Musings on economics and society

I came across this excellent video, which is doing the rounds all over the internet at the moment, called ‘Fight of the Century: Keynes v Hayek’.

It is a very well produced video, around ten minutes long, that features mustachioed actors playing economic theorists John Maynard Keynes and Frederich Hayek in two concurrent ‘fights’. One fight is metaphorical – a faux congressional hearing where they each put forward their cases to a Congressional panel (keep an eye out for Bernanke lookalike in the background). The other, a more literal fight, in a boxing ring (keep an eye out for who each economist has in their corner for extra geek points).

I urge you to go and watch this. It is funny, clever and thought provoking. Here are some thoughts it provoked in me. Your mileage will inevitably vary

In the video we meet both gentlemen as they arrive for the Congressional Hearing.

Keynes, all sleek smiles and self-assured charisma, is waved straight through by security and generally treated like a golden god. This is to illustrate that Keynesian economic theory, named for British economist John Maynard Keynes, has been the dominant force in economic policy making in Western democracies since World War II. It is the theory predominantly taught by economics schools and has been credited with the non-stop growth fiesta in industrialised societies that dominated the last fifty years. Time Magazine famously proclaimed in 1965 that we are all Keynesians now.

Mr Hayek on the other hand, is portrayed bearing a striking resemblance to uber-geek Dr Tobias Funke from Arrested Development. The security guy outside the Congressional Hearing has no idea who he is.

I won’t tell you what happens in the fight – go and watch it for yourself.

Instead, some more background about the dudes involved and why it matters:

Keynes 

Keynesian theory sees the economy in a predictable and repetitive cycle of booms and busts. Keynesian economists believe that governments can and should judiciously intervene in this cycle using fiscal and monetary policy. If done correctly, they can blunt the harsh and often painful edges of economic cycles and live in a magical pixie fairyland of infinite growth [disclaimer: ‘magical pixie fairyland of infinite growth’ are my words, not those of Mr Keynes].

Whether or not Mr Keynes was on the money (pun!) is particularly topical at the moment. The dominant political questions of our time boil down to what the eff to do about our economy. Whether stimulus or austerity is the best medicine for our current economic woes. Keynesians would argue that we need to keep stimulating the economy by continuing to spend and if we could just damn well spend a bit more, we’d get ourselves out of this pickle we’re in. The Keynesian Prescription feels like the easier pill to swallow, at least in the short to medium term (coincidentally, the term in which most governments operate). Stimulation =  funding programmes and policies. People generally like this, especially when the benefits of those programmes accrue to them and theirs.

Unfortunately, due to quite a lot of stimulus over quite a long period of time, there is a notable lack of available cash with which to continue carrying out this dream plan. This is not, however, stopping the massively indebted US Government (and many governments around the world) as they instead ‘create’ new money (aka debt) through a nifty little process they like to call ‘quantitative easing’ by the Federal Reserve. I like to call it a Massive Pyramid Scheme which will inevitably come crashing down, taking us all with it unless we act soon.

Hayek

Hayek is of the Austrian economist school. Where Keynes sees the economy as a beast that can be tamed by judicious intervention, Hayek is all ‘live and let live’. That is, he doesn’t think that we can centrally plan and control the economy and that any attempts to do otherwise are just plain arrogant.

On the face of it, Hayek’s view of the world is pretty brutal and a whole lot less palatable than Keynes’ experiments in pump priming. Hayek’s view also means admitting we can’t control everything – that we can’t know everything. This is scary because not being able to control things is Ultimate Human Fear Number One. However, pretending we can control something that we actually can’t doesn’t make the bad thing go away. Instead, the problem just gets bigger and uglier in the dark. Staying in the infinite dark and hoping that morning never arrives is not a good strategy. Sometimes we just have to turn on the light and look under the bed. Unsurprisingly, the implications of ‘feel the fear and do it anyway’ as applied to the economy does not tend to be a massive vote-winner.

These concepts are explained by two verses in the video. The first is Hayek responding to Keynes’ suggestion that we should spark up the economy by more stimulus and spending. He says:

The economy’s not a car, there’s no engine to stall
no expert can fix it, there’s no “it” at all.
The economy’s us, we don’t need a mechanic
Put away the wrenches, the economy’s organic

Basically Hayek thinks that the economy is not something that man can create or control. He believes that to think otherwise is hubris on a massive scale.

