Sunday, August 22, 2010

Lew Rockwell on Keynesian "Inception"

One thing I like about Lew Rockwell is that he has an uncanny way of explaining things in ways that anyone (except, perhaps, a Ph.D. economist) can understand. There is no wonkishness, no equivocating, and certainly no appeal to the God of the State.

His latest article, "The State's 'Inception' Fails," is an excellent case in point, and I urge readers to find out for yourselves why I believe this commentary is on the mark. Lew writes:
Two years ago, the economy was seriously dragged down amidst an amazing banking crisis that spread throughout the world. The illusion created by loose credit – that housing could go up in price forever and we could enjoy permanent prosperity due to monetary expansion – was shattered by events. Reality had dawned. We found ourselves in the midst of an economic depression.

At that point in policy, we were at a fork in the road. The wise direction was to let the depression happen. Let the bad investments wash out of the system. Let housing prices fall. Let banks go broke. Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by the Reagan administration in 1981, and by the Harding administration in 1921. The result in both cases was a short downturn followed by recovery.

The Bush administration, in a policy later followed by the Obama administration, instead attempted a tactic of dream incubation as portrayed in the recent film Inception. The idea was to inject artificial stimulus into the macroeconomic environment. There were random spending programs, massive buyouts of bad debt using phony money, gargantuan tax tricks, incentive programs for throwing good money after bad, and hiring strategies to weave illusions about how all is well.
His reference to "Inception" is quite accurate, and his explanation clearly explains his analogy:
In the movie, the goal of the dream incubation was to implant an idea into an unsuspecting subject’s head that would cause him to act differently than he otherwise would have. In the real life version of inception, the state tried to implant in all our heads the idea that there was no depression, no economic collapse, no housing crisis, no push back on real estate prices, and really no serious problem at all that the state cannot fix provided we are obedient subjects and do what we are told.

In the movie version, the attempted inception is on a time clock. The dream weavers can only keep the subject in a state of slumber so long. In the real life version, things are much messier. The headlines have spoken about the impending recovery every day for all this time, and yet the evidence has never really been there. All the stimulus really did was forestall events a bit longer, but it hasn’t prevented them.

Now, with the stock markets melting and the near-universal consensus that we are back in recession, everyone is awake. It is pretty clear that the inception did not take. The unemployment data look absolutely terrible. As the Wall Street Journal points out, only 59% of men age 20 and over have a full-time job (in the 1950s, that figure was 85%). Only 61% of all people over 20 have any kind of job now.
Unfortunately, the "educated" people like Paul Krugman and Ben Bernanke, while disagreeing on some of the details of what government policies should be, nonetheless share the same general view: Only government spending can bring back the economy through artificial "stimulus." Unfortunately, these people have misunderstood what an economy really is and how it works. Like other academic economists, they see an economy through mathematical equations in which there really is no purposeful human action.

Instead, the automons produce goods on one end and then "buy back" what they have produced, which makes no sense from the larger point of view. It creates a view of people who simply go through the same motions day after day, and if they do it enough times, the economy gains what Krugman likes to call "traction," which then permits this process to go on somewhat rhythmically. If the individual does not spend in the patterns that the academic economists declare are necessary for this "traction" to continue, then the consumer somehow is "falling down on the job."

With the "Ruling Class" economists and politicians, there always is someone else to blame. The "stimulus" was too small; consumers are greedily saving their money instead of dishing it out at the stores and in auto showrooms; businesses refuse to engage in long-term spending and investment; banks are sitting on reserves; or Republicans (though is a huge minority in Congress) are keeping President Obama from carrying out his proper duties just as Goldstein constantly thwarted the aims of Big Brother.

Unfortunately, this administration -- like the one that preceded it -- is refusing to face reality and continues to believe in its "inceptionist" tactics. However, an economy is not an imaginary construct; it is a real entity and its success depends upon the ability of entrepreneurs and producers to make those goods that people need, something that always will escape the understanding of the supposedly "best and brightest" among us.


Bob Roddis said...

