Wednesday, March 2, 2011

The Wrath of Keynes, or, The Fall of the House of Hayek, Part I

Periodically, various postings on this blog are criticized for being mean to John Maynard Keynes. Often it's implied, even explicitly stated that we must be enslaved to the heartless fiends of the Austrian and Monetarist schools of economics and don't care anything about the poor and the downtrodden that Keynesian economics allegedly cares for so well.

The problem with these and similar comments is that they reveal a basic misunderstanding of binary economics and its reliance on the substantive definition of money found in law and accounting, as opposed to the functional definition of money often used in mainstream economics. Further, the three mainstream schools of economics, the Keynesian, Monetarist/Chicago, and Austrian, all take the principles of the British Currency School of finance as a given, where binary economics uses the principles found in the British Banking School of finance.

To oversimplify somewhat, this reliance on the principles of the Currency School — chiefly 1) that new capital formation cannot be financed until and unless consumption is reduced and money savings accumulated, and 2) that "money" and "currency" are equivalent terms — restricts the financing of new capital (the rate of economic growth) to the "supply of loanable funds," i.e., the amount by which consumption has been reduced in the past. This is what Louis Kelso and Mortimer Adler called the slavery of past savings, and inevitably leads to a redefinition of Say's Law of Markets and a rejection of the real bills doctrine. Frequently it also results in redefining a number of natural rights, such as freedom of association and private property.

All three of the mainstream schools of economics are "guilty" of this, as all three are based on Currency School principles. (The classification of Keynesian economics as "Banking School" by some authorities is incorrect. It results from a misunderstanding of the "buillionist/metalist" controversy of the early 19th century that split both the Currency School and the Banking School.)

That having been said, binary economics is probably closer to the Austrian school than it is to either Keynesian or Monetarist economics. While there's a bit of fudging that goes on, the Austrian school acknowledges the importance of natural rights such as liberty (freedom of association/contract) and private property.

The problem is that, locked into the assumptions of the Currency School, the Austrian school uses an incomplete definition of money, and therefore does not take into account what, in the U.S. economy, accounted for approximately 60% of GDP in 2008. As you might expect, this throws distortions into the Austrian analysis, and precludes the adoption of the types of financing made possible by adherence to Banking School principles, notably Say's Law of Markets and the real bills doctrine.

What this means in terms of Friedrich von Hayek's analysis we will examine tomorrow.


No comments: