Ben Bernanke Was Incredibly, Uncannily Wrong
We now have the diametrical opposite of the famous "Peter Schiff Was Right" video (a compilation of 2006 and 2007 clips in which Schiff, a financial expert who subscribes to Austrian economics, predicted the deep recession that would follow the bursting of the housing bubble).
The new, opposite video is a compilation of the 2005–2007 prognostications of Federal Reserve Chairman Ben Bernanke. In it, Bernanke is shown to have been just as embarrassingly wrong as Schiff was uncannily right.
Could their differences in economic understanding have anything to do with this remarkable dichotomy? I have transcribed most of the video, and offer my own comments interspersed with it.
July 2005
INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?
BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.
This is not only wrong in hindsight; it's a complete misunderstanding of the issue. Bernanke said that the housing boom was fine because it was supported by, among other things, growth in jobs, incomes, and in the economy in general. But that very growth itself was supported by the housing boom! For example, most of the job growth was in the housing sector. Witness Bernanke's amazing levitating economy: its housing sector is held up by economic growth, which is held up by its housing sector. And it's just as ridiculous that he denied the existence of a housing bubble by pointing to low mortgage rates. The low rates were a chief cause of the housing bubble, and were a direct result of his actions as Federal Reserve chairman.
July 2005
INTERVIEWER: Tell me, what is the worst-case scenario? Sir, we have so many economists coming on our air and saying, "Oh, this is a bubble, and it's going to burst, and this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario, if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don't think it's going to drive the economy too far from its full employment path, though.
As Peter Schiff pointed out in his speech "Why the Meltdown Should Have Surprised No One," while it is true that up until the housing crash, house prices hadn't gone down on a nationwide basis, it's also true that they had never risen so precipitously before either. Bernanke's argument is akin to getting someone drunk for the first time, putting them in a car, and then saying, "He'll be fine; he's never been in a car accident before."
That interview continued:
INTERVIEWER: So would you agree with Alan Greenspan's comments recently that we've got some areas of that country that are seeing froth, not necessarily a national situation, but certainly froth in some areas?
BERNANKE: You can see some types of speculation: investors turning over condos quickly. Those sorts of things you see in some local areas. I'm hopeful — I'm confident, in fact, that the bank regulators will pay close attention to the kinds of loans that are being made, and make sure that underwriting is done right. But I do think this is mostly a localized problem, and not something that's going to affect the national economy.
Bernanke's Fed itself created the false signals that led to vast disruptions in the housing market. Speculators try to see through those disruptions and anticipate how prices will change as valuation mistakes are corrected in order to profit from them. In fact, their speculation is part of the correction process. If their speculation is on the mark, it speeds up the price-correction process. If it's wrong, then the consequences are on their heads. Speculation is nothing but high-uncertainty entrepreneurship; and entrepreneurship is how optimal prices are found and markets clear. It was the Fed under Bernanke himself, and his predecessor Alan Greenspan, that created the price disruption and high uncertainty that made speculation profitable in the first place.
November 2006
BERNANKE: This scenario envisions that consumer spending, supported by rising incomes and the recent decline in energy prices, will continue to grow near its trend rate and that the drag on the economy from the [inaudible] housing sector will gradually diminish. The motor vehicles sector may already be showing signs of strengthening. After having cut production significantly in recent months, in response to the rise in inventory of unsold vehicles, automakers appear to have boosted the assembly rate a bit in November, and they have scheduled further increases for December. The effects of the housing correction on real economic activity are likely to persist into next year, as I've already noted. But the rate of decline in home construction should slow as the inventory of unsold new homes is gradually worked down.
Here we have the Keynesian fallacy (which I have written about here) that consumer spending, in and of itself, creates general increases in wealth. And note the irony in Bernanke applauding the boost in automotive production: the products accumulated during that boost turned out just to be more malinvestment to be liquidated or bailed out when Chrysler and GM collapsed.
February 2007
BERNANKE: We expect moderate growth going forward. We believe that if the housing sector begins to stabilize, and if some of the inventory corrections still going on in manufacturing begin to be completed, that there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of the new year.
Our assessment is that there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy.
