Are the Keynesians Correct?

Paul Krugman definitely has a sense not only of his own "rightness," but also his own righteousness. While it would be interesting for me to delve into the details of his column today in which he attacks Fox News, when someone goes off the deep end into an outright rant, I let his own words speak for himself.

Although I don't have TV and would not be watching Fox News anyway, nonetheless I do find it interesting that Krugman even wastes time complaining about "news bias." Having followed his employer through the infamous Duke Lacrosse Case, in which the NY Times continued to insist that Mike Nifong was telling the truth and that black was white and that there was a "body of evidence" that should have pushed the whole thing to a trial, I can tell you something about "bias" from a media source. Even today, I marvel at how those "sophisticated" people at the NYT could find a way to believe in an actual "magic towel" that could wipe away all traces of Crystal Mangum's DNA while retaining the DNA of Duke "rapists."

So, when Krugman claims that anyone who disagrees with him either must be on the payroll of the Koch Brothers or the Coors family, I think he has jumped the shark. Could someone say just as easily that people who think like Krugman are on the payroll of George Soros? After all, the famed New Yorker article by Jane Mayer, which claims that the Koch Brothers are the secret force behind the Tea Party, admitted that Soros gives more to leftist causes and organizations in one year than the Kochs have given in their lifetimes.

(For the record, I have published two book reviews and one article in Regulation Magazine, which is published by the Cato Institute, which receives Koch Brothers money. I received $1,000 for each piece that I wrote. That must mean, according to Krugman, that I am on the Koch payroll.)

There is a much more important piece that Krugman wrote on his blog last week that is much more intriguing than his latest anti-Fox rant. In "How the Other Half Thinks," Krugman declares that the Keynesian predictions have been closer to the mark than what he calls the "classical" positions; therefore, Keynesianism must be correct. He writes:

The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.

Now, I am not sure what he means by "classical" here, given that there have been many schools of thought from the past. Does he mean the Monetarists? The Marshallians? The Austrians? (Not a chance there, since Krugman hates the Austrians and when he does describe their positions on things, he deliberately distorts what they say, creating his own "straw man," and then knocking down a false image.)

Like John Maynard Keynes, Krugman creates the "straw man" of "classical" theory and goes from there. If there is a heart to Krugman's point, it is this: So-called laws of economics are turned upside down when economic conditions push interest rates -- or at least interest rates set by the central bank -- to near zero.

When that happens, according to Krugman, then "virtues and vices" and, well, vice versa. Here is the problem I have with his point, and it is fundamental: The Law of Scarcity cannot be repealed by Federal Reserve policies. When one goes to the core of the issue, that is what Krugman is saying.

Krugman's economic thought is really not "economics" at all. It is a mathematical, mechanistic view of an overall economy in which there are no purposeful entities called people. In that view, production and consumption are two separate and unrelated things; the only purpose of "spending" is to clear the shelves so that producers will have something to do.

While the British "classicals" of the 19th Century were way off in their theory of value (and never did fully embrace Marginal Utility, instead creating a hybrid theory in which MU worked in the short run and cost-of-production in the long run), they did hold to Say's Law. (I discuss Say's Law and the Austrian Theory of the Business Cycle in this paper which appeared last year in the Quarterly Journal of Austrian Economics.)

I agree that Krugman has been correct in that we have not seen the hyper-inflation that some have predicted, although when one understands that new money moved into the system via bank loans, it is not surprising at all, since business activity is way down. The real issue, then, is why we are not seeing business activity.

Krugman's answer is that we have to have more spending before businesses are willing to borrow and spend beyond their short-term needs. In that view, spending will lead to spending, and once the system gains what Krugman calls "traction," the economic train can move forward. (My sense is that he dismisses the run-up in gold, silver, and other commodities as being the result of "nut cases" buying the stuff and having no economic meaning, except that Fox News viewers have extra money to spend.)

For lack of time (yes, I do have a day job, and I have to meet with the AACSB re-accreditation team this morning), I cannot go into a full explanation of an alternative view here. However, I do want to make this salient point: Laws of economics are immutable; they cannot change because no one, not Krugman, not the Keynesians, not the Charalists, no one, can repeal the Law of Scarcity.

Krugman really wants us to believe that the Law of Scarcity does not hold when interest rates (set by the Fed) are at a "zero bound." That is the bedrock of the discussion, as I see it. To me, it is like Krugman is saying that the Law of Gravity cannot hold when one is discussing the Theory of Evolution or the Theory of Global Warming. It makes no sense, for it violates the very fundamental tenets of economic theory.

Say what he will, Krugman is trying to argue that Scarcity does not matter. Well, it does matter and it matters greatly.