“The economy is not recovering…. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.”
– Paul Krugman, “The Wrong Worries,” New York Times, August 5, 2011, p. A21.
Federal energy policy is being driven by the failure of neo-Keynesian economic policy.
Stimulus spending was supposed to end the Great Recession and transform tax expenditure into additional tax revenues. Instead, we are left with both recession and broke government. Obama borrowed from the future and made the present worse. George W. did his share too.
Three Strikes: Is Keynesianism Finally Out?
Keynesian economics failed during the Great Depression (will more textbooks now admit it?). The activist approach of Herbert Hoover (the first New Dealer, according to Murray Rothbard) used the powers of government to slow the liquidation of unsound investments, narrow profit opportunities, injure international trade, and block employment.
FDR doubled down on activist government policy with new spending programs, higher taxes, and regulation and business hostility (Robert Murphy tells the story well in The Politically Incorrect Guide to the Great Depression and the New Deal).
Government spending and deficits crowd out private-sector activity that is consumer driven and thus efficient. The timeless explanation of the artificiality of public jobs by Henry Hazlitt in Economics in One Lesson applies to the U.S. experience in the 1930s and to today’s quagmire. Rothbard’s America’s Great Depression (1963) documents the artificial 1920s boom from expansionary monetary policy (the Federal Reserve Bank was founded in 1913) and the necessary bust that was not ever allowed to run its course to sustainable recovery.
Keynesianism failed again with the 1970s stagflation, which occurred during the energy crisis. The simultaneous existence of high unemployment and high inflation empirically refuted the (Keynesian) Phillips Curve, which graphed how more of one meant less than the other with the two never being high at the same time.
In the face of stagflation, neo-Keynesian leader Paul Samuelson, his guilty textbook Economics exposed, lamented:
It is a terrible blemish on the mixed economy and a sad reflection on my generation of economists that we’re not the Merlins that can solve the problem. Inflation is deep in the nature of the welfare state. Even when there is slack in the system, unemployment doesn’t exert downward pressure on prices the way it did under “cruel” competition.
But lessons were not learned, and Obama finds his third-way interventionism running on empty. The stimulus borrowed from the future and simply propped up mal-investments and created new ones, such as the government-dependent wind power industry. “Green” jobs are bubble jobs that are set to burst sooner or later.
Three strikes–is neo-Keynesianism out?
Austrian-School (Real World) Economics
Enter the ‘Austrian School’ or ‘market-process approach’ to economics.
Milton Friedman said there is only good economics and bad economics, not schools of economic thought. He answered as much at an Austrian economics conference in 1974 when asked about this school (named for several generations of economists who came out of Austria).
Today, more than ever before, Austrian economics can be seen as good economics, employing both realism in its assumptions and separating itself from inevitably falsified quantitative laws (there are none in the realm of human action). Austrian economics derives general economic principles; economics as a science is about qualitative laws that are invariant in time and place.
Austrian economics is going through a great revival on many fronts. Its scholars are on the cutting edge of today’s public policy debates. See for example, the blog Coordination Problem, led by Peter Boettke, a leader (if not the leader) of generation six of this school of economic thought.
Economics and political economy are at the core of the science of liberty. Enter Murray Rothbard, known in his lifetime as Mr. Libertarian, whose economic/political economy base (described by Roger Garrison in Part II) was complemented by his contributions to social and political philosophy and to revisionist history.
Rothbard is a multi-disciplinary scholar whose twenty or so books and countless essays and shorter pieces remain relevant to many scholarly debates today. His contributions are passing the test of time, while so many trendy scholars find their lifework under greater strain and critical scrutiny.
Murray was an inspiration to me with his multidisciplinary approach to social issues and his cackling, kind personal demeanor. He made it all fun. There are many personal stories that enlighten his personae, but maybe my favorite was when he had trouble ordering a pizza by phone late one night amid a group of us students and surmised that government intervention must be at work. After all, he was the market demand!
Rothbard’s economic treatise, Man, Economy, and State (1961), is a great work of scholarship, proceeding from first principles to the complexity of an industrial economic system to the political economy of interventionism (see study guide here).
I read this book very carefully (as I had done with Rothbard’s teacher’s treatise, Ludwig von Mises’s Human Action), which inspired me to think in terms of a treatise approach to the intersection of oil, gas, and government. Mine was a history book which was doable with a ton of inspiration and effort, drawing upon a sound worldview of business action thanks to Austrian economics.
Rothbard had written about energy from time to time–about public utility regulation of gas and electricity, about state and federal regulation that propped up the domestic industry from the 1920s through the 1960s, and the energy crisis of the 1970s. But all this was in passing.
So when I asked him to supervise my dissertation on a history of oil and gas regulation in the United States, he was very interested in getting the full story. We spent several years in correspondence and on the phone with the large manuscript, and we had our oral defense here in Houston.
He liked the result, calling my Oil, Gas, and Government: The U.S. Experience “one of the best and most significant studies I have ever seen in the area of economic history and contemporary political economy.”
I will always be honored with this association at the beginning of my intellectual career.
Part II tomorrow: Roger Garrison on Murray Rothbard…