For Bernanke, healthy lending is the same thing as "a lot of lending." This dovetails with his statement in the first interview, hailing low mortgage rates as a self-evidently good thing. He has no conception of an equilibrium interest rate determined by society's average time preference, so bubbles will always surprise him. For more on this calamitous gap in Bernanke's understanding, see "Manipulating the Interest Rate: a Recipe for Disaster" by Thorsten Polleit.
July 2007
BERNANKE: The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards, and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further, as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth in coming quarters, although the magnitude of the drag on growth should diminish over time. The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.
Strengthening in 2008? Perhaps the biggest confirmation ever of Rockwell's Law: always believe the opposite of what government officials tell you.
Bernanke's own words, in light of how the crisis developed, are a testament to much more than his own personal failings as a forecaster and policy maker. They demonstrate the complete inadequacy of mainstream macroeconomics in its present state, devoid as it is of the essential insights of the Austrian School. They also reveal the folly of the very idea of giving a single man and his institution the power to centrally plan the most important price in the economy: the rate of interest. Make no mistake: the present economic crisis was brought on by central planning. It is unsettling to think that the fellow in the new video who so badly misread an economy on the brink is arguably the most powerful central planner in the world.
But even the most powerful and sequestered bureaucrat is not completely invulnerable. The Federal Reserve Transparency Act and the End the Fed movement have ruffled the Fed's feathers enough that Bernanke actually felt the need to address the public in a "townhall forum" to be broadcast on the News Hour. According to NPR,
after the forum was over, a Fed employee passed out souvenirs, an unintended metaphor perhaps for what some fear Bernanke's aggressive policies may eventually do to the currency: shredded cash.
The Fed employee, who apparently suffers from a defective sense of irony, was even recorded saying, "Here, you want money?" and, "Here's some free shred folks, thanks for coming by, we appreciate it,"
No, no, thank you and your boss, Mr. Fed employee. Within the space of days, we've been provided, courtesy of the Fed itself, with footage that perfectly distills the complete failure of Fed forecasting and planning, and audio that encapsulates splendidly the only thing that the Fed actually accomplishes: the destruction of money.
How to Use Methodological Individualism
Two months ago, on May 16, the great French economist Pascal Salin celebrated his 70th birthday. I first met Professor Salin in late 1997, in his office at the University of Paris-Dauphine. When I mentioned that I had been drawn to the Austrian School not least of all because of Mises's epistemology, he raised his eyebrows and put on a skeptical face. I stopped talking and he threw in with amusement, "And all of economics is for you nothing but applied epistemology."
I protested that this was not my opinion, but the point was well taken. Economics is not a branch of epistemology; and one cannot say anything meaningful about its epistemology before one is perfectly familiar with its contents. My interest in the logical and epistemological problems of economics has remained unshaken, but I took Pascal Salin's reproach to heart and over the following years focused on economic theory proper. Now is the time to make an exception. The present paper is an epistemological bouquet for my dear mentor, thankfully remembering that he admonished me not to confuse the florist's job with that of the gardener.
I
Many writers who have set out to describe the logical and epistemological character of economic science consider the precept of methodological individualism to be among the distinctive features of economic analysis.[1] This point of view is especially widespread among Austrian economists.[2] According to this precept, the analysis of individual behavior is not only necessary to understand microphenomena such as consumer expenditure; it is also indispensable to grasp macrophenomena such as inflation, unemployment, and economic crises. The reason is that these aggregate or macrophenomena do not exist independent of human action, but result from the interaction of various individuals.
There cannot be the slightest doubt that this basic rationale for methodological individualism is simple, solid, and clear. Whoever wants to trace back the emergence, transformation, and decline of aggregate social phenomena to their root causes cannot sidestep the analysis of individual actions.[3] He must deal with the choices of individuals. He must deal with the meaning that individuals attach to the context in which they are acting, and to the alternative options that they believe are at stake.
It is a very different question, however, whether methodological individualism is a method of economics or, more precisely, of economic theory. In what follows, we will argue that it is not. Based on the Misesian distinction between theory and history, we will show that, while methodological individualism is properly applied in history, it is not a method that we use in theory.
II
In the causal analysis of individual human behavior we must distinguish between invariant and contingent factors.
