Thursday, June 14, 2012

This Depression Created and Perpetuated by Keynesian Economists

Maynard Keynes obtained a doctorate from Cambridge University for a thesis entitled A Treatise on Probability. In it, he argued that the probability that the cover of a book you have not seen is black is exactly 50%. How so? Because either the cover is black or it is not. Since you know nothing else, the probability of it being either one or the other must be 50%.

To convince the Cambridge dons of that, whether correct or not, one had to be a smart fellow. Keynes was. Following WW1 he wrote The Economic Consequences of the Peace, which convinced many that the Versailles Treaty which concluded the Great War was unfair to Germany, a perception that did much to consolidate support in the 1930's for Britain's policy of German appeasement.

Most importantly, Keynes figured out the cause of the 1930's Great Depression. Business was bad, so business laid off workers and axed plans for new investment. Laid off workers spent almost nothing at all, so business got worse. The result? a vicious cycle of reduced consumption leading to reduced hiring and investment leading to reduced consumption.

The solution? Government deficit spending financed by borrowing the funds capitalists were hoarding for lack of investment opportunity. Nazi Germany provided the first verification of Keynes' theory which, as Keynes noted in the Preface to the German edition of his most famous work, The General Theory of Employment, Interest and Money, was "easily adapted to the conditions of a totalitarian state".

Hitler brooked no delay in setting the wheels of German industry humming with the construction of autobahnen, Volkswagens, tanks and Stuka dive bombers financed with ingenious Erzatz money devised by finance minister Hjalmar Schacht. The rearmament boom in response to Germany's aggressive stance, first in Britain and later in America, verified the counter-cyclical efficiency of deficit government spending.

Thus vindicated, Keynesianism became the basis for post-war economic management throughout the West. If business was bad, governments had to do whatever was necessary to stimulate employment and consumption. Thus did capitalism triumph intellectually over communism. Not only did capitalism not impoverish the masses, as was fundamental to Marxist theory, it in fact could survive only by ensuring that the masses continually consumed more and more.

So why does the Keynesian solution no longer work? What went wrong? The 1994 General Agreement on Tariffs and Trade (GATT), now embodied in the World Trade organization (WTO), is what went wrong. The WTO, opens the West to unrestricted competition from four billion Third Worlders working for pennies an hour under what by Western standards are conditions of gross exploitation tantamount to slavery.

The impact of global free trade, or globalization, has been gradual. In 1994, the Third World lacked the capital, the technology and the trained workforce to constitute a great threat to Western industry. But following the GATT agreement, things changed rapidly. Western corporations worked diligently to develop manufacturing bases and service centers throughout the Third World to exploit cheap Third World muscle and brain power.

For the West, the most significant results of globalization have been twofold. First a huge increase in profits of globalized corporations such as IBM, Microsoft, and Apple, which have seen their market capitalization increase ten-fold or more over the last decade during which they have out-sourced and off-shored more and more manufacturing and service work from the West to the Rest. Second, a slump in investment and hiring in the West. Hence the Second Great Depression

Image source.
How have Western Governments responded to this undermining of Western prosperity? With bubbles and Third-Worldization.

Financial deregulation created an explosion of financial innovation including a derivatives bubble that, at ten times the size of the World's GDP, is still expanding. The result has been an increase in financial industry profits from less than 20% of domestic US profits in 1990 to to 45% in 2002.

Following the bust in the tech sector and stagnation in the stock market, which occurred at the turn of the century, financial industry profits stagnated, but real estate and real-estate-linked finance became the engine of Western economic expansion. Fueled by low interest rates, property boomed throughout Europe and the United States, then busted, taking much of the finance industry with it.

Throughout the bubble economy era, Western governments have pursued an aggressive policy of Third Worldization, or national self-genocide through mass immigration. The United States has tens of millions of illegal, mainly Hispanic immigrants, contrary to the wishes of most Americans, while Western Europe is flooded with Asians, Africans, Middle Easterners and East Europeans (most of them good people, no doubt), with the full connivance of the ruling elites in London, Paris, etc.

The policy of Third Worldization of the West serves both to discipline the indigenous people by subjecting them to massive competition from energetic, immigrants eager for work even at minimum or sub-minimum wages that far exceed what they could earn at home, and to complete the Bilderberger-Liberal-Left plan for global governance and the destruction of the nation state.

Now that the finance and real estate economies are busted, Western governments continue with the project of Third Worldization, Britain for example, absorbing a near record 550,000 immigrants in the first nine months of 2011. In addition, they have fallen back on the old policy standby, Keynesianism, which is to say subsidies for windmills, electric cars, and solar panels, plus food stamps and welfare paid for with money either freshly printed, or borrowed in large part from the the developing Third World and the oil states.

