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FREE

MARKET

THE

The Keynesian AbyssRON HERA

S

VOL. 30, NO. 8, August 2012 THE MONTHLY PUBLICATION OF THE LUDWIG VON MISES INSTITUTE

Ron Hera is founder of Hera Research, LLC, and

the principal author of the Hera Research Monthly

newsletter. Ron’s articles have appeared on GoldSeek.

com, 321gold.com, King World News, Seeking Alpha

and in other professional economics and investment

publication venues. (Email: [email protected])

Perhaps the greatest modern champion o central economic planning

was the twentieth-century English economist John Maynard KeynesKeynes advocated the idea that the government should play a large

active role in the economy. Among the consequences o Keynes’ economic theories, whether intended or unin-tended, is the act that Western economies today are char-acterized by large, central governments, central banks, andmassive debts.

Government policies based on Keynesian theories and

the institution o central banking orm a nexus o centraleconomic planning. Control o the central planning pro-cess is a winner-take-all proposition or businesses. In theU.S., the result is an unholy alliance o the U.S. ederalgovernment, the Federal Reserve (along with the largestU.S. banks), and the largest U.S. corporations. The logi-cal chain beginning with Keynes’ undamental idea thatgovernment, supported by a central bank, should play a large and active role in the economy sets the stage or a centrally planned economy and ultimately produces a cor-porate state.

The U.S. economy is locked in a downward spiral o economic decline. By growing in size, and by engaging

in ever-larger economic interventions, the U.S. edera

government became itsel a material cause o the recession that began in 2007. By attempting to grow the econ

omy through monetary expansion, the Federal Reserv

destroyed savings and ueled a series o disastrous economic bubbles, culminating in the housing bubble.

Following Keynesian economic theories, the policresponse o the U.S. ederal government to the recessio

that began in 2007 and o the nancial crisis that beganin 2008 was to expand the government urther and at

more rapid pace. In other words, some o the root cause

o the economic imbalances that led to the recession annancial crisis (the relative size o the government and th

resulting economic distortions) were compounded. As consequence, the so-called “double dip recession” in th

U.S. that began in the second hal o 2011 will be longeand ultimately more severe than the economic downtur

o 2007–2009.

Leviathan: The Size of the State

Government encroachment on the private sector, lika sel-ullling prophecy, oten magnies the reasons wh

government intervention was originally believed to be necessary. For example, when the U.S. ederal gov-

ernment became involved in education throughederally guaranteed student loans, the result was

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2 August 2012 The Free Market

Mises.org Ludwig von Mises Institute

Governments redistribute wealth and manipulate economic activity through taxes,subsidies, guarantees, and regulations, but they do not produce new wealth.

Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Editor: Daniel J. Sanchez | Contributing editors: Thomas J. DiLorenzo, Jeffrey M. Herbener, Robert Higgs, Mark Thornton | Publisher: Llewellyn H. Rockwell, Jr.

The Free Market is published 12 times a year. Note: the views expressed in the Free Market are not necessarily those of the Ludwig von Mises Institute.

Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832-4501 Phone: 334.321.2100; Fax: 334.321.2119; Email: [email protected];

Web: mises.org

that the cost o a college education rose toward the limit o what students could borrow and repay during their careerssimply because the loans were guaranteed by the govern-ment. The guarantees produced more and riskier loans,larger loans, and higher education costs.

When the U.S. ederal government promoted homeownership or minorities and the poor, mortgage loanguarantees resulted in higher home prices and contributedto the sub-prime lending debacle where banks originatedloans to unqualied borrowers in order to sell them togovernment sponsored entities (GSEs), i.e., to Fannie Mae

and Freddie Mac, and to investors as collateralized debtobligations (CDOs) and other mortgage backed securities(MBS).

Governments redistribute wealth and manipulate eco-nomic activity through taxes, subsidies, guarantees, regula-tions and so orth, but they do not produce new wealth.Government spending unavoidably avors businesses withclose ties to the government over those that are taxed butthat do not benet. Government programs that overlapthe private sector divert economic resources to businessesthat have the avor o politicians minus the cost o govern-

ment, thus producing economic distortions and a net losso wealth or society.

