Underneath all the author’s sophisticated jargon is the childlike wish to get something for nothing which underlies all Keynesianism.

The reason economics is called the dismal science, is because it keeps telling politicians there is no such thing as a free lunch, whereas politicians’ entire existence depends on promising people a free lunch and hoping the tab doesn’t arrive before the politician has left the room. The tab has now arrived in Europe.

“At the same time, a quite narrow and arbitrary set of fiscal criteria were enshrined by the Maastricht Treaty, which have since imparted a powerful disinflationary impulse throughout the Eurozone.”

Here we see laid bare the Keynesian belief that real wealth comes from inflating the money supply. Keynes said that credit expansion performs “the miracle of turning stones into bread”. This is obviously irrational, but the Keynesian cargo cult actually believe it.

Now you or I might think that your money being worth more - “disinflation” – would be a good thing. Not the Keynesians. They think it’s an unmitigated calamity. Your money should be worth less and less all the time. That’s the way to increase everyone’s standard of living.

Don’t laugh. This foolery is what passes for economic theory in government.

What really happens when governments create or licence more money substitutes, or expand credit by lowering interest rates, is:
a) a redistribution from the owners of property to government favourites – no net wealth is created
b) the distortion of the capital structure that leads to the inevitable bust.

“In a rather inexplicable violation of the basic principles of central banking, the Maastricht Treaty's design of the European Central Bank (ECB) designated that the "lender of last resort" function should be prohibited.”

Here we see a Keynesian’s bafflement at the idea that politicians shouldn’t be able to write as many dud cheques as they feel like, and have the subject populations of other countries press-ganged into toiling to pay for their charlatanry.

Note to Keynesians: real wealth comes from productive activity, not from stamping pieces of paper under monopoly licence from the god-state.

The euro may well be heading for collapse, but if it is, the cause is surely too little “neoliberalism,” not too much.

The risk with monetary union was always that it provides incentives for governments to adopt irresponsibly inflationary fiscal stances. These need to be curtailed by strict fiscal rules and enforcement. The failure of France in particular to abide by the conditions of the stability and growth pact, and of the EU to penalise them for that failure, showed up the central mechanism in the pact as toothless and unenforceable. If the leading EU members refused to be fiscally responsible, why should the other members? We're seeing the consequences of that now in the spectacular fiscal crises in Greece etc.

The current crisis may indeed merit expansionary counter-cyclical policies, but countries which have run structural deficits for decades haven’t got the reserves or credibility to borrow when the cycle demands it. Australia’s successful management of the recent global downturn owed much to its preceding years of debt reduction and budget surpluses. The irony is, Kenysian cyclical management works a lot better in a neo-liberal mindset of commitment to structural surpluses (averaged over the business cycle, allowing deficits only in years of economic contraction or weak growth).

Peter,

Much of what you say seems right. Countries like Greece need significant reform to their economies. They cannot endlessly increase their borowings, and then save themselves by asking asset holders to pay.

But,

Is it a good idea to let the Greeks fail? And the others who undoubtedly would follow?

Isn't it entirely possible that the cuts to public spending will force the Greek economy further into recession, reducing their ability to service their debt? And thus leading to further default? I accept that as a long term strategy, asking asset holders to pay (by monetization) is unsustainable. What about in the very real short term?

Finally, isn't it also true that a little (not a lot) more regulation might have reduced the devastation of the GFC. Eg. Australias banks?

I strongly agree with Peter Hume’s comments on this article. This does seem to be very convoluted and agenda driven article and I’m not sure the conclusions are effectively linked to the issues stated.

The EU started as a trading block to facilitate pan-European, tariff free trade between member states. Fine whilst only wealthy industrialized States were the main traders.

In its desire to bring in new members with whom they could “trade”, the EU provided development loans and “attractive trading terms” to help these new member states to kick start their industrialization efforts. This way the EU could sell them things, open factories in their Countries and buy things from them at a lower cost than they could produce themselves.

This has gone on for many years and the monetary union was formed to facilitate this.

Unfortunately, the new member states spent the “free money” on things that did not increase productivity. Instead they spent on a range of social and feel good things that would keep their respective governments popular and thus retain power.

This has left them with no margin of error with which to “exponentially smooth” market fluxes. As markets became tougher they lost their ability to repay their loans due to the absence of organic GDP growth.

The sins are primarily those of the EU plus incompetent and opportunistic politicians in member States, nothing new or complicated just the same old political SNAFU. The mistakes as always;

1. Legislation that interferes with market (profit driven) entities.
2. The creation of direct competition to business entities by governments.
3. The diversion of public funding into temporary, low or nil return ventures.

Sometimes I think economics is made to sound more complicated than needed and misses basic marketing.

Dear Peter Hume,

The logic of your opening paragraph follows Immanuel Kant’s conclusive “Critic of Pure Reason” and, for this, it would be impeccable if only the ‘great’ master had not been a human being.

But he was one of the ‘humans’.

Young, intelligent, passionate people like you gobble much from their teachers and store a lot of notions that prove unsustainable at the light of new experiences.

In your second paragraph you get carried by your passion and say “whereas politician’s entire existence depends on promising a free lunch and hoping that the tab does not arrive before the politician has left the room”.

In fact the politician never leaves the room, what he does is leave the space for another politician who continues promising juicer free lunches. The charade hence goes ad infinitum.

It is the third entity that you mention, ‘The State’, the one that does not leave the lunch room.

PaulL

The problems caused by government control of the economy cannot be solved by more government control of the economy, any more than the problems of the old Soviet Union could be solved by more central planning.

“Is it a good idea to let the Greeks fail?”

We have to distinguish between the socio-economic-ethical problems, and the political problem. The political problem is simple: how to postpone the day of reckoning by any expedient, even if it makes matters worse. This unprincipled reasoning is what has caused the problem in the first place.

The socio-economic-ethical problem is that:
a) the pretensions of the state to produce net benefits for society by manipulating the money supply are false, and
b) on the contrary, there is a direct conflict of interest between the state and the rest of the people over how money is supplied.

The history of state control of the money supply is a history of perpetual abuse and legalized fraud on a massive scale. There is no evidence or reason to assume that the government can be trusted with this function. The state has an interest in endless inflation, which causes enormous negative economic, social, and ethical consequences. Keynesian theory is a superstition, by which the high priests – economists and academics – preach to the masses that Pharaoh can do no wrong, even while he robs them.

At issue is whether we are to live in a free society, or one that gradually approaches closer and closer to a horrible fascist amalgam of big government, banksters, big corporations, protectionism and perpetual war, a police state nightmare of which America is a good present example, and the other western states aren’t far behind.

As to the short term solution, remember that Germany was still a starving bomb crater two years after the war ended, under the Allied armies’ comprehensive central planning and meal tickets. Werner Erhard abolished their controls, and within 5 years, Germany was one of the biggest economies in the world.

The short term solution is a lot more freedom, not a bit more central planning.

www.mises.org