The View From 1776

Krugman and Friedman - Part Two

Round two of New York Times columnist Paul Krugman vs Nobel Prize-winning economist Milton Friedman.

In Krugman and Friedman - Part One it was demonstrated that Mr. Krugman made non-factual statements about classical economics and the 1930s Depression. 

He misrepresents other facts elsewhere in his lengthy article Who Was Milton Friedman in the February 15, 2007, issue of The New York Review of Books.

In that article, he writes:

Although [British economist John Maynard] Keynes was by no means a leftist - he came to save capitalism, not to bury it - his theory said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government intervention in the economy.

That is equivalent to stating that Lenin was not a socialist, he was just anxious to control every aspect of every individual’s economic life.  As he doesn’t consider Keynes to be a leftist, it would be interesting to know Mr. Krugman’s definition of leftist.

Keynes’s prescription to provide full employment was, as Mr. Krugman himself states, massive and continuous government intervention in economic affairs.  That is a succinct description of socialism.

If “free markets could not be counted on to provide full employment,” the alternative was government-regulated markets under socialism, which is the policy we have had since publication of Keynes’s General Theory in the 1930s.  Agriculture has been socialized, top to bottom.  The government tells farmers what they can plant and how much of it, while controlling prices via import duties and domestic price supports.  Business is swaddled in regulations to such an extent that the United States has more lawyers and accountants per capita than any other place on earth. 

For a more extensive discussion of socialism’s nature, see Socialism Defined by the Socialists.

With regard to whether Keynes “came to save capitalism,” that’s not unlike the alleged assertion by a military serviceman during the Vietnam war that it had been necessary to destroy a village in order to save it.

Did Keynes in fact save capitalism?

The facts suggest otherwise.  No matter how assiduously President Roosevelt pursued Keynesian policies, unemployment never averaged in less than double digits until the start of World War II, when the entire economy was mobilized for war production and military service.  At its lowest point, in 1937, unemployment was 12 percent of the workforce.  In 1939, at the outbreak of World War II in Europe, unemployment was 16.7 percent of the workforce.

Mr. Krugman continually damns the tax-cutting policies of President Bush.  Since 2000, he repeatedly has predicted either economic recovery with high unemployment, or failed economic recovery.  Unfortunately for Mr. Krugman’s reputation as an economic seer, the economy is still climbing, and unemployment is only at 4.4 percent.

Given the 1930s’ numerous, always changing regulations and waves of new regulatory bureaus strangling business, together with what amounted to tax punishment for increasing sales and earnings, business was paralyzed and scared to death of what the President might decide to do next.  As most people know from observing the stock market, business hates uncertainty, but that’s what the nation had for the entirety of the New Deal.  With business cowed into fearful waiting, the only effective employer was the Federal government.

Following Keynes’s advice, President Roosevelt imposed extremely high income tax rates on wealthy individuals (in the 80% + range) and corporations (up to 42% on corporate income, plus 70% of retained earnings), coupled with deliberate inflation of the currency and deficit spending to raise consumption expenditures among the lower economic ranks and diminish that of the upper ranks.  (Egalitarian redistribution of income is, of course, a cardinal objective of socialism).

Keynes’s theory was that unemployment resulted from people saving too much and not spending enough on consumption goods.  Therefore government intervention had to fill the gap by spending in the form of wages paid to lower income groups.  Hence the WPA and a host of other ad hoc Federal works agencies.

Keynes said that it did not matter what the government spent money for.  It would work just fine to employ workers to dig holes one day, then to fill them the second day; and thereafter to dig and refill the same holes ad infinitum.

That may not be socialism in Mr. Krugman’s estimation, but it is very far removed from capitalistic business.  Only a sophistic mind like Mr. Krugman’s could maintain that such a state of affairs was intended “to save capitalism, not to bury it.”

Of this miasma, Mr. Krugman writes:

Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making sense of the world around us….

Mr. Krugman should have said that Keynesian economics appeared, to intellectuals educated to belief in socialism, to offer a better explanation of Depression era economic conditions.  In the 1930s liberals were confident that both Soviet economic policy and Keynesian theories were revealed truth, the unstoppable wave of the future. 

Not only was Keynesian theory a fictional characterization of the real world, but it led to disaster.

In addition to the Rooseveltian New Deal horror, when Keynesian economics was again tried on a grand scale under President Lyndon Johnson’s Great Society in the 1960s, the result was equally disastrous.  We got stagflation: the highest inflation in our history, coupled with high unemployment and the degeneration of our industrial heartland into what came to be called the Rust Bowl.

Keynesian economics gave us a five-fold increase in crime; burning cities like Newark, Detroit, and Los Angeles; inflation that wiped out more than half the value of everybody’s personal savings and forced women into the full-time work force at double the increase rate for men, just to pay the rent and grocery bills; an education system, for the first time Federally funded, that simply collapsed under the weight of teachers unions and the Federally-mandated PC and multi-cultural curricula; soaring numbers of people on welfare rolls; and single-parent families, along with the highest illegitimacy rates ever recorded in any society in world history.

If these results, in Mr. Krugman’s opinion, arose from “a better explanation for economic reality,” it would be fair to say that Mr. Krugman has no purchase on reality.

Mr. Krugman’s approval of Keynes’s theories presumably arises from his being personally a Keynesian economist and consistently an advocate of socialistic policies.  In a famous analysis (The structure of Scientific Revolutions), Thomas S. Kuhn observed that when one’s professorial career is founded upon advocacy of an hypothesis, even when it’s proved untenable, it is necessary to defend it for self-preservation.  Such is Mr. Krugman’s case.

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