Roberts and Papola have done it again: a rap video that explains the divergent views of two of the most prominent economists of the 20th century. It’s better than most textbooks, and entertaining to boot. It’s “Fight of the Century.”
The video is a follow-up to their 2009 Youtube hit, “Fear the Boom and Bust.” In each video the economists—John Maynard Keynes and Friedrich A. Hayek—square off about their differing views on business cycle theory and the proper role of government in combating recession.
Fight of the Century is fantastic on so many counts, from writing and acting to direction and production values, and oh yes, it’s jam-packed with great economic content. I want to focus on one line in particular that really hit a raw nerve with the Keynesians out there. The punch line (pun intended) comes at the point in the video where Hayek’s character says:
Jobs are a means, not the ends in themselves
people work to live better, to put food on the shelves
real growth means production of what people demand
That’s entrepreneurship not your central plan
Several Keynesian-oriented bloggers cried foul at their hero being labeled a full-on communist (summary here). “Keynes was most certainly not a Soviet- or National Socialist-style central planner!” they bemoaned, while criticizing Roberts and Papola for strawmanning him. In the ensuing brouhaha, several Hayek-oriented commentators shot back with Keynes’ own words, quoting from Keynes’ own preface to the German language edition of his well-known General Theory:
“The theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire”
Additionally, those who have delved deeply into Keynes’ works have discovered that he was not shy about his general enthusiasm for the economic experimentation going on in fascist Germany, Italy, and communist Russia, in the 1920s and 30s. Indeed, Keynes was surprisingly sparing in his criticism of these regimes, while admiring the general thrust of “reform” and holding out hope for eventual positive outcomes their boldness might produce.
Keynes’ pro-Soviet sympathies notwithstanding, he was technically not a socialist or communist. Despite his call for the “socialization of investment,” he never got around to specifying a concrete role for government, other than basically “spend more.”
Central Bank = Central Plan
But the application of Keynes’ ideas, as envisioned and implemented by modern academics and politicians, does amount to a form of central planning.
Keynesian policies are all about “stimulating the economy” through monetary and (especially) fiscal policy. To do monetary policy, you must be able to wield enough control over the money supply so as to influence the level of interest rates. To do fiscal policy, the government must be able to borrow freely—deficit spending, after all, is the biggest tool in the Keynesian kit bag.
All of this requires a central bank—specifically, a powerful central bank with a total monopoly on bank reserves and the ability to print money freely so as to monetize the government’s debt. Such an institution is the farthest thing from spontaneous, de-centralized, competitive market economy. Let’s be clear: in doing monetary policy, the central bank is basically dialing in an entire category of prices (interest rates) that have tremendous importance for economic decision making throughout the economy, and it’s printing just the right amount of money to make real its own vision of what these prices should be.
Sound Money and Central Planning
So maybe Keynes did not believe in government ownership and direct government management of capital. OK. But it’s bad enough that to do Keynesian policy requires the central planning of a whole slew of market prices, prices which, if they’re allowed to be off the mark for long, can lead to catastrophic imbalance in the economy and doom us to recession.
Let’s quickly contrast what a decentralized, competitive, sound money economy would look like. In a sound money economy, the money supply is set by market forces (supply and demand), just like with any other good. The free interplay of market forces—including, we should note, NO BAILOUTS or government-guaranteed profits—constantly push all prices, interest rates included, towards a market equilibrium, preventing the buildup of cheap credit with the attendant false boom and crash.
On the fiscal front, sound money itself is the greatest restraint on government borrowing, for the simple reason that governments cannot print the gold, silver, or other real money commodities with which to repay their own debts. Sound money thus does not allow for artificial “stimulus” by the politicians, but instead requires that investments, profits, and economic growth be reality-based.
It is not a coincidence that the US gave up on sound money in the 1930s; abandoning the gold standard was a prerequisite for implementing Keynesian-style “recovery” policies requiring massive new government spending, with the attendant deficits and “financial aid” from the central bank in the form of money printing. This kind of overbearing monetary and fiscal planning requires the elimination of sound money (the gold standard) to be fully enforced.
Thus activist government, with its perpetual “stimulus” policies, are in essence efforts to centrally plan certain key elements of overall economic activity. (It’s not a coincidence that it’s called a central bank!) The rap video Hayek was right. Defenders of Keynes can split semantic hairs all they want, but there’s no escaping the fact that their favored system is one of immense, intense, centralized, bureaucratic control over key aspects of the economy.
Tyler Watts is an assistant professor of economics at Ball State University.