Political Economics

Political Economics and Keynes

Summer 2009

by Cameron Nehrer




The greatest economists of history based all there theories on sound principles. For them it wasn't so much collecting data and allowing the data to speak for itself. Certainly human behavior, or action, is too spontaneous and robust for the data to provide enough support for any kind of theory. Of course, some sort of theoretical apparatus to analyze and evaluate the data is indeed a necessary tool while studying economics.  One must be committed to logic and reasoning before ever becoming a great economist.

Today, however, a growing number of mainstream economists have a reckless disregard for the use of both logic and reason in their work. When I hear Obama say,"...economists endorse.." his plan to recover from the downturn by running trillion dollar deficits over the next decade, I think right away of these economists. I question the motives of these so called intellectuals, and would not be too surprised if they were being paid off by politicians to fashion a theory that benefits the state. Either way, for the sake of scientific advancement, sound principles must always provide a strong foundation for economic theory.

John Maynard Keynes, the pioneer of mainstream economics was described as a neo-classical economists. Keynes paved the path for economists who are great at deluding the public. In his 1963 book, General Theory of Employment, Interest and Money, Keynes explains that the government could raise employment, real income and capital wealth merely by burying money under the ground and inviting private enterprise to dig it up. Many economists today see this as some sort of great revelation that Keynes had made. They see government fiscal policy as the best stabilizer to an economy in all cases, without proper examination of the effects it has. Of course, any economist who is dedicated to his work would agree with what Ludwig Von Mises once said in 1848, that "The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen". Keynes of course had a different idea, his famous statement, "In the long run we are all dead", illustrates this clearly.

Its no wonder that Keynesian theory has been the politicians best friend during times of economic turmoil. It is during times of economic turmoil when society demands solutions from the government. Politicians thrive in this environment by making promises that make people feel good. Phony politicians win people over by promising handouts to special interests. But during this whole delusional process no one stops to question whether these solutions will solve anything. Politicians provide temporary fixes like trillion dollar stimulus plans on the basis of little more than citing Keynes. Fortunately, for them, by citing Keynes they are able to talk about economics without really using any.

But is Keynes right? Does the free market have inherent problems that must be tamed by the almighty government?

Classical economists at the time such as Ludwig Von Mises argued that the U.S. economy was not completely a free market because of issues like the FED reserve, and the federal income tax, which were both enacted just over a decade prior to the depression. Furthermore, Mises and others at the Austrian School of Economics stressed that the depression was a result of business cycles that are caused and exacerbated by government intervention. Mises explained that treating economic downturns with government intervention, quickly turns into a never ending downward spiral of unintended consequences.

In any case, all regulation or control will have some type of effect or consequence on the subject. Today more than ever it is important for people to examine the type of consequences regulation will have on our economy. But unfortunately our government is regulating and controlling more than ever. Taking on almost religious proportion the vast majority of the public continues to have a blind faith in the almighty benevolent government. Here are some examples.






CASH FOR CLUNKERS
Here is a government program with the goal of reducing co2 emissions and stimulating the economy. The government has come to the conclusion that offering $3,500, and $4,500 cash vouchers to car buyers who trade in a clunker will not only solve our economic woes, and will stimulate our economy back to normal, but also will be good for our environment. Sounds great! Right?
Well, so far congress has approved $3 billion dollars for the Cash for Clunker program. With car sales picking up and the approved funds drying up, politicians have nothing but praises for how good the program has worked. But what are they actually doing here? What could possibly result from these interferences? What kind of human action will result in this control that the government is putting on our economy? Furthermore, what will the overall impact on the mass of individuals be?

Ok so let's think about this. So if the idea is that the cash voucher will induce people into trading in their  car and buying a new car. And the cars that are being traded in are being destroyed. Then the government has essentially made a program that gives people cash vouchers for destroying clunkers and buying new cars.  To me, already this sounds crazy! But let's follow the path paved with great intensions.

What is a clunker anyways? Well according to the bill it is pretty much any car that gets under 18 mpg and that has been registered and insured for the past year. So this program is destroying perfectly good cars. Many people will be affected by this alone. Kids or people who are struggling to afford new cars are usually content with clunkers. This bill will severely limit the supply of used cars. By destroying the supply of "clunkers" many people will be left with out a car at all. Another victim of this bill is the local mechanic who would have been working on these clunkers had they not been destroyed.

A big problem with this program is that it encourages all the wrong things. This bill encourages Americans to destroy working cars and to go further into debt to buy cars they simply don't need and can't afford. The last thing this country needs is more debt.

So what should the government do?

NOTHING

Milton Freidman would probably tell the government,
"Don't just do something; stand there!"

Too often politicians are convinced they have some vested power to control and regulate the economy for the good, but I think the study of economics should prove that most often they end up doing the opposite.