Friday, February 20, 2015

"Here is the central flaw of Keynesian thought: he never showed how the state could get its hands on money to spend into the economy, thereby increasing aggregate demand, without simultaneously offsetting any increase in aggregate demand by the original act: taxation, borrowing, or fiat money."

Undermining John Maynard Keynes
Gary North

I have been writing recently about my proposed Keynes project. I have pointed out that no young economist has taken the bait. Nobody wants to devote a lifetime to refute the central economist of the 20th century.

Murray Rothbard would have done a devastating job on Keynes, but he died before he got to the 20th century. He never wrote the third volume of his monumental history of economic thought. If he had, this would have saved us a great deal of time.

I am a debater. I know how to debate in a formal debate, and I know how to debate in print. I have understood the basics of debate ever since my senior year in high school, when I took a public speaking class, and part of that class required us to do public debates. I learned the techniques by the time I was 17 years old. These techniques do not change.

Anyone who wants to take on John Maynard Keynes had better know the basics of debate. I want to go over the basics here, not on the assumption that somebody is actually going to take me up on the deal, but at least so that you will understand how to deal with people who hold a position that you think is incorrect. You have to think in terms of debate.

The first step of the debate is this: identify your audience. You have to understand something about your audience, because you are going to appeal to the audience. You are going to persuade something in the range of 80% of the audience to move in your direction. About 10% of the audience will already be on your side; about 10% will be on your opponent's side, and the people in the middle are your target audience. You had better know what motivates them. You had better know their frame of reference. You had better know something about the emotional commitment of the audience, because emotion is the basis of winning a debate verbally.

In a written debate, emotion is not so important. In a written debate, you have to stick to logic and facts. There will be some use of emotion (rhetoric), but because people can reread what you have written, you have to back up what you have written by logic and facts.


Let me give an example that was important early in my career: Karl Marx. I wrote my first detailed high school term paper in the social sciences on communism. That was in 1958. A decade later, my book was published: Marx's Religion of Revolution. I updated it in 1988, which was poor timing: the Berlin Wall went down in 1989. My revision was premature. You can download the book for free here.

Read the chapter on Marx's economics. This is not the heart of the book. But, with respect to the technical issue of Marx's economics, this was an important chapter. If you read it, you will see how I structured the debate. First, I pointed out the fact that Marx's economics were not crucial to his basic philosophy, which was historical materialism, and beyond that, a call to social regeneration through bloody revolution. The title of my book is the thesis of the book: Marx held to a religion of revolution. It is an old religion.

In the introductory section of the chapter on his economics, I pointed out that Marx was not neutral. I wanted to make the case that his system was not based on science. He had always made the claim that his system was scientific, but that claim was totally false. His followers believed it, but in December of 1991, when the Soviet Union committed suicide, the vast majority of his followers simply wandered away. I wish I had written the update in 1992.

In the second section of the chapter, I identified the crucial assumption that Marx made: the labor theory of value. I did this because this was his crucial mistake. The labor theory of value is false. I used the arguments of Eugen von Bohm-Bawerk, which were originally published in 1884, the year after Marx died. His criticisms were fundamental, and they have never been improved on.

Here is my debate strategy. If you can show that the fundamental premise of a man's position is false, and if your listeners and readers understand the logic of your position, you have disarmed your opponent. If he starts out with a false premise, everything he says after that is going to be false.

In the next section, I got to the specifics: Marx's theory of surplus value. From a technical standpoint, this was the heart of his economics. It was wrong in and of itself, but there was more to it than that. It was wrong because the labor theory of value is wrong. This was simply a specific application of an erroneous assumption.

Once I had the reader convinced that the labor theory of value is wrong, and next I convinced him that Marx's theory of surplus value was therefore wrong, everything else was a mopping up operation. I then went on to somewhat minor aspects of his overall theory of surplus value. I showed that they, too, were wrong.

You take down the critic in a series of refutations. You start with the most general area in which he was wrong. Then, step-by-step, you show that the specific arguments that he made in terms of this erroneous theory were also wrong, and they were wrong because he was wrong about the initial theory. Your readers or listeners will not understand all of the details. All that they are likely to understand is that you undermined your opponent's original underlying presupposition, and the dominoes then toppled. You keep coming back to the original premise. You keep coming back, in the case of Marx, to the error of the labor theory of value.

People won't remember all the details. So, you begin with this premise. What you have to do is drill into their minds the foundational error of your opponent. Then you extend the critique to the specifics of his argument, but always keep coming back to the initial critique. You want the person listening or reading to remember the fundamental error of your opponent.


