Video: F. A. Hayek on J.M Keynes: Keynes Knew Very Little of Economics, Economics was just a sideline to him

In the following interview, the great Austrian economist Friedrich August von Hayek makes his comments on mainstream economic deity, John Maynard Keynes' knowledge of economics. Hayek has been a personal friend and an intellectual rival of JMK. 

F. A Hayek opens with a strong criticism of Keynes who he says "knew very little of economics"(0:10), except that Keynes concentrated (or tunneled on) "Marshallian economics". 

Hayek further says that despite being one of the most intelligent thinkers he has ever known "economics was just a sideline for him" (2:28). Hayek said that Keynes wanted "to recreate the subject".

Hayek further noted that Keynes "knew very little of 19th century economic history" (0:22) whose understanding had been guided by "aethestic appeal" although paradoxically Keynes "hated the 19th century".

Hayek also noted that Keynes was never interested in the theory of capital (4:28), was "very shaky on the theory of international trade" (4:32) although Keynes was "well informed on  contemporary monetary theory but even there did not know such things are Henry Thornton or Wicksell" (4:37) and Keynes only read French where the "whole German literature was in accessible to him" (4:48)

Interesting.

(hat tip Mark Thornton Mises Blog)

IMF’s Christine Lagarde Inflationist Delusions

From the Deutsche Borse Group: (bold added)

International Monetary Fund Managing Director Christine Lagarde praised monetary stimulus efforts of the world's major central banks Thursday, but said non-monetary authorities in Europe, the United States and elsewhere need to build on those steps to improve growth in a slowing world economy.

Lagarde, at a press conference ahead of the annual meetings of the IMF and World Bank, said she "expects courageous, cooperative action" at the meetings.

She also aimed criticism at China, whose top economic policymakers declined to attend the meetings because of territorial disputes with host Japan. China needs to be more of a global partner and increase demand for foreign products, not just concentrate on exporting its own products, she said, after pointedly noting its officials' absence.

Lagarde vowed the IMF "will spare no time and effort" to help Greece, but said the objective is to ultimately free that country from dependence on outside assistance.

Noting that the IMF has downgraded its projections of global growth, Lagarde said, "we are not expecting a very strong recovery." Indeed, she called high unemployment rates in advanced countries "terrifying and unacceptable."

The Federal Reserve, the European Central Bank and the Bank of Japan have all adopted additional easing measures, and she praised their moves, but said that by themselves those actions are "not sufficient." 

The "momentum" imparted by monetary easing "should be seized as an opportunity," she said.

Ms, Lagarde’s “momentum” remarks essentially echoes former President Obama’s chief of staff and current Mayor of Chicago Emanuel Rahm’s infamous sly quote on establishing political controls over society…

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

And emerging market central banks have fawningly embraced Ms. Lagarde’s recommendations.

This from Reuters:

Emerging market central banks have clearly taken to heart the recent IMF warning that there is “an alarmingly high risk”  of a deeper global growth slump.

Two central banks have cut interest rates in the past 24 hours: Brazil  extended its year-long policy easing campaign with a quarter point cut to bring interest rates to a record low 7.25 percent and the Bank of Korea (BoK) also delivered a 25 basis point cut to 2.75 percent.  All eyes now are on Singapore which is expected to ease monetary policy on Friday while Turkey could do so next week and a Polish rate cut is looking a foregone conclusion for November.

South Africa, Hungary, Colombia, China and Turkey have eased policy in recent months while India has cut bank reserve ratios to spur lending.

The BoK’s explanation for its move shows how alarmed policymakers are becoming by the gloom  all around them. Its decision did not surprise markets but its (extremely dovish) post-meeting rhetoric did.  The bank said both exports and domestic demand were “lacklustre”.  (A change from July when it admitted exports were flagging but said domestic demand was resilient) But consumption has clearly failed to pick up after July’s surprise rate cut — retail sales disappointed even during September’s festival season.  BoK clearly expects things to get worse: it noted that ” a cut now is better than later to help the economy”.

Ms. Lagarde’s comments, which gives emphasis on the short term at greater costs of the future, can be summed up into two types of casuistry: 

The delusion of central planning: 

From the great Ludwig von Mises (Omnipotent Government),

It is a delusion to believe that planning and free enterprise can be reconciled. No compromise is possible between the two methods. Where the various enterprises are free to decide what to produce and how, there is capitalism. Where, on the other hand, the government authorities do the directing, there is socialist planning. Then the various firms are no longer capitalist enterprises; they are subordinate state organs bound to obey orders. The former en­trepreneur becomes a shop manager like the Betriebsführer in Nazi Germany.

As well as the delusions of the elixir of inflationism or perhaps a stealth scheme being employed by the cabal of central bankers to demolish what remains of laissez faire capitalism 

From the deity or icon of inflationism, Lord John Maynard Keynes (PBS.org) [bold added]

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Inflationists are either aware of the evils their policies create but nevertheless insidiously impose them for covert political reasons, or have been too blinded by their possession of power.