How the Government Destroys Jobs

While politicians extol the theoretical benets o evermore government control o the economy, e.g., throughincreased regulation, rom the standpoint o individualentrepreneurs, businesses and private investors, the govern-ment is a nuisance, an impediment to wealth creation, andthe source o countless costs and risks. The larger the gov-

ernment becomes relative to the size o the economy, themore it tends to discourage economic activity. Although

roughly 70 percent o U.S. jobs are created by small busi-nesses, ranging rom amily owned businesses to high tech-

nology startups, the burden o government alls dispropor-

tionately on them because they have ewer resources with

which to administer and to demonstrate compliance with

government regulations.

When large companies are audited or investigated by

any o several government agencies, their accounting, legal,

and compliance departments are well equipped to deal

with such matters. However, when a small company aces

the same hurdles or seeks government permits, licenses or

certications, its operations are directly impacted and theassociated accounting, legal, and regulatory compliance

costs can cause the business to lose money or to ail. In

the event o an audit or investigation, small business own-

ers in the U.S. generally seek to comply immediately and

oten pay nes or penalties without contest in order to end

the government’s intererence. While large companies can

aord to dispute the government, small businesses ace the

equivalent o extortion.

As a practical matter, small businesses in the U.S. are

permitted to operate at the sole discretion o government

bureaucrats that can eectively shut down small businesses without any evidence o wrongdoing. Setting aside the act

that small business owners live in constant and well-justi-

ed ear o their own government, the result is a stifing

o economic activity and a net loss o jobs. For example,

traditional small businesses in the U.S., i.e., sole propri-

etorships, increasingly avoid hiring employees.

Free-market competition and the inherent uncertainty

o economic conditions provide ample risk or startup

businesses. A disproportionately large government rela-

tive to the size o the economy damages economic activ-

ity and discourages investment in new businesses. The

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The Free Market August 2012 3

Ludwig von Mises Institute Mises.org

aggregate overhead o government regulations and regula-tory compliance, along with taxes and potential penalties,e.g., the 2010 Patient Protection and Aordable Care Act(“Obama-care”), increases business costs, amplies busi-ness risks, and urther increases the burden o regulatory

compliance. The result o systematically increasing thecosts and risks o doing business—in lock step with thesize o government—is to reduce the rate o business or-mation and to encourage investors to look elsewhere tond returns.

I the U.S. government, currently almost 45 percent o GDP, desired to create jobs, the correct policy would beto greatly reduce the countless regulations, taxes, and eesthat encumber small businesses. The path to job creation isor the government to reduce job destruction.

Central banks, such as the Federal Reserve, are exam-

ples o central economic planning, i.e., they control themoney supply and exercise centralized control over thevalue and cost o money through interest rates, bank reserve ratios, monetary infation and by other means. TheFederal Reserve engages in central planning or the beneto banks. Like the U.S. ederal government, the FederalReserve, through monetary mechanisms, distorts spend-ing and investment patterns, redistributes wealth and pre-empts the nancial and economic decisions o households,individual entrepreneurs, businesses and private investors.

Keynes and The Corporate StateThe U.S. economy is anything but a ree market today.

In act, the U.S. government increasingly resembles an oli-garchy in which the oligarchs are large corporations, i.e.,a “corporatocracy.” Thus, the illegitimate ospring o thegrand government envisaged by Keynes and the institu-tion o central banking is a corporate state.

Without a large government, businesses have littleincentive to infuence it, but with the government (local,state, and ederal) representing nearly hal o the U.S.

economy, infuencing the government is a mission-criti-cal objective or every company. The size o governmentimplied by Keynesian economics provides motive andopportunity but only the largest corporations have themeans to succeed.

The goals o businesses seeking to infuence the govern-ment include winning government business, mandating consumption o products and services (rom child car seats

to health insurance), avoiding taxes, guaranteeing prots,creating regulatory loopholes, protecting markets, elimi-nating competition, socializing losses, and so orth.

The infuence o Wall Street over Washington D.C.through political campaign contributions, corporate lob-

byists, and revolving doors (where the same individualsalternate between closely linked private sector jobs andgovernment posts) is almost absolute. Lobbyists are inti-mately involved in writing legislation that is oten rubber-stamped by the U.S. Congress, i.e., passed without readingor meaningul debate. The largest corporations supportpolitical candidates through campaign contributions andby unding political action committees that, among otherthings, use corporate public relations tools or politicalpurposes, i.e., propaganda. Key government posts are con-sistently held by individuals with clear conficts o interest,

and the existence o such conficts is routinely ignored.The current reality o the United States is

that the largest corporations have hijacked theKeynesian central planning powers o the ederal

Register online at mises.org or by phone at 800.636.4737.

