Creeping American Socialism

The previous post discussed the influence of pluralism in economic policy. As an historical summary of the cognitive dissonance, it suffices to observe the policy circus: the free-market capitalism in the early twentieth century was blamed for the Great Depression; it gave way to Keynesian socialism after the Second World War (WW2) then back to deregulated market capitalism and monetarism since the stagflation of 1970s; and more recently back to renewed Keynesian government intervention since the global financial crisis (GFC) which started in 2008. With each circuit of theoretical favoritism, the structure of the US economy evolved with mutating blends of policy pluralism, but generally with increasing socialism.

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Pluralism of Cognitive Dissonance

Pluralism is the enemy of science. At any given time, science deals only with a single most correct theory in any particular domain, not with multiple incorrect theories. There is a huge difference between evaluating many new ideas and the uncritical tolerance of many inconsistent ideas, which is what economic pluralism really is. Economists usually criticize each other privately and avoid open confrontation in public, giving a misleading impression of the unity of economics. The global financial crisis (GFC) has been seen (e.g. Economist, 2009) as a failure of the dismal science of economics, because mainstream economics is assumed to be science, with all its mathematical models and statistical analyses.

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Posted in Econoclasm, Economics, Science | 7 Comments

Capitalism and Economic Growth

The global financial crisis (GFC) has been blamed on the failure of capitalism, with the 2011 Occupy protests declaring, “capitalism isn’t working” (Hussey, 2014). What is capitalism which has failed?

Economists appear reluctant to define explicitly key economic terms such as capitalism. For example, whole books on capitalism (e.g. Marx, 1890; Baumol et al., 2007; Kaletsky, 2010; Piketty, 2014) have been written without giving explicit definitions from the start of their lengthy discourses. One has to guess what they mean. Indeed they call many different ideas “capitalism”, for example, as Kaletsky (2010, p.3) asserts:

…capitalism is not a static set of institutions, but an evolutionary system that reinvents and reinvigorates itself through crises…

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Posted in Economics, Methodology, Science | 7 Comments

Keynesian Fallacy and Collapse

One of the first posts of this blog describes the potential for a Keynesian economic collapse due to persistent policy application, over decades, of the Keynesian fallacy. The fallacy originated from simple mathematical errors in Keynes’ General Theory which have never been corrected. Instead, they have been perpetuated in basic economic textbooks and form the foundation of government macroeconomic policy.

It is now so important to point out this fallacy that it is worthwhile repeating the argument and its refutation as simply and clearly as possible. On page 115 of the General Theory, Keynes (1936) wrote (suppressing inessential subscript symbols):

For \Delta Y=\Delta C+\Delta I, where \Delta C and \Delta I are the increments of consumption and investment; so that we can write \Delta Y=k\Delta I, where 1-\frac{1}{k} is equal to the marginal propensity to consume.

Let us call k the investment multiplier. It tells us that, when there is an increment of aggregate investment, income will increase by an amount which is k times the increment of investment.

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Posted in Econoclasm, Economics | 8 Comments

Policy of Debt and Destruction

For several decades, the historical data show that the monetary policy of central banks has been to use debt to stimulate the global economy, constrained only by the possible emergence of high inflation. This post shows that the policy has been economically destructive for US economic growth and, with more audacious pursuit of such a monetary policy recently, the risk of a Keynesian economic collapse has increased substantially (Sy, 2014).

A few decades of US monetary stimulus has led to zero or negative interest rates and the accumulation of a mountain of debt, which economists confuse with money and consider as innocuous, because “debt is money we owe to ourselves” (Krugman, 2015) or “one person’s debt is another person’s asset” (Fatas, 2015). Of course, debt is harmless provided it does not lead to bad loans or credit defaults, which are assumed negligible and ignored in standard economic theories taught at universities. The reality is very different.

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Posted in Economics | 6 Comments