“Critics of John Maynard Keynes were so determined his economics were wrong that they allowed Keynes to dictate the terms of the debate,” says Victor Claar, professor of economics at Henderson State University, in his Acton University lecture. He continues to describe Keynes flawed anthropology with respect to classical economists and the Great Depression. Key observations of human nature include the principles of work, property, exchange, and division of labor. We can survive and prosper, take ownership of our work, support and rely on each other through exchange, and specialize in exchange at an opportunity cost. Furthermore, these observations are linked to moral imperatives.
The U.S. government shutdown ended last night with a budget agreement that raises the debt limit, funding the government until February. Acton director of research, Samuel Gregg, addressed this in a new post at Aleteia. He says:
Once again, I’m afraid, the United States Congress and the Administration has opted to live in un-truth by denying the dire fiscal realities facing America. Since August 2012, the total public debt of the United States has increased from $16,015 trillion to $16,747 trillion. And in the meantime, the size of the federal government also continues to grow. How much more debt do our political masters think Americans want? How much bigger do some of them think the federal government should be? Is there any upper limit in their mind?
But it isn’t just a question of the failure of legislators and government officials. There are, it seems, a good number of American citizens who simply don’t care about fiscal responsibility, not to mention plenty of businesses that prefer corporate welfare rather than actually competing in the marketplace.
In Gregg’s newest book, Tea Party Catholic, he says that governments and individuals running up high levels of debt may be dealing with a “deeper moral disorder.” He quotes Benedict XVI who said that living off of debt is “living in untruth.” (more…)
Over at AEIdeas, James Pethokoukis challenges our attitudes about work and leisure by drawing a helpful contrast between economists John Maynard Keynes and Deirdre McCloskey.
First, he points to “Economic Possibilities for our Grandchildren,” in which Keynes frames our economic pursuits as a means to a leisurely end:
Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.
The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.
Then, he draws the contrast, relying on Deirdre McCloskey’s The Bourgeois Virtues: Ethics for an Age of Commerce. In the book, McCloskey quotes Studs Terkel, who eloquently describes a job “as a search, too, for daily meaning as well as daily bread, for astonishment rather than torpor; in short, for a sort of life rather than a Monday through Friday sort of dying.” (more…)
That seems to be the story, based on what Veronique de Rugy has written at National Review Online. Calling for tax increases in an economic downturn doesn’t make any sense, even under Keynesian theories. So why do so many Keynesians seem to be supporting the idea of allowing tax increases for those earning more than $250,000 a year?
Reason Magazine expanded on this question on their blog. They argue that this trend reveals more about neo-Keynesians like Paul Krugman than it does about the actual accomplishments or shortcomings of John Maynard Keynes. (more…)
[Thanks to RealClearWorld, ThePulp.it, NewsBusters and PewSitter.com for linking to this commentary.] Over at the American Spectator, Acton Research Director Samuel Gregg points to Europe’s “perceptible inability” to acknowledge some of the deeper dynamics driving its financial crisis. And these are primarily a “slow-motion population implosion” complicated by the exodus of young European Union citizens and the return of hundreds of thousands of immigrants to their homes in developing nations. That is an ominous development for a region where the dependency rate — the ratio of retirees per member of the labor force — has ratcheted up as the welfare state has ballooned over several decades.
These facts have made some Europeans willing to ponder the necessity of labor-market and welfare reform, not least because those countries that have weathered the crisis better than others (e.g., Germany and Sweden) actually implemented such changes in the 2000s. Getting Europeans to talk publicly about the continent’s population-trends and their economic consequences, however, is a different matter.
Why? One reason is that many Europeans have long been in thrall to the over-population gospel. Long before Paul Erhlich’s The Population Bomb (1968) — whose doomsday future-scenarios of a world devastated by famines, mass disease, and social unrest unleashed by overpopulation never materialized — numerous European economists had bought into this thesis.
In 1798, the Anglican vicar and one of the first modern economists, Thomas Malthus, published his Essay on the Principle of Population. This argued that growing populations would produce an increasing labor-supply. The result, Malthus insisted, would be lower wages and therefore mass poverty. “The power of population,” he claimed, “is so superior to the power of the Earth to produce subsistence for man, that premature death must in some shape or other visit the human race.” Another English philosopher-economist, John Stuart Mill, was so convinced by Malthusian arguments that he actually spent time in London parks distributing birth-control pamphlets to bemused onlookers.
Read Samuel Gregg’s “Europe in Demographic Denial” on the American Spectator.
The story of Keynes’s rise as the scholar shaping economic policy from “within” is more, however, than just the tale of one man’s meteoric career. It also heralded the surge of an army of activist-intellectuals into the ranks of governments before, during, and after World War II. The revolution in economics pioneered by Keynes effectively accompanied and rationalized an upheaval in the composition and activities of governments.
From this standpoint, it’s not hard to understand why New Dealers such as John Kenneth Galbraith were so giddy when they first read Keynes’s General Theory. Confident that Keynes and his followers had given them the conceptual tools to “run” the economy, scholars like Galbraith increasingly spent their careers shifting between tenured university posts, government advisory boards, international financial institutions, and political appointments — without, of course, spending any time whatsoever in the private sector.
In short, Keynes helped make possible the Jeffrey Sachs, Robert Reichs, Joseph Stiglitz’s, and Timothy Geithners of this world. Moreover, features of post-Keynesian economics — especially a penchant for econometrics and building abstract models that borders on physics-envy — fueled hopes that an expert-guided state could direct economic life without necessarily embracing socialism. A type of nexus consequently developed between postwar economists seeking influence (and jobs), and governments wanting studies that conferred scientific authority upon interventionist policies.
Read Samuel Gregg’s “The Madness of Lord Keynes” on the American Spectator.
Acton’s director of research Samuel Gregg has provided his reasoned take on the new document from the Pontifical Council for Justice and Peace — it’s up at The Corner. While its diagnosis of the world economy is fairly accurate, the council’s treatment plan is lacking in prudential analysis. Gregg’s disappointment is expressed at the end: “For a church with a long tradition of thinking seriously about finance centuries before anyone had ever heard of John Maynard Keynes or Friedrich Hayek, we can surely do better.”
He’s got four main points (full text below): (1) the fiat money system that accelerated financial decline wouldn’t be reformed by a world bank; (2) neither would the proliferation of moral hazards, which might in fact be increased; (3) there is no mention in the document of public debt and deficits, which problems face most developed countries and can’t be ignored; (4) there is little reason to believe that a newly created world bank could avoid the mistakes made by the Federal Reserve and other sovereign banks in the lead-up to the 2008 crash.
Despite the Catholic Left’s excited hyperventilating that the document released today by the Pontifical Council for Justice and Peace (PCJP) would put the Church “to the left of Nancy Pelosi” on economic issues, more careful reading of “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority” soon indicates that it reflects rather conventional contemporary economic thinking. Unfortunately, given the uselessness of much present-day economics, that’s not likely to make it especially helpful in thinking through some of our present financial challenges.
Doctrinally speaking, there’s nothing new to be found in this text. As PCJP officials will themselves tell you, it’s not within this curial body’s competence to make doctrinal statements that bind Catholic consciences. Moreover, the notion that an increasingly integrated world economy requires some type of authority able to make decisions about what the Church calls “the universal common good” has long been a staple of Catholic social teaching. Such references to a global world authority have always been accompanied by an emphasis on the idea of subsidiarity, and the present document is no exception to that rule. This principle maintains that any higher level of government should assist lower forms of political authority and civil-society associations “only when” (as this PCJP text states) “individual, social or financial actors are intrinsically deficient in capacity, or cannot manage by themselves to do what is required of them.”