Any human action has certain invariant causes and consequences. Invariant consequences result from like action at any place and any time and are said to follow from it by necessity or law. For example, an increase of the quantity of money tends to entail an increase of the price level above the level it would otherwise have reached, irrespective of when and where the money supply is increased. According to Ludwig von Mises, the study of such consequences is the task of praxeology and economic theory.
But human action also has contingent causes and consequences. The very same action — increasing the quantity of money — can be inspired by different ideas and value judgments. And the objective consequences resulting from any action can provoke very different individual reactions at different times and places. In other words, the causal chains through which ideas and value judgments are connected with human action are contingent. According to Mises, the elucidation of these contingent causal chains is the specific task of historical research.[4]
Mises did not exclude that individual value judgments and ideas had invariant causes, but neither he himself nor anybody else knew what they were. At present, only some of the contingent causes of human action can be identified by historical understanding on a case-by-case basis. And even this analysis is not likely to give the full picture. There is an unfathomable remnant that defied any explanation whatever: historical individuality. Mises explained:
The characteristics of individual men, their ideas and judgments of value as well as the actions guided by those ideas and judgments, cannot be traced back to something of which they would be the derivatives. There is no answer to the question why Frederick II invaded Silesia except: because he was Frederick II.[5]
Historical analysis, if it just sticks to the known facts, must explain all social phenomena as resulting from individual action, and the causal chain of events must start and end with the ideas and value judgments of individuals. History describes in retrospect how the acting person perceived the situation in which he had to act, what he aimed at, what he believed to be the means at his disposition. And it uses the laws provided by economics and the natural sciences to describe the objective impact that the acting person had through his behavior. Thus the mission of history is to describe the drama of social and economic evolution from the point of view of its protagonists. Its own specific tool in this task is "psychology" or — Mises's favorite expression — "thymology."
III
With these distinctions in mind, let us turn now to the precept of methodological individualism and see where it applies. As a matter of fact, it has shown its usefulness in a number of important cases. The best-known example is the explanation of the origin of money.
Thinkers from Aristotle to John Locke have explained the origin of money with the help of an intellectual shortcut. They have suggested that money, being a social institution, has come about by some sort of collective deliberation. Money is indeed so useful that it would have to be invented if it did not already exist. So what is more natural than to assume that a group of wise men decided to sit together and institute the use of money? The problem is that no such convention is known ever to have existed.
But as Carl Menger has famously argued, there is no need to postulate that money came into being through the deliberation of such a mysterious council.[6] Money would have come into being even in the complete absence of a coordinated collective decision-making process. Consider that in the absence of money, only barter exchanges (one-step) are possible and that the opportunities for barter are severely restricted by great problems, in particular, by the requirement that there must be a double coincidence of wants. Two-step "indirect exchanges" (with the help of a medium of exchange) help to overcome this limitation. Most importantly, indirect exchange can be beneficial even with an ad hoc medium of exchange, that is, even if there is yet no such thing as a generally accepted medium of exchange.
Media of exchange become ever more generally accepted to the extent that they are objectively more suitable than their competitors in arranging indirect exchanges. Silver is more suitable as a medium of exchange than cherry cakes because it is durable, divisible, malleable, homogeneous, and carries a great purchasing power per weight unit. Market participants are likely to recognize this relative superiority in a process of learning and imitation, and eventually most of them will use silver to carry out their transactions. Hence, one can explain why the technique of indirect exchange is adopted on an individual level; and one can explain why specific media of exchange become generally accepted and thus gradually turn into money. It is not necessary to postulate the creation of money through collective deliberation.
Methodological individualism has also been successfully applied to a number of other cases, such as the origin of the division of labor, the origin of nations, and to rather technical issues such as the explanation of redistribution effects resulting from money production.[7] It has proved its utility especially in those cases in which we set out to explain aggregate social phenomena as resulting from individual perceptions, ends, and values. In short, it has proved its case in historical analysis.
IV
To understand our point that methodological individualism is not a method of economic theory, it is best to start with a few examples of what economic theory is all about. Consider the following economic laws:
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More-roundabout production is more productive (in physical terms) than less-roundabout production.