The following verse delivered by Hayek is my favourite stanza in the whole thing:

the lesson I’ve learned? It’s how little we know,
the world is complex, not some circular flow
the economy’s not a class you can master in college
to think otherwise is the pretense of knowledge

This stanza actually gave me goosebumps. It hit on something I have held subconsciously in my mind for a long time. I have always struggled to put my penny down on important matters – to know definitively which way is ‘right’ and which way is ‘wrong’. At times I have seen that as a weakness – a flip-floppy indecisiveness whose prevarication means that, in refusing to stand for something, I end up standing for nothing. On the upside, I don’t pretend to know shit I don’t.

A common response to not knowing what the eff is going on is to flock to people who seem like they do know what they’re talking about. This is dangerous. Noone knows more about what I need and want than I do. How could they? Even I don’t know what I want most of the time.

Socrates/Plato and a little Shakespeare (not in the video but bear with me. Just because it’s not on TV doesn’t mean it isn’t important.)

Allow me to jump briefly into my space/time contiuumobile and to take you to Athens in the 5th Century BC. There was this dude called Socrates and he was awesome.  He talked a lot with the people of Athens. One of those he talked to was another dude called Plato. Plato wrote a bunch of their chats down (hence we don’t know what was actually Socrates and what was actually Plato – doesn’t really matter though) .

One of the many awesome things Soc-dawg taught was aiming to disabuse people of the notion of their own certainty. In particular, Socrates was all about lighting a flaming torch on these dudes the sophists that were roaming Athens purporting to know pretty much everything about everything, and charging big bucks to share it (Uh, Shyster alert guys!). One of his quotable quotes:

I am only wise insofar as what I don’t know, I don’t think I know. – Socrates/Plato, 5th Century BC sometime.

Boom! You said it, Socrates or maybe Plato!

My conclusions

Back to the present day: It is probably pretty clear that I am highly sceptical of anyone telling me they know what’s best for me and others. The word ‘should’ is dangerous and if someone uses it on me it instantly get my heckles up. I look at them as a potential sophist, ‘full of sound and fury signifying nothing’ (to steal from another philosopher king).

Back to the video I am so enamoured with: It ends with a couple of quotes written up on the screen for people to ponder. This from Keynes:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood … Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

John Maynard Keynes in The General Theory of Employment, Interest and Money

What is ironic is that, unbeknownst to Keynes, he has become that defunct economist. 

In sum:

a) Believing that we know best about anything, including the economy, usually ends in fail. Thinking we have the power to enslave the economy to the ultimate benefit of all is a notion full of endearingly human hubris.

b) In the absence of our own knowledge, ceding decision making powers to a few who purport to ‘know best’ and ‘act in your interests’ is a particularly silly notion. [NB: Some will say that in the absence of a strong government to assert control we are effectively embracing the freemarket and ceding those same rights to big business. This is where Corporatism and Capitalism get confused.  I don’t have time to go into it here but suffice I don’t think Government can protect us from Corporatism. Instead, what often happens is a horrific marriage of the two, worse than either on their own. Witness the US right now.]

c) We have spent the last half a century, doing exactly that (i.e. allowing the economy to be controlled by a few who presume to know best). We are now reaping the ‘rewards’. Albert Einstein defined insanity as doing the same thing over and over again and expecting different results. It’s time to turn the light on and deal with what’s been going on in the dark. This will probably involve stopping printing money that is actually debt, stopping spending money on things we can’t afford and stopping telling and accepting the lie that we can afford them. Ouch. It’s gonna hurt but not as much as what will happen if we keep letting the shadows in the dark fester and feast on our fear for even longer. They don’t go away, they just get scarier and bigger.

d) Keynes isn’t ‘right’. Hayek isn’t ‘right’. The Government, any Government, isn’t ‘right’ and doesn’t have the answers. To believe that they do is ceding your individual sovereignty to a group of people who, by definition, have very different interests to you. When push comes to shove, their interests will outrank yours and suddenly you’ll find yourself out of your leveraged up home in the shadow of a collapsing pyramid, trying to use your flat screen plasma TV as a blanket and asking, where did it all go wrong?

It’s time to take back the dark, people.

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About maximumbrooks

Christine is currently based in Wellington, New Zealand. She improvises regularly at venues around town and dabbles in other things that interest her. She likes mango sorbet, monkeys and, apparently, throwing caution to the wind.
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2 Responses to Musings on economics and society

  1. login_id_ says:

    Nice review. Yes this was a pretty fascinating video. There are some parallels to the upcoming U.S. republican primary, where we’ll be hearing from a lot of devotees of Keynes and Hayek. Should be interesting.

