A world in economic crisis

Straw man arguments – why anti-Keynesians are often wrong

Posted in anti-Keynes, Gough Whitlam, stagflation by Aussie on October 14, 2013

Keynesians are defined as people who follow the teachings of John Maynard Keynes. By definition, and because of the nature of my degree, and in particular because I did my studies more than 30 years ago, I am a Keynesian. I was taught basic Keynesian economic theory, including theories about Supply and Demand. However, that is about as far as I go where the definition is concerned, because I do in fact believe that Keynesian economics failed by the mid-1970s and the reason for this failure was in fact Stagflation.

Economic theory should not be something that is considered to be static. If Keynes had not died so soon, perhaps he would have revised further his own ideas. I do know that he revised some of his ideas after his interaction with Hayek, and this is a point that I never see acknowledged by those who take an anti-Keynesian stance.

What I am going to argue here is that the anti-Keynsians are guilty of building up a straw man and then knocking it down with their own ideas. What I am going to point out is that many anti-Keynesians are guilty of having the narrow view of the world at large, seeing as they do everything through an American prism.

The first thing to point out, therefore, is that Keynes was an Englishman. His observations of the world economy were based upon his own English and European experience. As such, I argue that Keynesian theory needs to be studied not via the American prism of an economy but through the British experience instead. By necessity, this includes examining the rise of unionism and its impact upon the British economy during the era in which Keynes lived. This is also relevant to the Australian experience, but there are some differences.

The second thing I am going to point out here is that Australia had recognized the role of unions from the beginning of Federation, and had in place a system whereby the Arbitration Commission (now extinct) had set a minimum wage for all wage earners. I can write more about the Australian experience rather than either the British of the US experience when it comes to wage earners or I should say Labour.

The Australian Arbitration Commission was very influential when it came to the setting of rates of pay. Up until about the 1980s Australia had a system where the national unions and employers would take a case before the Commission that always ended up setting the minimum wages. In the end, this system served to fuel wage inflation… but I will try to get back to this point. The point I want to make is that in Australia we did have in place a system where the wages for an apprentice and the lowest paid workers were set by the Arbitration Commission. The system itself was inflexible and inefficient because there were many factors not taken into account with regard to raising the minimum wage. In other words, what appeared on the surface to be a win for the workers, when the minimum wage was increased, usually had a cost in terms of jobs lost as some employers struggled to pay the new wage rates, or if jobs were not lost, then prices rose in response to any increase in pay.

It is this last point that I believe is the key as to why some aspects of Keynesian economic theory began to crumble by the late 1960s. Australia had followed Keynesian theory from the 1930s, and the government was reasonably successful in dealing with various problems. When government debt began to get out of control there would be a tightening of the belt or a contraction, in other words a credit squeeze, and at other times there was a little bit of an expansion. It all worked whilst Menzie was Prime Minister, but by the time Gough Whitlam grabbed power, Australia’s economy had begun to go into decline.

Under Menzies, as well as under such Premiers as Bolte, Australia was relatively prosperous. There was some moderate expansion programs that included building of the Westgate Bridge in Melbourne, as well as Warragamba Dam, the Snowy Mountains Hydro-Electric Scheme and other projects. All of this was investment in infrastructure and government paid for such schemes by the issuing of Treasury bonds.

However, when Whitlam took over the reins of government, his whole Ministry spiralled out of control when it came to spending taxpayer money. There were a lot of unfunded schemes, especially in relation to education, as well as the introduction of the Universal Health Scheme known as Medibank. Funding for Medibank was to come from the imposition of a levy that all taxpayers were supposed to pay. It is worth pointing out that largely unfunded schemes like Medibank (now Medicare) sound like a good idea until implemented and that is when the rorts begin to happen. A lot of doctors were prosecuted for rorting the bulk billing side of the scheme. A lot can be said about other forms of rorts but that is beside the point here.

As well as the out of control spending of the Whitlam Government, something which was controllable, there were other events that were not controllable in this era. The first of the uncontrollable events was the first oil shock. The 1960s was the first time that Islamic terror was splashed across our headlines. It was the era of aircraft being blown up.  This had one type of impact upon oil supplies etc. but the oil shock was caused not by Islamic terrorism, but by the oil cartel known as OPEC. The OPEC countries are mostly Middle Eastern nations, but it also includes the USA. The cartel used to get together to determine the price per barrel of oil that we had to pay to get hold of unrefined oil.  Thus, we have a group that was not exactly a monopoly controlling how the market behaved.  The second oil shock occurred after the fall fo the Shah of Iran.

Whilst Whitlam was not entirely to blame for Stagflation, especially in Australia, his out of control spending was in fact a major factor in the prolongation of the Stagflation. As well as the impact of OPEC, Australia and he world was facing a period of inflation. In Australia I believe that the inflation is best explained a cost-push inflation because of the factors most responsible for the inflation including: sudden high wage increases due to never ending union demands for higher wages, the OPEC oil shock, and government taking up more than their fair share of the pie available for borrowings.

Keynes never had the opportunity to observe these economic patterns because these were events that occurred a lot time after his death. Had he been alive, then I feel certain that he would have modified his theories according to what he could observe after his theories were put into practice. The Keynesian solution worked for a time, but over time the solution stopped working. The failure of the Keynesian solutions is something that needs to be examined in some depth.

I am arguing that both anti-Keynsians and Keynesians are wrong in their outlook. The anti-Keynesians are blaming the wrong guy, and there are alleged Keynsians who wrap up their Marxism, using Keynesian theory to hide their real objectives (yes I am referring to Krugman who has pretensions to being a Keynesian when in fact his theories are Marxist in origin). The straw man built by the anti-Keynesian never in fact applies fully to Keynesian theory. The Marxist also never applies Keynesian theory but does in fact cherry pick what is convenient to their way of thinking.

My argument is that we need to examine government policy and government expenditure to see why Keynsian theory when applied in our modern society has been such a spectacular failure, and that any further implementation would continue to bring about the wrong results. Doing this unfortunately requires looking at the lunacy that is Green policy.

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