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When X persons divide labor amongs themselves, their work is more productive (in physical terms) than when it would have been if these same X persons had produced the same type of products in isolation from one another.
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Under indirect exchange the market (and thus the division of labor) is greater than under direct exchange.
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Any quantity of money can serve as an intermediary for any volume of trade, except for technological constraints (e.g., coin size).
These propositions are genuinely theoretical propositions in the Misesian sense. They make assertions about time-invariant relations between cause and effect. Indirect exchange for instance is not said to have produced greater exchange opportunities than direct exchange last year in Brazil — or that it will have this effect next month on the French Riviera. It is said to have this effect at all times and all places.
The question is whether methodological individualism is needed to demonstrate such propositions. The answer is in the negative. Methodological individualism helps us to understand why and how aggregate phenomena can result from individual actions. But it does not help us to demonstrate propositions about invariant — or even necessary — relationships between cause and effect. It is, for example, not strictly speaking impossible to introduce money through collective deliberation at a council; and neither is it impossible that increases of the money supply do not bring about redistribution effects. By contrast, the propositions of economic theory, according to Mises, purport to make statements about necessary causation.
Let us examine our first example in more detail to make our point. We come to know about the effects of roundabout production in two steps: first we analyze the conditions of production in general, and then we study how a more- or less-roundabout production process affects these conditions. In the first step, we realize that the physical productivity of labor is subject to the law of returns. In the second step we learn that more-roundabout production means to take time off from the production of consumers' goods in order to increase the supplies of the other factors, so that human labor becomes more productive. Notice that here we do not take our departure from any concrete choice. Rather we compare the consequences of two different hypothetical actions: more-roundabout as compared to less-roundabout production. These two hypothetical courses of action are a priori causally related to one another by the fact that they are choice alternatives. Their causal nexus is scarcity — the fact that the choice of one course of action prevents the realization of all other actions that could also have been chosen. The choice of the one alternative necessarily causes the renunciation of the others.
Our comparative analysis provides insights about the relative consequences of choosing one rather than the other — irrespective of which one would actually be chosen. If these relative consequences are invariant, as they are in the present case, then we have identified an economic law, that is, a necessary relationship between the choice alternatives on the one hand and their relative consequences on the other hand. In the present case, as we have seen, the law can be formulated as follows: "More-roundabout production is more productive (in physical terms) than less-roundabout production."
Now suppose we apply this law to explain observed behavior. Then the law still keeps its comparative nature, but the comparison is no longer a purely hypothetical one. It turns into a counterfactual comparison as we compare the observed behavior to alternative courses of action that could also have been chosen.[8] For example, if we watch Smith hunting rabbits with bow and arrow, we might explain, "Smith kills more rabbits than he could have killed with his bare hands because he took some time off to first make bow and arrows." And with just as much exactness, those who see the glass half empty might explain, "Smith kills much less rabbits than he could have killed because he did not take enough time off to first make a shotgun."
Methodological individualism plays no role in this demonstration. Neither would it have played any role if we had examined the other three initial examples in more detail. The reason is that it serves a very different type of explanation than the one offered by economic theory. It serves to explain observed behavior as resulting directly from (contingent) individual motivations that prompted this very behavior. By contrast, economic laws serve to explain the (invariant) causes and consequences of human behavior in comparison to completely different, alternative courses of action which are related to the observed behavior through the a priori nexus of scarcity.
Methodological individualism is therefore not some sort of a basic foundation on which we erect the edifice of economic theory. It is actually the other way round. Only if we first have a correct economic theory can we then successfully apply methodological individualism to reconstruct the emergence of aggregate phenomena. For example, in the Mengerian explanation of the origin of money, the starting point is the fact that indirect exchange at all times and places creates more exchange opportunities than barter. If it were not for this economic law, Menger's account of the origin of money would not make any sense at all. If indirect exchange were more beneficial than barter only at some times and places, but not at others; or if silver were more suitable as a medium of exchange than butter only at some times and places, but not at others; then one could not argue that the technique of indirect exchange becomes ever more widespread through a process of learning and imitation. People can learn about something only if this something remains constant through time. It is only because there is an economic law at play that one can successfully apply methodological individualism to explain the origin of money.