What was the fundamental error of Keynes? Make this clear to the audience. They will be permanently immunized against Keynes and Keynesianism.

Different economists will disagree on this. This is why a refutation of Keynes has to be made by one economist, not a committee. One critic has to decide what the central flaw of the original Keynesian system is, and then hammer on it for the rest of his career. He has to show, in every application of Keynes's thought, that this single error comes into play. The audience has to remember the fundamental error of Keynes's economic position.

I know what that error is. But if I asked a group of non-Keynesian economists what this error is, I would probably get multiple answers. The old adage is true: "Where there are five economists, there will be six opinions."

Here is the central flaw of Keynesian thought: he never showed how the state could get its hands on money to spend into the economy, thereby increasing aggregate demand, without simultaneously offsetting any increase in aggregate demand by the original act: taxation, borrowing, or fiat money. This central error can be boiled down into two questions.

1. If the problem is insufficient demand, where does the state confiscate the resources necessary to increase demand?
2. What would the original resource owners have done with these resources?

Keynesianism rests on what Bastiat called the broken window fallacy. It is also known as the fallacy of the things not seen.

Convince the audience that Keynes never explained how or why the state's redistribution of wealth out of the hands of private investors and into the hands of government planners would increase aggregate demand. From the very beginning, Keynesianism rests on a single presupposition: something for nothing. This is the fundamental error of all anti-economic viewpoints. All of them want to get something for nothing. All of them are the equivalent of a perpetual motion machine. All of them are refuted with one familiar statement: "There ain't no such thing as a free lunch."

In debating with somebody who promotes state intervention as a means of increasing wealth, you have to identify that central area of his thought in which he argues that it is possible to attain something for nothing. You will find it if you look hard enough. Then, when you find it, exploit it. Hammer on it. Repeat it. Come back to it again and again.

It does no good to list 20 erroneous arguments that Keynes used. Nobody is going to remember all of these 20 arguments. If you come to one or two key arguments, and then you show how Keynes applied these key errors in 20 different areas, the listener or the reader will remember the key error, and he will also remember that you said that Keynes misapplied this error in 20 different areas. Even better, try to find 21. The number 21 sounds more precise than 20.

This is a debate. You cut off your opponent at the kneecaps. You show that, from the very starting point of his argumentation, he invoked the dream of something for nothing. You keep coming back to the point: we can't get something for nothing. That is the heart of free-market economics. It has always been the heart of free market economics. "At zero price, there is greater demand than supply." If you can show that your opponent relies from the very beginning on the assumption that it is possible to get something for nothing through state intervention, you have won the argument. That is to say, you will move more people to your position among the 80% who have not made up their minds, than your opponent will move with his arguments.

This is why a committee cannot be successful in the Keynes project. This is why Hazlitt's 1959 book, The Failure of the "New Economics," had more impact than his 1960 collection of articles against Keynes, Critics of Keynesian Economics. Those economists who wrote the articles he assembled were far more famous professional economists than Hazlitt was, but nobody can remember all of their arguments. These men were not debaters. Hazlitt was a much more effective debater than any of the people whose articles he collected. He had spent his life as a financial columnist, and he knew how to get to the point quickly and effectively.

Here is the strategy. One man has to identify what he believes is the central error of Keynes. Then he has to produce dozens of articles, videos, books, and everything else associated with the Keynes project. There must be a consistent application of the general rule, namely, to identify the central area in which Keynes advocated something for nothing, and then come back to this theme over and over.

If half a dozen economists were willing to get involved with this project, each of them would have to do it with whatever debate strategy he thinks is best. This would confuse the audience. This would be like Hazlitt's collection of articles critical of Keynes, not Hazlitt's definitive one-volume refutation of Keynes. But, as I said, I don't think even one economist is going to do this, let alone half a dozen of them. Making multiple lines of argumentation memorable in the minds of the audience is not a problem that I think is going to develop.


Once Keynesianism goes down in a heap after the Great Default of the modern welfare states, there will be lots of economists who rush in to provide evidence on where Keynes went wrong. They will all be young. They will all be new at this. They will not have identified themselves as anti-Keynesians before the Great Default. Probably none of them will distinguish himself in this effort. They will arrive a day late and a dollar short. This is what university scholars do. They are not entrepreneurial.

The person who will distinguish himself is the person who adopts a comprehensive lifetime project of refuting Keynes, and does this before the Great Default. This economist will establish anti-Keynes as his USP: unique selling proposition. The correct strategy was articulated by Gen. Nathan Bedford Forrest. To win the battle, you must get there "fustest with the mostest."


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