Keynesianism: The (near) 80-year-old fallacy

One of the things that interests me about Paul Krugman is his use of the word "fallacy" when applied to economics. When I first was learning about economic fallacies, I was taught that they are committed when people believe they can circumvent or negate the Law of Scarcity and the Law of Opportunity Cost.

This was neatly expressed in the acronym TANSTAFL, or "There ain't no such thing as a free lunch." Today, however, it seems that economics, or at least the "economics" of Paul Krugman, has "evolved" and "progressed" well beyond opportunity cost. How do I know? Krugman himself has told us.

In a recent blog post, he makes some interesting, if not outrageous, statements. (Come to think of it, Krugman makes lots and lots of outrageous statements.) He declares:

...when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.

The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.

What happened in 1971? The U.S. Dollar collapsed as President Richard Nixon declared that suddenly it had come "under attack" by those evil "speculators." Nixon said nothing about the fact that the government, through the Federal Reserve System, had inflated the dollar for years in order to pay for the Great Society and the Vietnam War, and at the same time offering gold from the treasury to foreign governments at $35 an ounce.

Not surprisingly, U.S. gold reserves were fast dwindling and there was a run on the dollar itself, so Nixon did as one might expect Nixon to do: he blamed others and failed to tell the truth about what really was happening. Furthermore, he slapped down general wage and price controls in order to try to keep consumer prices from escalating.

Nixon had the public support of a lot of economists, even those who knew that his "economic plan" (then called Phase I) would be an inflationary disaster -- and it was. What economists "knew" in 1971, if one looks at the actions of the Fed and the president's economic advisers, was that government could inflate its way out of trouble, and the government could manage the economy through various edicts.

This was the day when John Kenneth Galbraith was the king of American economists, along with Paul Samuelson. Of course, what these men "knew" turned out to be utterly untrue. Government could not inflate its way out of trouble, and the 1970s, a decade when the U.S. economy lurched from one crisis to another, proved it.

However, I suspect that Krugman would have us believe that the price controls were brilliant, that all of the problems of the dollar in 1971 were due to speculators, and that had the government left price controls on everything, we would have enjoyed unparalleled prosperity. Or something like that.

His next statement, however, is a Classic Krugman Howler:

I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies in the belief that they’re profound insights, because they’re ignorant of the hard-won insights of the past.

What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t.

And what is the "enlightened" viewpoint? Why it is print money, bail out everyone, continue the fraud of heavily-subsidized "green energy" that Krugman and his friends insist will lead us to recovery, and have the federal government hire millions of people to engage in make work.

Now, since the General Theory was published first in 1936, it is only a 75-year-old fallacy. The "80-year-old "fallacies" apparently are things like the Law of Scarcity and the Law of Opportunity Cost. In Krugman's view, it is "progress" simply to say that when the economy is in recession, Opportunity Cost no longer holds, and that government can alleviate or even do away with Scarcity via the printing press.

Furthermore, Krugman has made it clear that anyone who might actually appeal to those "80-year-old fallacies" is immoral and has no conscience. Yeah, Krugman and the Really Smart People have done away with Scarcity simply by declaring it no longer exists, at least when government prints up the money.

Keynesianism is one big fallacy, and a cult fallacy at that. It violates the Law of Cause and Effect by declaring that effect really is cause. And it wants us to assume that work is nothing more than a transmission mechanism for money, and it does not matter what government pays people to do, just as long as it provides money so that they can spend it and make us prosperous.

This isn't economics. It is nonsense.