Thursday, June 16, 2011
University Economics Reminiscent of Rowan and Martin's Laugh-In
Those who were old enough to watch prime-time television in 1973 remember Rowan and Martin's Laugh-In. In the upper clip Goldie Hawn mimics an American economist in explaining time zone differences. The second is a compilation of R&M routines. Rowan was the straight man, Martin the comedian.
American economists are like Rowan and Martin. Monetarists are like Rowan, Keynesians like Martin. Neither are scientists. Scientists are open to falsification of their theories. If evidence disproves a theory, scientists reformulate the theory. Keynesians and monetarists have both seen their theories fail, and both stick to their theories but look for excuses, many of which are as funny as Rowan and Martin routines. They are ideologues, not scientists. Ideologues can be funny.
First, Martin opens the act. Keynesians claim that lack of demand causes depressions so we needed to print lots of money and borrow and give the money to George Soros and other Democratic Party special interests. But demand in 2008 was at record levels. No one was saving. In fact, there had been a lack-of-savings crisis because of excessive credit. But Keynesian theory says that depressions are caused by insufficient demand, too much saving. Like a carpenter who only has a hammer and sees everything as a nail, Keynesians then concluded that there needed to be more credit and more debt. Laugh one. Spending is at record levels, and the banking crisis was caused by insufficient demand. Ha, ha.
The problem of 2000-08 was an incompetently managed financial system, and an incompetently run Federal Reserve Bank. The Fed lent huge amounts of its counterfeit money to people unable to invest it intelligently: banks, Wall Street, hedge funds and big business. The result was the sub-prime and derivatives crises, the products of excessive demand brought about by an immoral and incompetently run financial system. The derivatives investment did not involve too little demand. It involved excessive demand and fraud. By "fraud" I refer to the Federal Reserve Bank's counterfeiting power by which it creates new money and transfers wealth to its privileged and generally incompetent clients. Commercial banking and Wall Street lack the ability to find investments that cause real wealth to grow. They are risk averse and focus on what they perceive as sure bets: real estate and big business lending. Even with the risk aversion, Wall Street's stupidity and greed means that it cannot function without ongoing public subsidy. The financial system is value destroying. It is a failure.
Enter Rown, the monetarist straight man. In 2005, right before his death, Milton Friedman boasted in the pages of The Wall Street Journal of how great a success the 2002-4 monetary expansion under Alan Greenspan and the Bush administration had been. It was, he said, proof of the success of his ideas. It would have been interesting to hear him explain the credit disaster of 2008, which also was entirely due to Friedman's ideas, to Greenspan and to Bush.
Next, Martin, the Keynesian comedian, comes up with an idea. Actually it's the same idea because Keynesians only have one idea. Since excessive credit, bad investment and incompetent management of financial institutions caused an economic crisis, we can still blame the economic problems of 2008 on insufficient demand. (Audience laughs.) Even though the $900 billion given to Soros, organized crime-run construction firms and ACORN did not stimulate the economy, we need to give even more, trillions, to Democratic Party cronies. After all, the fact that the stimulus did not work is proof that it works.
Rowan, the straight man-monetarist, cocks back his head. "Give more money to Soros-like crooks?" You're out of your mind," Rowan says. "No, no, that's big government. I'm for small government. Print more money and give it Lloyd Blankenfein, not Soros. Keynesians are irrational and in favor of big government. Soros is big government. Blankenfein is small government." (Audience laughs, then applauds.)
The definition of science is the willingness to falsify hypotheses. Keynesian ideas have never worked. But Keynesians have creatively cooked up stories to explain the failure of their ideas, such as the claim that the spending of World War II ended the Great Depression. In fact, there had been rationing, suppression of wages, many potential workers killed, four years of military pay to 14 million Americans and massive misallocation of wealth during the war. As well, Europe's and Japan's industrial bases had been destroyed, and the US was a source of supply. Sweden, which also did not suffer damage from the war, saw its economy perform well afterward. That employment grew in the 1940s and '50s after years of frustrated demand, artificially induced economic collapse, and the elimination of most of our international competitors is not proof that borrowing and spending improves the economy. It is simply proof that low wages stimulate demand for workers and that competition is eliminated when competitors bomb each other.
So, dear friend, enjoy the entertainment. Keep voting for Democrats and Republicans who are Keynesians and monetarists, keep printing money and giving it to a failed financial system, keep making yourself poorer and keep destroying innovation. Like Rowan & Martin, the American democracy and the legacy media provide us with a laugh-in.