The results are as you'd expect. Third Worldization is going well, and leading to massive unemployment, since as Cambridge economist Ha-Joon Chang -- no that's not an English name -- points out, for every low-skilled Englishman in need of a job, there's a more competent immigrant ready to take whatever job he might otherwise have had. Meantime, the Keynesian "stimulus" spending does little for the unemployed, but instead pulls in more shoes and shirts and computers and car parts from the Third World, where wages have risen from about 3% of those in the West in 1994 to about 5% of those in the West today.

Keynesians like to quote Keynes' retort to a questioner who charged him with changing his position: “when the facts change, I change my mind.  What do you do, sir?” It's time for Keynesians to take Keynes' advice and review the facts that now prevail. The West is in a depression not for lack of demand but for lack of competitiveness. That means stimulus spending on more school teachers, on roads and bridges, windmills and solar panels is counter-productive. It makes the West less competitive, not more so, thus further reducing the incentives for investment and hiring in the West. 

What Keynes would recommend now, would be quite different from the prescription of the Keynesians. His advice would be to end mass immigration, eliminate tax disincentives to investment, i.e., the corporation tax, and cut consumption spending, particularly wasteful government programs many of which contribute nothing to the public welfare -- in America the TSA's blue-gloved goons and the entire apparatus of Homeland Security comes to mind, not to mention the war for global empire.

In the meantime, to mop up surplus labor, the necessary solution is either a tariff, or as I have advocated, state-funded wage subsidies distributed by competitive auction, which would eliminate unemployment at less than the cost of welfare, while providing a huge affordable labor resource to Western entrepreneurs. Once again workers in America and Europe could then make stuff for one another, instead of being dependent for almost every manufactured product on the slave plantations of the Third World.


  1. Thanks for the history, and economics, lesson! Very interesting.

  2. And I guess your solution is to just kill off the unemployed and retirees?

    1. My dear fellow, why do you imagine that?

      I state in this piece the need to eliminate mass unemployment by means of "either a tariff, or ... state-funded wage subsidies distributed by competitive auction, which would eliminate unemployment at less than the cost of welfare, while providing a huge affordable labor resource to Western entrepreneurs."

      Clearly, my solution is to eliminate the unemployed by providing them with jobs, not by murdering them.

      Or as I said here that by means of a job subsidy program "Western workers would be available once again to make to shoes and shirts and car parts for one another at a competitive price, rather than living a demoralized or degraded existence on welfare or by crime because the jobs that should be theirs by right have been outsourced to the Third World."

      As for retirees, being almost one myself, I am not for their extermination. I do believe though that unfunded, pay-as-you-go pension plans such as those of the UK and the US are a bad idea. They discourage workers from saving for their retirement, while providing absolutely no assurance that a pension will be available when needed.

      It would be much better to require all workers to contribute a percentage of earnings to a personal pension fund, whether publicly or privately administered, with a means tested public pension (welfare) program to ensure the a subsistence to the indigent elderly.

  3. If you take your ideas seriously, you must have thought about promoting them beyond this blog. And ironically, it may be the current Western elites that will have the most interest in them. "They love to be verbally demolished," said an anti-war political analyst after giving a lecture in Arlington, on Pentagon's invitation. (So I've been told by his colleague.) Somewhat connected to that, probably the last time I raised my eyebrows was over this:

    “...whenever in the last 200 years political passions and nation-state politics have collided with economic rationality, political passions and the nation-state have won.”

    COPYRIGHT 1997 Council on Foreign Relations Inc.

    1. Don't think I take my ideas too seriously. Just trying to figure things out as we go along!

      Although, anyone thinking about what's happening can surely not but be struck by the futility of most commentary and so-called analysis of what is wrong with Western economies.

      I think it is the feeble mindedness of most commentary, including that from Nobel-Prize-winning economists, that leads many to consider the possibility of some kind of evil global conspiracy behind events.

      And indeed, it is difficult to believe that people running things can perpetrate so many crimes and fiascos unless it's intentional.

      But if you think about it, why would those people know anything. Consider George H. Bush or Al Gore, quite important people. But are they intelligent, do they know anything? I think Bush scored 550 out of 800 on the SAT test and Gore 650, or was it the other way around. But in any case it's worth bearing in mind that at least one or two percent of the entire population would score close to 800 out our 800, which puts the raw intelligence of the leadership in perspective.

      But then maybe they are well trained. But even that seems unlikely. Gore is a blundering fool when he purports to be an expert on climate science, and Bush thinks that Greece is inhabited by Grecians.

      And when you consider the likes of Blair or Cameron, what do they know? Evidently they know where the power lies and how to mobilize it. But one has only to hear Blair speaking about religion with Chris Hitchens to realize that his thinking is fundamentally vacuous. He's merely a spinner of words, with essentially no knowledge whereof he speaks.

      So that's an interesting question: is there really anything one could call national or global leadership, or are we all just rollicking along, heading for we know not what?

      Thanks for the link to Peter Drucker, I'll read it.