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The Politically Correct but False Economics

The Politically Correct but False Economics

8 Mins
March 19, 2018

Gordon Gekko: Stop telling lies about me and I'll stop telling the truth about you.

Wall Street: Money Never Sleeps (2010)

Scams and rackets, hoaxes and frauds … are as old as humanity itself. The Federal Trade Commission estimates that over 25 million Americans lose in excess of $2.5 billion to fraud each year.

Science, the exemplar of the taming of Nature by Reason, is not exempt from swindles. Indeed, the cloak of respectability facilitates longer-running rackets that ensnare the good, the bad, and the ugly (of character).

The Piltdown fossils were claimed to be half ape, half man. If only. The famous Beringer fossils were all pre-planted to fool Beringer. The remains of the ten-foot-tall Cardiff Giant, an exhibition that attracted enthusiasts from afar, were carved out of stone.

Then there was “Towards a Transformative Hermeneutics of Quantum Gravity,” a prank (known as Sokal’s Hoax) by a physicist—a willfully nonsensical paper that a then-respected journal published. Sokal was only having an inside laugh at his own profession.

But some fields are so open to a corruption of the mind, that the con artists themselves can be made unaware that they are scamming anybody. Now that’s the swindler’s utopia.

A Corruption of the Mind

A lust for power and Science can also intersect on the gravy-train bound for glory. Academics, once brainwashed to a state beyond repair, serve up a lie so often to well-respected journals that the lie becomes the norm, and the norm then becomes the judge, the jury, and the executioner.

The game we are about to unveil had been in play since Karl Marx, but it really took off in the 1930s. When the worst of Charles Ponzi and Bernie Madoff is orchestrated behind the façade of graphs, equations, and the peer review of the brainwashed, the game can end in destruction, not just of one major corporation, but of entire economies.

Ponzi Schemes

A Ponzi scheme, named after Charles Ponzi, is a con wherein a money manager pays a high rate of return, say 15% per annum, while investing part of the money raised, and using the principal itself to reward investors with 15% “returns” every year. The curtain should go up when the time comes to return the original principal. But, enticed by the 15%, new investors are lured into a sister-scheme. Now the new, incoming money is used to pay off the original investors’ principal in full, thereby creating a mask of end-to-end diligence and a final payoff—that’s the Ponzi nature of it. At times, some money is siphoned away as well, but fraud and criminality are already in place via its Ponzi nature; siphoning funds off for private use only adds to the charges.

If the pool of funds continues to get bigger with further schemes, the snowballing effect can hide the Ponzi nature from discovery by an eventual collapse for decades. A proper audit, of course, would illuminate the problem at first occurrence.

There is, today, a global epidemic of government-instituted Ponzi schemes.

But the lie we shall unmask is deeper, and wider in scope, because human nature is not so duplicitous that multitudes will carry the water for evildoers. The game needs millions of clever—even brilliant—students and professors, journalists and businessmen, politicians and activists, to wrongly, but truly, believe in the goodness of the hoax that facilitates it. This level of brainwashing calls for backing from the Holy Grail of Science.

The Game

The classic foundation is a theory, enthusiastically supported, replete with millions of published “peer-reviewed” research papers, its high-priest proponents rewarded with commendations, promotions, tenure, acclaim … the Nobel even, and its token detractors not silenced, but elevated to a distant number two to assuage conspiracy theorists that academe has in fact continued a free flow of ideas. Which allows the true detractors to be likened to flat-earthers, their research diminished as belonging to the sorts of predatory journals that will publish wild, unsubstantiated conspiracy theories.

However, the complete reversal of truth and falsehood has one Viking it cannot vanquish: Reality. When reality strikes, as it must, the lie needs a set of ready-made fugitives, villainized by Hollywood and the media, in place to take the blame when the vicious cycle intermittently implodes into crises, as it must. Meanwhile, some good must be done that counteracts the deluge of evil that the scam unleashes, so that the tricksters can take credit for such good … nay, they must truly believe they facilitated it so they bask in glory with the clearest conscience.

Every element of a great scam is now deeply entrenched: An exalted “science,” a society indoctrinated with the false narrative, a bunch of Fall Guys in place and demonized by the culture, token detractor theories that seemingly oppose the new orthodoxy, a coalition of governments the world over from all dominant sides of politics backing and using the scam, and a productive, innovative few that unknowingly slow the Titanic down as it hustles full-steam-ahead toward the iceberg. What is this racket?