V
Methodological individualism is a precious tool for historical analysis. But it is not a foundation of economic theory. One could, of course, define economic theory in such a large sense that it would include even those elements that are indeed obtained with the help of methodological individualism, such as Menger's explanation of the origin or money. But this would be a purely verbal finesse. There is a fundamental difference between the logical character of explanations based on economic laws on the one hand, and the logical character of explanations based on methodological individualism on the other hand. The purpose of the foregoing essay was to emphasize and explore this difference.
Keynesians Can't Predict
If you take the trouble to interrogate a large number of economists about the economic future of the country you will find that an overwhelming majority argues in the following way: In about two years at the latest, rearmament will be completed and the amounts spent for this purpose will be negligible. At about the same time the pent-up demand for investments will be largely satisfied. The productive apparatus will be sufficiently enlarged, improved, and modernized to meet the needs of an increased population and all other reasonable requirements. A depression — or at least a serious recession from the present high level of production and employment — must follow.
These predictions will awaken unpleasant memories in those who do not believe in the possibility of objective, "scientific" forecasts. They will be reminded of the forecasts of a postwar depression so popular during the war. At that time it was the general opinion of the experts, based especially on a study by Morris Livingston, "Markets After the War," that the increase in population, the rising productivity and the inability of consumption to keep up with production would inevitably lead to unemployment of many millions of workers. And the well-known Swedish economist, Gunnar Myrdal, impressed by this line of argument, propagated it in many articles in the Swedish and Swiss press. I myself, in an article, "Do Not Predict Postwar Deflation — Prevent It,"[1] tried to show the fallacies of the underlying mechanical approach to economic problems and of a forecast so astounding to anybody who knows from the study of history that inflations and not deflations have always been the aftermaths of wars.
All forecasts of postwar deflation turned out to be entirely wrong, as was to be expected. Almost immediately after the end of hostilities a postwar boom began. But the forecasters, in no way discouraged by their errors, stayed on the job. Now they predicted the continuation of inflation. Just when their forecasts became most articulate, in the spring of 1949, the recession of that year set in. Then deflation was considered here to stay; government intervention was advocated. The second postwar boom, not caused, I think, but accentuated by the outbreak of the Korean war in 1950, led again to predictions of continued and even of runaway inflation. But 1951 was basically a year of deflation, and of inflation only in the areas where it was governmentally fostered.
Clearly the regularity of these errors in forecasting cannot be pure chance. Something like a Law of the Necessity of Errors in Forecasting must be at work.
It is seldom realized that belief in the possibility of "scientific" business forecasts, and the forecasting mania of our time, are comparatively new phenomena. Until about 1930 serious economists were not so bold — or so naive — as to pretend to be able to calculate the coming of booms and depressions in advance. It would not have fitted into their general view on the working of a free economy. They considered the economic future as basically dependent on unpredictable price-cost relationships and on the equally unpredictable psychological reactions of entrepreneurs. Predictions of future business conditions would have seemed to them mere charlatanry, just as predictions, say, regarding the resolutions of Congress two years from now.
The "Multiplier" and "Acceleration" Fallacies
The forecasting mania of our time is a natural concomitant of what is called Keynesian economics. It constitutes an integral part of the world of "functional finance," of the "multiplier effect" of the "acceleration principle" and similar concepts. If one really believes, as the "inventors" of functional finance do, that a depression can be prevented and a boom prolonged ad libitum by government deficit spending, if one fails to see that the elimination of the maladjustments in the price-cost relationship created during the previous boom are necessary conditions of revival, then indeed the economic future appears no longer too uncertain. And if one really believes in the working of the multiplier and the acceleration principle, then the more remote future also appears predictable. For according to the multiplier theory a given amount of spending on investment leads in time to an immediately ascertainable stable amount of spending on consumption; whereas a given amount of spending on consumption leads in time to an immediately ascertainable amount of spending on investment.