  2. Geoff says:

    Up front I want to say that I really like your intention and completely agree with what I think is your main message. People certainly need to get engaged in what is going on and not cede their thought sovereignty to others. That said, I have 3 concerns with the video and aspects of your blog.

    First point: an emotional one. I am don’t like the idea of putting words in the mouth of dead people. Calling modern policy ideas Keynesian or Hayekian hugely oversimplifies their ideas. They might have said something completely different in the modern circumstances.

    For example, Keynes did not believe in a “magical fairytale land of endless economic growth”. He actually felt we would get to a stable point of wealth where growth would taper off. He might have thought we are already past that.

    Modeling your thinking on someone else – what would Jesus/ Keynes/ Hayek do? – is a useful thought exercise. It helps you generate new ideas, but it is no basis for deciding economic policy. The world is so different that we don’t really know what Keynes or Hayek would think. Well, maybe Hayek, because his theory was really that simple.

    I am also uncertain Keynes would approve of the current approach to spending. More importantly I doubt he would have endorsed the profligate lending and spending of the 1990-2010 era. The financial regulation we had during that time is more reminiscent of Hayekian economics than Keynesian. Under Keynesian theory, that is the time we should have saved. The trouble is that we grew for so long that we thought it was normal and we started to get reckless. So Keynesians might well argue to spend now, but if they are consistent then they should have argued we spend less before, which would have kept us out of the pickle. To his credit, Cullen was one of the few finance Ministers in the world who kept running a surplus during the false golden era of the 2000’s. Hence NZ did OK in the financial crisis, despite our huge private debt.

    Which brings me to my second point. Most dogma is pointless, because it is just a theory. Theory inevitably simplifies the world to a set of assumptions. Reality is messy and not that simple. So, most dogmas are right some of the time, but few are right all of the time. We need to focus on what works.

    What I find most interesting about dogma is how few people are consistent in applying it. As discussed above, we were all Hayekian low regulation free marketers during the 2000s, and now we are Keynesians. Most people switch their beliefs on the basis of what suits them personally. You are right in that Keynesianism is the easier pill to swallow now, but it wasn’t during the naughties. I find that arguing about dogma is usually just a smokescreen for naked self interest.

    You can see it with the Emissions Trading Scheme. This is a perfect neo-classical market solution to an environmental problem. It should be embraced by the right, but instead it is muted, because it doesn’t suit their business interests, particularly farming. This is why I have respect for my good friend the Austrian economist Frederic Sautet, despite our differing views. At least he is consistent with his beliefs, which is more than most.

    My final point is on the classic Austrian stance regarding the pretence of knowledge. Your favourite stanza:
    the lesson I’ve learned? It’s how little we know,
    the world is complex, not some circular flow
    the economy’s not a class you can master in college
    to think otherwise is the pretense of knowledge

    I find this to be the sort of stuff you hit in Stage I philosophy. In my early twenties I had many intoxicated conversations about how little we really know. Wow. It is true, but to hold this as a central belief is an excuse for inaction. Should have let the banks collapse? That would certainly teach them, but then we would have returned to people saving money in their mattresses. We have sure learned our lesson, and the lesson is never allow banks to take that kind of risks with our money again.

    How far should you push the pretense of knowledge argument? Do you ignore science completely? You probably should, because it is the pretense of knowledge. I think you should try flying off a building, because gravity is merely the pretense of knowledge.

    Yes, we don’t know as much as most people think we do. Yes, most ‘experts’ are really making a best guess in a complex world. Nothing is certain. People should know this. But we shouldn’t use it as an excuse not to do anything. We need to try stuff, based on the best available knowledge, and see what works. Sometimes, it needs to be Government that tries stuff. I agree we need to be humble, and act in a precautionary manner because we will never really understand what is going on. And yes there needs to be more debate. And people shouldn’t leave it to experts, because most people that run a household understand enough economics to talk about how the country works.

    Example: should we act on climate change? Surely taking action is the pretense of knowledge. The science will be never more than 95% certain about it, there will always be doubt exploited by the deniers. And maybe they are right, it might take us years to find out for sure. But probably they aren’t, and the implications are potentially devastating, so I say we should act, even if it is on the basis of a pretense of knowledge.

    Incidentally, you may read this diatribe as defensive of Keynes. But I want to say that I don’t consider myself Keynesian. I am interested in what works, and to me dogma has very little to do with it. So maybe you are right, Keynes is defunct. But if he is then so is Hayek. May they both rest in peace following a simultaneous double KO.

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