, but also the nature of a politician.

The author of this text is, as earlier stated, a supporter of Austrian economics (though not of libertarianism). As a consequence, I also support the Austrian business cycle theory, which states that booms are caused by an expansion of the money supply, and recessions by the inevitable slowing down of the expansion of the money supply. During booms, credit is easy available, and people become more indebted. During the recessions, they focus on paying back the loans and saving money.

Many people would disagree with the notion that this is how recession is created; however, the majority should be able to agree on that it can be created this way (if it’s always, or just sometimes the case is a separate issue). What we can see is that the hoarding that may occur in the end of the boom is actually a result of the fact that the boom is artificial. In other words; the government creates a boom during which consumption goes through the roof, and as a consequence, saving will have to go through the roof at some later point. When it does, government tries (and usually succeeds) to tell people that the increased saving is the problem – not the earlier consumption which caused people to become heavily indebted.

The result is that the average man or woman will, I dare to say, become poor. This is what happens in the long run – we will all die (to paraphrase John Maynard Keynes himself). Debts acquired during the boom years are never paid off, or at least not paid off in full. Few people like to save; they need an incentive to do so. It’s easy to be fooled into thinking that the incentive is there all the time – who wouldn’t want to save for a rainy day? Unfortunately, if the government creates the illusion that it can provide all citizens with umbrellas, they won’t save to buy an umbrella themselves. Which makes sense; why would they do so if they’ll get an umbrella for free from the government if they ever would need one? We save to buy things we don’t expect to get for free. If the government promises to provide everyone with health care, no-one will save money to cover possible health care costs in the future.

Except for the obvious disincentive to save that occurs when the state promises to provide for something people used to save for, another disincentive is the constant pressure to consume, and liberal (Keynesian) media’s portrayal of saving as some kind of betrayal. People who not only believe that the state will act like a helicopter parent if they ever need something, but also that saving will hurt the economy, simply will not save much.

To have little or no savings equals having little independence. You need savings to move, especially from one country to another. You (normally) need savings to campaign, to start a newspaper, to hire a lawyer and so on. Encouraging people to live from paycheque to paycheque is an effective way of a totalitarian government (or a government which strives to become totalitarian) to gain control over the population, who will be at the mercy of the government. Banks are likely to be blamed for the recessions that really are caused by the printing presses, and it will be easy for bureaucrats to justify nationalisation of the banking industry. Once banks are nationalised, they can be used for social engineering: If you recycle, you’ll have an easier time getting a loan or a high interest rate on your savings; if you insist on driving an SUV, you can forget about a car loan.

Now, is nationalisation of the banks really a Keynesian goal? No, but it is a Keynesian consequence. When a recession occurs, the government will either have to take the blame, or find a scapegoat. The most likely scapegoats are the bankers, since the public’s image of them isn’t very positive in the first place. When the public is told that the bankers and their greed is behind the recession, they will naturally ask themselves why we don’t nationalise the banks and put an end to their greediness and power, once and for all. This, together with the fact that certain politicians have nothing against the power they would get if banks were owned by the state, will make nationalisation inevitable in the long run.

The dangerous nature of politicians

So what about the nature of politicians? As I mentioned earlier in this essay, it’s important to understand this nature in order to understand why a totalitarian government is inevitable if the Keynesian theory is accepted as a fact.

Politicians, in general, are visionaries. You get involved in politics to change things, not to give people the power to change themselves – this applies even to a significant number of those who label themselves as conservatives. A politician is a man, or a woman, who looks at people on the street who doesn’t wear scarves, despite the fact that it’s really cold. The politician cannot understand why anyone wouldn’t want to wear a scarf on a winter day, and quietly thinks for himself: “If only I had more power; then I’d be able to ban people from not wearing scarves when it’s as cold as it is now. Fewer people would get pneumonia, and the world would be a better place”.

This does not apply to all politicians, and I grant that it’s an extreme example. The point is that many politicians take pride in being social engineers (or simply bureaucrats) and believe that the main cause behind most problems in the world is that the average human is too stupid to control his own life. They also in many cases don’t know the difference between something that is stupid, and something that should be banned. Keynesianism is a dangerous weapon in the hands of these people, because it gives them more power than any other. What works in theory doesn’t always work in practice, especially not if politicians are responsible of putting the theory into practice. If politicians aren’t blamed for a recession, they won’t work hard to fix it. Any stimulus package is likely be loaded with non-stimulating money in order to please voters, and if they don’t work, you can be sure that bankers and other capitalists will somehow get the blame for that as well.

What is the alternative?

The logical questions many people now ask themselves are: Is there any better system? And; don’t at least some dictatorships have a fiscally conservative/libertarian policy?

The answer to both questions is Yes. A free market policy means politicians will have to adopt a hands-off attitude to the economy, leaving them with fewer means through which they can take away freedom from the individual.

I am now going to explain how the free market deals, or would likely deal, with the problems I have counted up in this essay:

Unexpected events, war etcetera

I am not going to claim that a transition from a peace economy to a war economy is easy just because you have a free market. I consider the question whether war requires a planned, or at least more planned, economy, to be open. However, because free market economies don’t acquire trillions of debt during recessions, they’ll have an easier time getting loans (with reasonable interest rates) during a war if they need it. Also, private companies can see a war coming a long time before it’s actually here, and take the precautions necessary (whatever they may be). Government, on the other side, may have a foolish belief in diplomacy and be ill-prepared for war (there is numerous cases of this through history). Private companies can sense that there’s going to be a high demand of hand grenades in the near future, and switch to produce hand grenades instead of whatever they were producing before. The government may be way too late when it comes to producing weapons and mobilizing the army, and the lack of competition that occurs when the government has a monopoly on something (be it production of weapons or production of medicine) may slow down the development of new, and improvement of already existing products.

