Why Keynesianism Sucks

The science of Economics has often got it wrong – and Gandhi, Marx and Keynes are the best examples. All three have had "influence" on government policy, with devastating effect. But none more than Keynes and the Keynesians.

Keynes propounded the thesis that government spending was the way out of a depression. The idea is that this money would circulate in the economy and boost consumption, that too with a "multiplier effect" – which is the way out of a depression, during which goods are lying unsold and labour is sitting around unemployed. Government over-spending would fix this, or so the Keynesians believe.

Because of Keynesian theories the US Fed is pumping US$ 700 billion into the system. The Europeans are doing likewise. And even our Reserve Bank of India has stepped in with a "liquidity injection" of Rs. 1,45,000 crores. All the world's central banks are acting like a cartel led by the US Fed.

The question to ask is: "Who will first get to spend this new money?" The answer to that is politicians, bureaucrats, bankers and those cronies who get loans.

The second question is: "Who will get to spend this money last?" And the answer to this is ordinary people like you and me.

We must then analyze what will happen in the intervening period. The analysis, developed by the Austrians, is compelling: In the real economy there will be a redistribution of real goods. Wealth will be redistributed from those who get to spend the new money last to those who get to spend the new money first. This is because of the inevitable inflation that accompanies massive injections of money. Gold was US$ 35 an ounce in Keynes' times; it is touching US$ 1300 an ounce now.

Of course, in the present case, the entire world will face inflation. All currencies will depreciate in real terms. Purchasing power of all paper currencies will decline. The poor will pay the "inflation tax." And those who control the levers of the economy will gain anyway. This is why Keynesianism continues: Not because all gain, but because the personnel of The State gain anyway. The dumb masses lose. The idea of boosting government spending through deficits is thus totally corrupt.

What do Austrians recommend in a crisis such as this present one? Very simple: Lower the prices of those goods that lie unsold. Lower the wages of those workers who sit around unemployed. The real estate lying unsold in the US can definitely be sold at lower prices. Even if there are losses, the economy will slowly recover. Once the first worker accepts a job with lower pay, there will be a "natural multiplier" that will come into effect as he uses his salary to demand wage goods.

The greatest harm done by Keynesians is not in Economics. Rather, the greatest harm is done in Politics, which is totally corrupted. The classical liberals believed in "limited government." The government was limited by constitutional laws; and the government's ability to tax was limited by democracy. Keynesians turned the entire edifice upside down. Democracy became meaningless when government got the power to issue limitless paper money. Governments became omnipotent. Which is to say that politicians became omnipotent. The very idea of "limited government" became meaningless.

It is noteworthy that Paul Krugman, the Keynesian who won this year's Nobel prize in Economics is a card-carrying member of the Democratic party. This is the party of the "welfare state." This is therefore the party that believes that governments can spend as they like, as much as they like; that the government has unlimited resources. It is this ugly fiction that is destroying our world – and impoverishing the poor too. Welfare based on paper money is a fraud on the poor.

The Austrians have the solution to this political corruption too: Sound Money backed by Gold. This will lead to "limited government" as no politician will be able to issue money as per his whims. Austrians also believe in "legitimate banking" governed by Law. They stridently oppose the corrupt banking model centered around central banks issuing inconvertible paper notes – the Keynesian model that is behind the crisis of today.