It’s always important to remember what drives Krugman. It’s his view that market economies just cannot work without tinkering and that he is the most brilliant and essential economic tinkerer of all (after Keynes, the master):

Some of those who consider themselves Keynesians, myself included, agree with what Keynes said in The General Theory, and consider the rejection of Say's Law the core issue. On this view, Keynesian economics is primarily a theory designed to explain how market economies can remain persistently depressed.

Krugman then declares that Keynes suggested that the core of his insight lay in the acknowledgement that there is uncertainty in the world… This irreducible uncertainty, he argued, lies behind panics and bouts of exuberance and primarily accounts for the instability of market economies.

There is absolutely no basis for either of these naratives. But those phony narratives coupled with Krugman’s own self-inflated view of his own goodness and brilliance (like all other “progressives”) give us the Krugman we know and love: an arrogant fool and clown demanding to be allowed to run everyone else’s economic life.

Note that no one anywhere ever bothers to refute the basic Austrian axioms (because, due to intellectual sloth, they don’t know them), but almost all online Keynesians denounce those who have refuted the absurdities of Keynesianism as dumb and ignorant of “economics”.

AP Lerner said...

It’s appropriate that Prof. Anderson and one his hero’s, Lew Rockwell, reference the movie ‘Inception’ in this post. You see, if one paid close attention to the movie, and actually spent some time analyzing it (analyzing – a difficult task for Austrian economists) you would realize the entire movie was a dream. From the opening credits to the final roll, the entire movie was not reality.

This can be said for most of Rockwell, Schiff, Anderson, and Murphy’s economic thinking as well. You see, they pay little attention to the reality of the world, and it’s evident by their ignorance of the monetary and banking systems of a sovereign country such as the US. Austrians don’t believe in facts, or data, or reality. They believe in ideology first, and according to their misguided ideology, governments and the deficits they bring are evil and we will end up in limbo when the government defaults and/or hyperinflation sets in. Of course, all the empirical evidence says otherwise, but that does not matter to this group of dreamers.

In fact, much like the movie, Austrians’ have created their own dream like world, libertopia. In libertopia, where Rockwell, Murphy, and Anderson reside, it’s ok to misrepresent the facts when they do not support your ideology. This essay by Rockwell is a great example of ignoring facts and reality. There is a lot that is nonsense in this Rockwell article, but I’ll focus on this one line:

“Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by the Reagan administration in 1981”

This must be a joke. Ronald Reagan intervened with the economy more than any president in the last 40 years. For example, during the course of his presidency, Reagan signed into law 15 different tax bills. This, folks, is the very definition of regime uncertainty. And by the way, 6 of those bills were during the first two years of his presidency, and 11 of those bills RAISED taxes by $132B, negating nearly half of the tax cuts he passed. And, by they way, most of those 11 tax increases were targeted at the middle class. Can you say income redistribution from the middle to the rich?

On top his repeated attempts to change the tax code, Reagan’s Fed jacked up interest rates to sky high levels in a pointless attempt to rid the economy of inflation – inflation created by OPEC setting prices, not by demand. Why would higher interest rates fight off inflation not caused by demand? By the way, it was de-regulation that took place in the late 70’s that ended the ‘inflation’, not Reagan and Volcker punishing the economy and the middle class.

But the greatest ‘gift’ that the great Reagan gave the US economy? Of course, the great Reagan appointed none other than Alan Greenspan to head the Fed. That’s right, Reagan, the greatest champion of free market capitalism since ‘Atlas Shrug’, appointed the maestro, the greatest manipulator this country has ever seen. Ironic, don’t you think?

And you want to claim Reagan just
stood by and let the market work it’s magic during the early 80’s? Well, if you believe that, then someone must of planted that idea during a dream.

Bob Roddis said...

To [the fake] APLerner:

We Austrians have been aware of Reagan’s severe case of statism from the very beginning:

Still, interest rates were 20% and with a few exceptions (Chrysler), there was not a lot of bailing out done.

When are you going to answer my questions about scarcity and from whence all of the promised social security goodies are going to come? See the post dated 9/16/10.

We understand you completely. You might as well march around with a sandwich board announcing “I don’t know nothin’ ‘bout no Austrian economics! ” Or economics in general for that matter.