The free market can act more effectively if the entrepreneurs know that the government won’t mind their business.

The paradox of thrift

This subchapter could also be called: How to deal with a rising savings rate?

Before I answer that question, I’d like to point out that we are nowhere near a high savings rate. To claim otherwise is completely insane. The savings rate is low in the western world compared to the developing countries. Granted, in the current financial crisis, the rate has gone up, but still hasn’t in my opinion reached any significant level.

Anyone with just a grasp of knowledge in elementary economics knows that money never sleeps. This includes money deposited on the bank. They don’t disappear from the economy. When people save, it becomes more profitable to build houses and other expensive products, since the consumers are likely to buy them in a few years when they’ve saved enough.

Also, saving can help ease a so called credit crunch, since the borrowers become more credit worthy (and since the banks will have more money to lend out). This in turn can help the housing market (among others).

But if the savings rate is going up, doesn’t that mean that some people at least temporarily unemployed? The retail sector will have to cut down on spending and likely fire a number of workers, that is true, but I cannot see how anyone could claim this is negative. After all, what use is economic growth if consumers cannot get what they want? If people suddenly want more savings and fewer everyday commodities, then that’s what the private sector should provide them with.

I’d also like to point out that in a free market society, more people are likely to learn two or more professions, so that they can find a job no matter if people are spending or saving. Programs at university are likely to get broader, covering more subjects to better prepare the students for the real world.

Bureaucracy and the dangerous nature of politicians

Many people have told me that even without the economical power given to them by Keynesianism; politicians have more than enough ways to rein in the freedom of the individual. This is certainly true, but; free market policies are not a path towards totalitarianism in the way that Keynesianism is.

A country may become totalitarian because of Keynesianism, but it cannot become totalitarian because of the free market. If it does indeed turn totalitarian, then it is despite the free market.

Why? Because free market economics (whether we mean monetarism or austrianism) teaches that the individual can choose for himself; he does not need a bureaucrat to help him with that. An individual, who is used to choosing on the marketplace, will find it logical that he should have the right to choose in other matters as well.

So how does it come that there are, after all, right-winged dictatorships? If we look at two of those, China and Russia, we can see that a common factor is that they were not democracies before they turned right-winged. In other words, Russians and Chinese people were used to living in totalitarian states. Changing from communism to capitalism doesn’t necessarily create democracy, but that does not mean that capitalism leads to dictatorship – only that it can work despite a dictatorship. I would also like to add that we still don’t know how long a dictatorship can survive in capitalism; recently it has become much harder to censor media because of the invention of blogs. Maybe in the long run those regimes that are described as being capitalistic dictatorships will have to surrender and reform. No-one knows what will happen in the future; my point is that history will tell.

Another free market dictatorship was created in Chile in 1973 in a military coup. As we all know, it did not survive for more than 17 years – much less than the communistic system in the Soviet Union – and so does not suggest that capitalism is compatible with totalitarianism, especially not when considering that the military dictatorship ended with a democratic election in which the ruling party was voted out of office.

Technically, politicians can still micromanage the citizens even if their country has a fiscally conservative/libertarian policy, but thanks to many things such as limits in spending (bureaucracy tends to be expensive, and so a low-tax country probably won’t be able to afford much of it), and the picture of the individual as a being who is free to choose and responsible for her actions, it is unlikely that such a country will end up making laws concerning scarves.


I know that the subject of this essay is controversial and that many, if not most, people will disagree. As I’ve stated earlier, I do not believe that Keynesians have a secret agenda. And maybe that’s why they are so dangerous; because they don’t know that they are dangerous. Had the Keynesians had a secret agenda, a conspiracy, it would have been more easily to fight them. All it would have taken to stop them would have been an infiltrator with a hidden camera or a microphone. Unfortunately, since Keynesian economists aren’t aware of what they are doing, their teachings cannot be fought that way. The very majority are useful idiots who will, unless stopped, likely create many totalitarian states in Western Europe and/or elsewhere within a generation.

Some people are going to claim that I demonize politicians. My simple response is that if we look at how the world has developed since World War II, I wouldn’t say that politicians are demonized – they are accused of doing what they’ve done, it isn’t more complicated than that. The individual, on the other hand, have been demonized by politicians for centuries. They say that the individual cannot handle her own money or make her own decisions. They say that she is so stupid, that she can barely decide what she wants for breakfast. That, if anything, is a demonetization.

Others are going to ask for more proof. They are going to point to statistics showing budget surpluses during booms, and they will also point at the fact that the government debt isn’t constantly increasing. So be it. But the government debt is rarely, if ever, paid in full. And the trend is upwards, especially if we are talking about the United States, the biggest economy in the world. Politicians today don’t know anything about economics, and economists don’t know anything about politics. Until this change, politicians are going to make decisions without knowing the economic consequences, and economists are going to give advices which don’t take the political reality into account.

Keynesian economics have already been used to support wasteful spending in the USA, in the name of stimulus. The purpose behind writing this essay has been to show some other ways the Keynesian teachings can be misused, and misused in far more serious ways. I have shown some of the practical consequences that Keynesian economics will have in the hands of politicians, and why it will happen. Lastly, I’ve also explained the alternative, and why it is, though not perfect, definitely better.

If the Keynesian resurgence will continue is hard to tell, and I have not attempted to analyse that in this essay. But the future, if it does, will certainly look dark. That is the main point that I have tried to make through this essay, and I hope everyone understood.

John Gustavsson
3rd of September, 2009
Örnsköldsvik, Sweden

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