Novemer 9, 2012WHAT HAS GOVERNMENT DONE TO OUR MONEY?A Seminar for High-School Students (Sponsored y

an anonymous donor)Mises Institute, Auurn, Alaama

January 25, 2013ARE PROFITS EVIL? A SEMINAR FOR HIGH-SCHOOLSTUDENTS (Sponsored y Jeremy and Helen Davis)Marriott at Hoy Airport, Houston, Texas

January 26, 2013THE MISES CIRCLE IN HOUSTON(Sponsored y Jeremy and Helen Davis) Marriott atHoy Airport, Houston, Texas

March 21–23, 2013 AUSTRIAN ECONOMICS RESEARCH CONFERENCE(formerly Austrian Scholars Conference) Mises Institute, Auurn, Alaama

June 10–14, 2013ROTHbARD GRADUATE SEMINAR

Mises Institute, Auurn, Alaama

July 21–27, 2013MISES UNIVERSITYMises Institute, Auurn, Alaama

Coming Events at the Mises Institute

S

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government and have used these powers to encourage ever

larger and more direct interventions in the economy or

their own benet, as well as laws and regulations that serve

as a barrier to ree-market competition. U.S. regulators,

such as the Securities and Exchange Commission (SEC),

Commodities and Futures Trading Commission (CFTC)

and the Food and Drug Administration (FDA), appear to

have been captured by the industries they are intended to

regulate. Government regulators selectively enorce regula-

tions, oten against small businesses and growing compa-

nies, such as organic dairy armers, protecting the interests

o the largest corporations rom small businesses, ree-mar-

ket competition, and consumer choice.

The largest U.S. corporations (including oil companies

like ExxonMobil and Chevron; drug companies like John-

son & Johnson, Pzer, and GlaxoSmithKline; agribusiness

companies like Archer Daniels Midland, which are heav-

ily subsidized by the U.S. ederal government; agricultural

biotechnology companies like Monsanto; military contrac-tors like Lockheed Martin, Northrop Grumman, Boeing,

Raytheon, and General Dynamics; and banks like Bank

o America, J.P. Morgan Chase, Citigroup, Wells Fargo,

Goldman Sachs, and Morgan Stanley) have not only

been the beneciaries o government expansion, decit

I n s i d e : “ T h e K e y n e s i a n A b y s s ”

b y R o n H e r a

L u d w i g v o n M i s e s I n s t i t u t e

5 1 8 W e s t M a g n o l i a A v e n u e

A u b u r n , A l a b a m a 3 6 8 3 2 - 4 5 0 1

F R E E

M A R K E T

T H E

T H E M O N T H L Y

P U B L I C A T I O N O F T H E

L U D W I G V O N M I S E S

I N S T I T U T E

A D D R E S S S E R V I C E R E Q U E S T E D

N o n p r o f i t O r g . U . S . P o s t a g e

P A I D

L u d w i g v o n M i s e s I n s t i t u t e

spending,and central economic planning, but, consider

political campaign unding practices, have become the de aoligarchs o America.

Sliding Into the Keynesian Abyss

The decline o the U.S. economy is the logical outcome

Keynesian economics, which enshrines central economic pl

ning and embraces central banking. The unholy alliance o ederal government, the Federal Reserve, and Wall Street

all but eliminated capitalism and has transormed the UniStates rom a burgeoning ree-market economy into a ail

corporate state.The U.S. ederal government, the Federal Reserve, and W

Street each played a role in the progression rom central e

nomic planning and central banking to a corporate state. Pticians used Keynesian economics to justiy big governmen

welare state, and budget decits. The Federal Reserve souto grow the economy through monetary expansion, ther

crippling it. At the same time, Wall Street sought higher prothrough infuence over the government. The resulting cor

rate state undermined capitalism and the ree market in United States and produced a downward spiral o econom

decline rom which there is no escape without undamen

reorms. ¾

august2012 (1)

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