But first, a little about the rationality that the racket conceals.

Rational Economic Science

In the Nineteenth Century, economic science was simple. However, as George Reisman noted in his magnum opus, Capitalism: A Treatise on Economics, the field now known as Classical Economics did not come with zero defects. But it at least hinted at an easy solution to everything: “free markets.”

The foundations of economic science were accessible to the lay, and could be grasped in a few evenings of learning, if one only held fast the holy phrase: “free markets.”

Let’s state a few commonsensical paradigms of real economic science:

  1. When markets are free, prices of goods and services are discovered in the process of voluntary negotiation. Price discovery is a frequently occurring process—prices must reset to bring supply and demand into equilibrium repeatedly. High prices that continue to attract demand while delivering profits, entice new entrants into the industry. Low prices do the opposite.
  2. Interest rates are the price of credit. Creditors need a reward for deferring consumption, as well as for taking the risk of losing their money. This price can be different, even when expressed as ‘percent per annum’, for different periods: a month, a year etc. Thus we have a term structure of interest rates. Like all other prices, the term structure of interest rates is best discovered by the free market.
  3. Economic growth is primarily driven by scientific progress and innovation. In turn, this drives up the supply of investible capital. Capital when invested wisely in profitable ventures, begets more capital, and aids more innovation.
  4. The real economic arrow is unidirectional. Production comes first. Producers, including workers who receive wages, use their compensation to demand other available goods and services. Merely demanding a motorcycle will not produce one.
  5. Investments must come from savings. No investment can arise from thin air. An investment forced by decree (say, on a high-speed train project—a politician’s dream) must deprive some other investment of savings. The politician’s dream is the capitalist’s nightmare. Capital will most likely be wasted.
  6. A society’s productivity is inextricably linked to its intellectual capital, and, barring vicious accidents such as war, will tend to go up more or less continuously. This will cause prices to fall if the money supply is stable and reactive to its actual cost (e.g. of mining, if gold is money), and the standard of living to thereby rise.
  7. Businessmen are human and make errors sometimes. There is no intrinsic force that snares millions of unrelated business people not in communication to make the same mistake. There is no business cycle except as caused by governments.

We can go on, but the point is made … except for one problem.

How can something this obvious morph into a scientific hoax that has run for over 80 years and is still growing? Because all the elements of a great fraud fell into place.

The Big Lie

In the 1920s, a once-brilliant mathematician became a delusional economist, arguing for government spending to create jobs. At the time, many of his colleagues disagreed, but buoyed by the promise of eminence in political circles, he persevered. A lust for power intermingled with mathematics on a gravy-train bound for glory.

In 1936, John Maynard Keynes published his magnum opus. Today, Keynesian solutions, “particularly the use of fiscal stimulus, have been adopted on a dramatic worldwide scale.”

But was Keynesianism, defective and misguided, embraced because the ideas elevated politicians to the role of economic overseers and their economist pals to political confidants and policymakers? Hunter Lewis tackles this crucial question in Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts.

The Quackery of Keynesianism Laid Bare

Lewis laments the fact that not enough literature exists that rebuts Keynes directly. Friedrich Hayek apparently planned one but gave up because Keynes so frequently changed his mind, that Hayek thought it would be a waste of time. Lewis has high regard for Henry Hazlitt’s comprehensive takedown in his 1959 epic The Failure of the New Economics. Hazlitt, however, exposed the inconsistencies and fallacies by going through The General Theory of Employment, Interest, and Money, Keynes’ magnum opus, line by line, resulting in a 500-page classic.

Dedicating his book to Henry Hazlitt, Lewis decides to concentrate on the major fallacies, and even then ends up with over 300 pages plus endnotes. In part, this is because of the book’s unusual structure, and in part, this is because, as Hazlitt found, there are simply too many absurdities to cover.

Part II of Lewis’s six-part book consists of excerpts mainly from The General Theory, followed by a commentary on what Keynes most likely meant, with a brief on how that meaning has been derived. Simply getting to what Keynes actually meant is rendered difficult because The General Theory is very badly written; even his famous pupil Paul Samuelson, a life-long Keynesian himself, admitted that as much.

