Economics to End Economics

I used to think that Ludwig von Mises was exaggerating quite a bit when he suggested that Keynes was not really an economist. One way he did this was to associate Keynes with infamous monetary cranks like Silvio Gesell. The following quotation will give you a flavor of Mises’s opinion:

“John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume’s and Mill’s views on miracles.”

Clearly, Mises under-estimated the power of Keynes’s intellect, his influence on the economics profession, and his ability to change the terms of public debate. Just as clearly Mises was a master of sarcastic mockery.

However, Mises’s mockery had a profound point. It can be simply stated. Keynesianism is not concerned with the allocation of resources and related niceties. One can see this is the policy prescriptions of the stimulators. Just get people back to work. If a market is depressed: Prop it up. Labor, other resource-owners and entrepreneurs need to stop worrying about searching for the appropriate use of resources. Bankers have to stop fretting about to whom they should lend. They should abandon their ultra-restraint. Those who are holding money should invest; they should buy bonds. No need to worry about inflation because the potential output of “stuff” (however it is allocated across industries) is above the actual less-than-full-employment output.

Where did my microeconomics go?

Now the typical Keynesian would probably say: This is the economics of depressions or recessions. Your precious micro will come back into its own when we get out of the slump.

But wait a minute. One of Keynes’s major points is that investment is volatile. Animal spirits are unpredictable. The news can turn investment demand topsy-turvy. So we are at all times at the brink of a Keynesian world. The needs of aggregate demand can at any moment overturn our “normal” concern with the niceties of resource allocation.

I hope to say more (in a more precise way) about this in future posts or elsewhere.

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