[Posted on Tuesday, May 3, 2011, in the site of the Instituto Mises do Brasil, http://mises.org.br/Article.aspx?id=1001}

Imagine a father that taught his children at an early age to spend everything they owned - even more than they earned - and instilled in them that the habit of saving is an abominable vice and that contracting debts is a commendable virtue.  When dying, he calls his children and tells them that he is leaving them with huge financial burdens, and, moreover, still instructs them to do the same with their children when they become elderly by leaving their children in a bigger hole than they are in now - inevitably putting pressure on their children, grandchildren, and great-grandchildren and all future generations. Certainly, we would immediately brand such a father as irresponsible, parasitic, wasteful, extravagant, and a spendthrift. In moral terms, a horrible example for his children.

 

However, what few people realize - including nearly all economists, is that Keynesianism is nothing more than a supposedly "scientific" defense of behavior of the hypothetical father! Furthermore, that the vices of the father are not, from the view of society, vices, but virtues; and, that individual virtues such as frugality, modesty, thrift, and good management of hard work, when considered from the point of view of the many, are not virtues but deplorable vices and deadly sins.

Surprised? Well, think with me about the essence of the General Theory, and note that the concept of the "multiplier" of spending, according to which increases in the marginal propensity to consume of the whole society end up creating more than proportional increases in collective income, must be a magic trick! In a closed economy, the "multiplier" is defined as mathematically identical to the inverse of the "marginal propensity to save," i.e., the higher the savings rate, the worse for everyone. In this case, the multiplier will be low and we will have unemployment and wailing and gnashing of teeth. I will not demonstrate here the inappropriateness of Keynesian "macroeconomic" thinking; I'm more interested in highlighting the inherent immorality of Keynesianism than in discussing technical weaknesses and drawbacks of the General Theory, which makes it a rather mediocre book in terms of economic theory.

But if you are interested in dissecting and analyzing them, you only have to read the works of the authors from the Austrian School  - particularly Man, Economy, and State, the seminal work of Murray Rothbard which is currently being translated into Portuguese by the Ludwig von Mises Institute Brasil. In addition, the economists of the Public Choice School, especially James Buchanan and Gordon Tullock, may enlighten you on Keynesian weaknesses (Note that even important critics of government interventionism and ardent supporters of free markets, like Milton Friedman and the Monetarists of the Chicago School, used essentially Keynesian instruments in their critiques. A famous line by Friedman reads: We are all Keynesians now).

Keynesianism is an immoral doctrine because it is based on the gratification of immediate consumption and spending, not on concern for future savings and productivity increases. Under the pretext of combating unemployment and poverty, Keynesianism radically reverses the moral values established in economic theory since St. Thomas Aquinas, and later, through the post-scholastics, since David Hume and Adam Smith, to transform private vices into public virtues and private virtues into public vices. This perspective breaks with the whole tradition of economics that, as we know, began with great moral philosophers. This does not mean that every Keynesian economist is immoral. Indeed, for the most part, they are morally upstanding and well intentioned. It just means that, due to serious deficiencies in their training, they have not studied moral philosophy and ethics and therefore do not realize the immorality of the theories which they naively defend.

How can the success of Keynesianism be explained? How, in one of the most famous debates of the early 20th century, between Keynes and Hayek, did Keynes emerge the winner despite numerous inconsistencies in his theory when contrasted with strong Austrian arguments based on rationality? How can it be explained that, in politics, virtually all political parties throughout the world have turned into bastions of Keynesians?

The answer is not difficult to find. The success of Keynesianism is in its strong popular appeal, in the sense that "markets are evil" and governments are "good" and always look after the common good. Also, while Hayek preached austerity, Keynes argued that it was necessary to spend more. Is this not exactly what politicians, all throughout history, have wanted to hear? Especially if told by a "scientific" source?

In the recent article, Crises: Economic and Financial, or Cultural and Institutional? Analysis in light of the debate between Hayek and Keynes, published in the FAAP's Economic Journal of International Relations (vol. 9 (num. 17), 2010), Portuguese economists Jose Manuel Moreira and André Azevedo, professors at the University of Aveiro, concluded emphatically that "the society of consumerism and improvidence is, after all, the reverse of the coin of a famous dictum attributed to Keynes that: "In the long run, we are all dead." They argue further:

"We also affirm that both the root causes and the most striking consequences of the crisis of our time can only be perceived and addressed if we look at Keynesianism as a coherent and articulated system that goes beyond the economy. A system, especially since the 1960s - to transform the majority of economics, politicians, and "opinion makers" into supporters of the tenets of Keynesianism - that has successfully asserted itself as a social theory of our time. A system that is not based in economic theory, but on global thinking. It is a system of attacking savings, and a set of liberal, conservative, and Christian values - always with an eagerness to eliminate the wrinkles of the future." (p. 122)

Near the end of his life, Keynes gave testimony that he no longer believed in what he had written in the General Theory - which came to contradict some of his most famous disciples, like Nicholas Kaldor and Joan Robinson - but, as noted by Rothbard, Keynes thought he was too old to change his attitude, and should for this reason still be considered immoral. It never hurts to remember that in an autobiographical passage (My Early Beliefs), Keynes had boasted of how his circle of Cambridge friends (almost all belonging to the Bloomsbury Group) refused to respect traditionally preferred moral norms and eschewed any personal obligation to obey general rules. They were immoralists, in the strict sense, in their own admittance.

It is saddening to see that, especially after the devastating financial crisis of 2008, so many years after the General Theory, many economic analysts and - even worse - the general public and the central banks of developed countries had advocated applying Keynesian therapies to remedy the crisis. Monumental expansion of money and credit, using taxpayer funds, was used to rescues shortsighted banker and businessmen and promote policies that encourage consumption. It seemed like a Risorgimento of Keynesianism. This, however, will not last long.

Why will this resurgence be short? Keynes' diagnosis of the Great Depression was entirely wrong (as well as the crisis of the early '20s which ended without any need for state intervention), but today, after seven decades, there is a serious aggravating factor that makes it more wrong yet, because after seventy years of Keynesian fiscal and monetary management, states are broken all over the world, plagued by debts they cannot pay and other economic ills (social security systems, health, labor, and tax problems) that grew, swelled, and today overflow due to the welfare state Keynesianism provides.

The grandchildren of 2011 are being called the pay the bills that their fathers and grandfathers have collected over seven decades, and although Keynesians recommend the trick of passing the bill to future generations - this will be absolutely impossible; states will be broken before this passes. Fiscal and monetary morality both, individual and collective, will be restored, not by beneficial causes, but by the evil of unemployment and inflation

And the morality that has characterized the Austrian School of Economics and the Public Choice School, will be restored in practice. And, hopefully, in academia.

 

Translated by This email address is being protected from spambots. You need JavaScript enabled to view it.

Ubiratan Jorge Iorio Ph.D. in Economics from Fundacao Getulio Vargas, Professor of Economics at the State University of Rio de Janeiro - UERJ (Brazil) and Academic Director of the Mises Institute Brazil.