But putting aside doctrinal questions, this text also makes claims of a more strictly economic nature. Given that these generally fall squarely into the area of prudential judgment for Catholics, it’s quite legitimate for Catholics to discuss and debate some of this document’s claims. So here are just a few questions worth asking.
First, the text makes a legitimate point about the effects of a disjunction between the financial sector and the rest of the economy. It fails, however, to note that one major reason for this disjunction has been the dissolution of any tie between money and an external object of value that regulates the quantity of money and credit in circulation in the “real” economy.
Between the late 1870s and 1914, such a linkage existed in the form of the classic gold standard. This gave the world remarkable monetary stability and low inflation without any centralized authority. You needn’t be a Ron Paul disciple to recognize that fiat money’s rise is at least partly responsible for the monetary crises this document correctly laments.
Second, this document displays no recognition of the role played by moral hazard in generating the 2008 crisis or the need to prevent similar situations from arising in the future. Moral hazard describes those situations when people are effectively insulated from the possible negative consequences of their choices. This makes them more likely to take risks they wouldn’t otherwise take — especially with other people’s money. The higher the extent of the guarantee, the greater is the risk of moral hazard. It creates, as the financial journalist Martin Wolf writes, “an overwhelming incentive to privatize gains and socialize losses.”
If PCJP were cognizant of this fact, it might have hesitated before recommending we consider “forms of recapitalization of banks with public funds, making the support conditional on ‘virtuous’ behaviours aimed at developing the ‘real economy.’” Such a recapitalization would simply reinforce the message that Wall Street can always turn to taxpayers to bail them out when their latest impossible-to-understand financial scheme goes south. In terms of orthodox Catholic theology, it’s worth reminding ourselves that the one who creates an occasion of sin bears some indirect responsibility for the choices of the person tempted by this situation to do something very imprudent or simply wrong.
Third, given this text’s subject matter, it reflects one very strange omission. Nowhere does it contain a detailed discussion of the high levels of public debt and deficits in many developed economies, the clear-and-present danger they represent to the global financial system, and their negative impact upon the prospects for economic growth (i.e., what gets people out of poverty).
Given these facts, how could governments provide the aforementioned public funds when they are already so heavily in debt and already tottering under the weight of existing fiscal obligations? By raising taxes? Even Bill Clinton thinks that’s not a great idea in an economic slowdown. Indeed, the basic demands of commutative justice indicate that governments need to meet their current obligations to existing creditors before they can even consider contributing to further bailouts.
Fourth, the document calls for the creation of some type of world central bank. Yet its authors seem unaware that much of the blame for our present economic mess is squarely attributable to central banks. Here one need only note that the Federal Reserve’s easy-money policies from 2000 onwards played an indispensible role in creating America’s housing-market bubble, the development of questionable securities products, and the subsequent 2008 meltdown.
Calls for a global central bank aren’t new. Keynes argued for such an organization 75 years ago. But why, given national central banks’ evident failures, should anyone suppose that a global central bank wouldn’t fall prey to the same errors? The folly of a centralized supranational body like the European Central Bank setting a one-size-fits-all interest-rate for economies as different as Greece and Germany should now be evident to everyone who doesn’t live in the fantasy world inhabited by EU bureaucrats. Indeed, it is simply impossible for any one individual or organization to know what is the optimal interest-rate for every country in the EU, let alone the world.
Plenty of other critiques could — and no doubt will — be made of some of the economic claims advanced in this PCJP document. As if in anticipation of this criticism, the document states, “We should not be afraid to propose new ideas.” That is most certainly true. Unfortunately, many of its authors’ ideas reflect an uncritical assimilation of the views of many of the very same individuals and institutions that helped generate the world’s most serious economic crisis since the Great Depression. For a church with a long tradition of thinking seriously about finance centuries before anyone had ever heard of John Maynard Keynes or Friedrich Hayek, we can surely do better.