Chicago School economics, Fed Report, Friedman and Von Mises, how to fix the economy, Keynes, Keynesian economics, QE-3, Reagan and Friedman, Why Stimuluses do not work, why the economy is not improving
Three great economic minds that shaped twentieth century economics. The progressive Keynes, the libertarian leaning Friedman and the classical liberal Von Mises. The patriarchs of Keynesian, Chicago School and Austrian School economics respectively.
Over a hundred and twenty-nine years ago, a man named John Maynard Keynes was born. Now, nearly sixty-six years after his death, the great economist’s blunders are still being used to justify government expansion and interventionism. Keynes, a Fabian socialist, took Marx’s failed worker based economic system, and reworked it with unequaled finesse into a consumer based model. This, new peoples based economic, system proposed the idea that government could control unemployment by controlling the supply of capital. To over simplify, he thought by just increasing consumption in an economic downturn the situation could be reversed. To do this, he proposed using huge government expenditures. For him the what or who did not matter, just spend spend spend. His theories, of course, found a more than eager audience among politicians of all stripes, unfortunately his ideas were, and are, fundamentally flawed. Despite being applied across the globe for most of a century, and trillions spent, there has been no clear cut success stories to tell. Of course, the failure of Keynesian economics has not deterred his followers from following his advice over and over again.
Taxpayer boondoggles, and debt financed stimulus packages, have been the most common expression of Keynesian Tom Foolery, but not the only ones (for the record Keynes did not advocate massive debt to finance his schemes, that has been his followers doing). The Federal Reserve has gotten into the act lately too with what it calls Quantitative Easing. So far, two rounds of inflation seeding magic money has been handed out. This week the tycoons of Wall Street will be licking their lips, and crossing their fingers, that the Fed report will give some sign that another round of magic money will flood the market. It seems the last two installments of Quantitative Easing (QE-1 and QE-2) were such spectacular successes at creating a vibrant economy, some are hoping for more.
The truth the quantitative Easing, a fancy term for a government printing money in order to buy its own debt, did nothing but help wall street reap-in profits. No economic expansion or production of real wealth occurred, the only thing they increased was the bank accounts of stock brokers. The reason is simple, Quantitative Easing and other stimulus schemes do not change economic fundamentals. If anything, they muck up the processes that can create wealth, something Keynes and his followers totally missed.
The economic engine that drives growth runs on the ideas of those with the insight and the willingness to put it all on the line. Throwing money at the economy does not fix it, no more than throwing seeds to the wind will make a garden. Classical economists knew this and so did their true successors. One of those successors was born a hundred years ago. Milton Friedman was the first exposure to economics of this article’s author. At a time when progressive Keynesian economics was sweeping the world into a prolonged depression, Friedman was learning his craft in one of the few holdouts against the Keynesian onslaught. By the time the War was over, Friedman was a premier professor at the University of Chicago and leader of what had become known as the Chicago School of economics (School here refers to school of thought not an actual school). [for those who want to start to understand economics Friedman’s books Capitalism and Freedom, and Free to Choose are an excellent start]
It was Friedman and Chicago School economist’s policies that led the country out of the dismal stagflation of Carter. No massive stimulus’s needed, no wasting of a trillion dollars on foolhardy political payoffs and pet projects, just key reductions in taxes and regulation. Like when the gates are opened at a thoroughbred horse track, take away the obstacles, and the capitalists large and small will race to create a vibrant economy.
Today the lessons of the Reagan era seem lost on those in power. Instead of concentrating on what works, they revel in what has proven not to. If one goes by Einstein’s definition of insanity as doing the same thing over and over again and expecting different results, than those holding the reigns of power today are ready for a straightjacket. Unfortunately, no amount of psychotherapy is likely to cure them. At this point public sentiment has put an end to massive stimulus packages, and the hope and change folks in charge are left with hoping things will change. Of course under the currant policies they won’t!
As the economy stumbles along with less of the people working today than has in decades and with an undertow of taxes, regulation and uncertainty dragging business down, there seems to be little hope for better times ahead. Only a change in the thinking of those in power, or a change of those in power can alter the situation. One thing that is for certain is more stimulus, whether from the Fed or politicians in need of funds for their latest political payoff, is going to help. Something that would of been known if people had listened to a short smiling Jewish economists from Chicago or even an equally impressive jolly economist from Austria named Von Mises.