Video: What Murray Rothbard thought of John Maynard Keynes

[hat tip Bob Wenzel]

video: What Hayek thought of Keynes

On inflationism: the great F. A. Hayek thought that Keynes would have "disapproved of what his pupils made of his doctrines".

Here is more of what Hayek thought of his personal friend Keynes [pointer to Bob Wenzel]

Quote of the Day: Keynes the Crony

Writes Bob Wenzel,

He was 83% long going into the downturn that resulted in the 1929 crash. So how could Keynes be a great investor with such a bad performance? Because Keynes, the evil bastard, along with Bernard Baruch, talked FDR into confiscating the gold owned by all Americans. He then loaded up his portfolio with gold mining stocks and then urged FDR to prop up the price of gold.

So John Maynard Keynes practiced the interventionist theories he preached because he personally profited from them—he was a rent seeking crony after all!

F. A. Hayek On Keynes: I Think He Would Have Been Fighting The Inflationary Policy

Here is a short video interview of F.A. Hayek in discussion of wage rates and the deflation during the British Depression of the 20s and 30s.(Hat tip Greg Ransom)

Some important quotes,

“While I’d spent a year analyzing in great detail his earlier book the Treatise on Money and then only to hear him by the time the second part of my criticism was published “oh I no longer believe in all that”, I didn’t want to invest more effort in criticising the general theory who’s success is still a puzzle to me, because it reverted to a very primitive idea which had been clearly refuted in the nineteenth century that there is a single relation between the demand-aggregate demand for final products and employment. So much so that Leslie Steven in the 1880s had pointed out “The test of a good economist is that he does not make that particular mistake. Well Keynes revived it and gave a plausible explanation and, I should add that he did not succeed while he lived. But when he died he was suddenly raised to sainthood.”

“The very last time I saw him about six weeks before his death...and talked to him after dinner and asked him whether he wasn’t alarmed by what his pupils naming two....were agitating for more expansion. when in fact, the danger was clearly inflation. He completely agreed with me and assured me my theory was frighteningly important in the 1930s when the question was of combating deflation. If inflation ever becomes a danger, I am going to turn around public opinion like this and six weeks later he was dead and couldn’t do it. I think he would have been fighting the inflationary policy.”

Fiscal Stimulus Debate: Oops, We’re Using The Wrong Keynes!

Given today’s worsening financial and economic crisis, the debate on the viability of the fiscal stimulus (government spending) patterned after John Maynard Keynes theories continues to rage.

courtesy of American.com

But, unfortunately, both proponents (including uber-Keynesians) and detractors have been citing the "wrong" theories of “rock star” economist JM Keynes. That’s according to Professor Rizzo who wrote, ``we should pay attention to his mature ideas rather than to the textbook versions of what he said, some of which reflect Keynes’s earlier thinking.”

So what were the thoughts of the “matured” Keynes?

Again Professor Rizzo (all bold highlights mine), ``Keynes did not think that public works expenditure was very effective in countering existing or impending recessions. He believed that it was difficult to get the timing right.

``In the first place, he preferred that such investments be made without deficits. But if they were to be made as “loan expenditure”—that is, through a deficit in the portion of the government’s budget allocated to long-term expenditures like infrastructure—the expenditure should be covered by a surplus in the portion of the budget allocated to ordinary expenses like transfer payments, or through a special fund accumulated in prosperous times for just such purposes. If a deficit were incurred, the investments should be “self-liquidating,” that is they should repay their costs over the long run. Thus his strong, but not rigid, preference was against deficit-financed public works.

``The more fundamental reasons for his preference against deficit-financed public works, however, emerge from the theoretical framework he built in his masterwork General Theory of Employment, Interest and Money (1936). As economists Bradley Bateman and Allan Meltzer stress, Keynes was convinced that avoiding depressions required the maintenance of a high level of investor confidence. He believed that (in general and not just during slumps) confidence tended to be too low. This low confidence was due to radical uncertainty generated by speculation inherent in financial markets, especially the stock exchange. This speculation could give rise to unsustainable asset bubbles. The ever-present threat of such speculative activity creates instability in the expectation of investment returns. As a result, investment spending will fluctuate unpredictably. This in turn creates further instability of investor expectations.

``In Keynes’s view, the financial uncertainty generated by such speculation was an unnecessary social burden. It tended to keep long-term interest rates above where they would lead to full employment. The task of good economic management is to reduce this uncertainty burden and lower long-term interest rates through a kind of “socialization of investment.” The state in one way or another (Keynes is not entirely clear on this) should undertake large investments with no thought of speculative gains or advantage. The long-term social return on capital should be its only guide. And it should do this reliably, as part of a well thought-out plan, and on a permanent basis. Stabilization is to be achieved not by temporary and discretionary policies, but by permanent changes. Stimulus follows stability, not vice versa.

Read the rest here

Some observations:

The matured Keynes admits he does not “think that public works expenditure was very effective in countering existing or impending recessions”

Goes to show how interventionists have been using Keynes inappropriately for intellectual cover.

Finally, don’t be slaves of defunct immature economist!

(Hat Tip: Café Hayek)