Pre-Keynesian economists would not, incidentally, have been seduced into forecasting and calculating such secondary and further effects of spending. They would have considered a development of multiplier and acceleration theory as unrealistic toying with ideas rather than the scientific achievement it is considered nowadays. For whether increased spending on consumption leads in time to increased investment is dependent on the unascertainable profit expectations of entrepreneurs. The fact that inventories have been used up through increased consumption may or may not improve these expectations. And whether spending on investment leads to a corresponding spending on consumption is dependent on the equally unascertainable presence or absence of buyers' resistance — as the early New Deal experiences clearly showed. Multiplier and acceleration theories thus do not answer but simply beg the question of what the long-run effects will be of single doses of spending.
The basic error of the whole approach lies in the fact that the causative link between objective data and the decision of the members of the community are treated as mechanical. But men are still men and not automatons. There does not even exist, as is sometimes maintained, a fixed correlation, for instance, between birth and marriage rates and the demand for housing; or between the increased need for electric current and the investments of public utilities. The investments can — and are — either speeded up or postponed according to whether entrepreneurs are optimistic or pessimistic regarding future demand, and prices — i.e., regarding the prospect that the investments will be profitable. If they are optimistic, a boom may develop; if they are pessimistic, a depression.
Forecasting the economic future means forecasting decisions on investment and consumption that are as uncertain as the whole future. The professional forecasters pretend that they have a sort of monopoly of clairvoyance in this respect. They forget, however, that it is precisely the main occupation of entrepreneurs to predict future demand in order to adjust their production to it. What leads to the maldistribution of demand — called the business cycle — is that the majority of entrepreneurs are at times too optimistic or too pessimistic; that they either invest too much and too soon, or too little and too late. Now there is not the slightest reason to assume that in the game of forecasting future demands correctly the theorists will be on the average more successful than the businessmen. On the contrary, it can be assumed that the businessmen will on the average do better. They are more responsible. For businessmen suffer losses when they err, whereas the theorists can forecast with no risk — not even to their prestige, it seems.
Thus the world does not consist, on the one hand, of theorists who can calculate future investment and consumption, including their "accelerating" and "multiplying" effect, and, on the other hand, of businessmen for whom the future is uncertain and who are forced to "speculate." The tragic — not to say tragi-comic — consequence in the real world is that the forecasts of the great majority of theorists can never hold good. If the businessmen in sensing future maldistribution of demand are at least as smart as the theorists, they will adjust to it by speeding up or postponing their investments — with the result that the predicted cycle will not materialize. It is, one can say by definition, impossible to calculate depressions in advance. Calculated depressions do not happen. Nor, by the way, do calculated inflations — though it was so popular, just before the latest recession in commodity prices, to calculate a new inflation in advance. A recession was clearly due the moment certain theorists began to speak of our age as the age of permanent inflation.
So don't forecast a post-armament deflation. It will not happen — whatever other depression, not yet recognized and recognizable either by you or the majority of businessmen, may materialize.
The Economic Isolationists
But why, it may be asked, are these simple and obvious ideas not widely accepted by American economists? To one outside the magic circle of the Keynesians the reason seems to be what can be called the isolationism of Anglo-American economics. It is this isolationism that prevents economists from seeing the merits and weaknesses of their work in a detached and objective way and in the right perspective. It prevents them from being aware that most economists in Germany, France, and Italy strongly oppose the Keynesian doctrines. For example, to Professor Adolf Weber, the well-known economist of the University of Munich, the idea that full employment is mainly threatened by a lag of investment behind saving, sounds merely like a bad joke.[2]
But the isolationism of Anglo-American economists is also historical. They believe earnestly that their ideas are fundamentally new, unique, and a definite answer to the problems of a competitive economy. Insufficiently educated in the history of economic thought, they do not realize that Keynesianism — down to the most technical details, like the concept of the foreign exchange multiplier — is mercantilism or, more precisely, John Lawism pure and simple. Thus they do not recognize that the objections of the classical economists to mercantilism are valid also in respect to their own teachings. Nor do they see that many concepts of the modern planners — fair prices, fair wages, fair profits, and so on — are nothing else than a new edition of the medieval scholastic concepts of justum pretium and justum salarium, which proved so detrimental to economic progress.
Reading, quoting, praising, and promoting each other, and only each other, will not liberate these economists from their voluntary isolationism. They will remain in their dream world. They will continue to predict the unpredictable.
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