These are some of the Keynesian inferences that are taken up for a comprehensive dismissal. It is hard to say which of these Keynesianisms are the most ludicrous:

1. Interest rates are always too high without government intervention. This is the primary cause of poverty.

2. The stock market behaves like a casino.

3. The State should decide the volume of investment.

4. In an economic crisis, federal agencies should print or borrow money, and then spend it to get the economy to recover.

5. Gold is a barbarous relic.

6. Consuming more will lead to higher investment.

7. Commodity prices should be managed by the State.

8. Markets do not self-correct.

These are not the only preposterous statements that Lewis has to deal with. Part III runs into 165 pages of refutation, and absolute repudiation, of what is essentially The General Theory’s whimsical, and full frontal, assault on the price system, plus its inconsistencies, arbitrary assertions, and serious logical problems.

Among other things, Keynes assumed that labor markets do not adjust to restore full employment. Keynes’s approach is not just a vicious attack on the holiness of price discovery, but also on sound money, and the reward for saving. But his solution, government-stimulated demand to take advantage of idle capital and labor and pull economies out of recession, comes through as a perfect symphony to the ears of political megalomaniacs craving the blessing of scholarly nobility. The illogical cacophony was propelled into action—Roosevelt’s New Deal had the blessing of Science.

Eventually, euphemisms like fiscal policy, monetary policy, and quantitative easing became folklore in peer-reviewed journals, then part of an everyday lexicon of generations of bureaucrats, economists, journalists, and finance professionals. As the lie morphed into “mainstream economics,” it became the Big Lie. What does the Big Lie euphemize?

Money supply manipulation, interest rate bastardization, crony project funding, incessant stealing from savers to let borrowers borrow cheaply, an absurdist reverence for inflation as though it’s needed for economic growth, setting up false convictions (the Fall Guys), extolling the issuance of paper money unlinked to value, subsidizing and interfering with banking … are only some of the preposterous realities that hide behind these euphemisms.

Government-instituted Ponzi schemes, too, are the indirect result of the Big Lie becoming ubiquitous—in education, in the media, and in Hollywood.

The Great Scam

The Game is a perfect set up for politicians, mainstream economists, and their cronies to take credit for whatever good happens to the economy via its innovators, while taking action that undermines the economy. The regulators will blame their Fall Guys like “Shadow Banking” or unregulated money managers for causing each new financial crisis, and issue a clarion call for more power: deeper and wider regulation. The politicians will seemingly blame their own crony donors—but only metonyms like “Wall Street,” and “Big Oil,” will be thrown under the bus, without incarcerating flesh-and-blood people.

The Big Lie makes The Game’s key players believe that they are doing the noble thing. And that’s how this game becomes a great heist.

The daft inference that maturity transformation is a must for banking, and that a monetary authority be constrained by some credit-expansion rule (thus conceding that a monetary authority ought to exist) are promulgated by iconic individuals and institutions associated even with free markets or libertarianism. There you have it—the last of the pieces of the puzzle in place—the token defenders of free markets elevated to be the intellectually competitive alternative, as the Fall Guys are lined up to take the fall.

Every economic crisis from the Great Depression to the 2008 financial crisis, was set up by interference with the free market. But over the last 80 years, the swindle got buried much too deep under the auspices of mainstream, “neo-classical” economics.

Humanity has never known a greater scam than the “politically correct” economics. Trying to end this one, if it can be ended at all, will result in the fight of the century.

This essay has merged and edited two essays that appeared on Savvy Street: “Was Keynes a Quack?” and “Will the Greatest Scam of All Time Ever Come to Light?


Vinay Kolhatkar

Vinay Kolhatkar is a freelance journalist, novelist, screenwriter, and finance professional. He is the Chief Editor of The Savvy Street. His work has also been published in The Missing Slate, Reason Papers, AS Journal, Cuffelinks, and JASSA. Vinay has penned two TV pilot screenplays (Marlon Stone, and Unlikely Partners), and has had two novels published in the unusual Romantic Thriller genre: A Sharia London and The Frankenstein Candidate.

Vinay Kolhatkar
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Vinay Kolhatkar
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