von Hayek Was Right—Keynes Was Wrong—Politicians Follow Keynes

    Do not think about, write about or deal with  human behavior without determining the effects of incentives.

    Wherein we see that how far politics is from reality.

George Leef: How Far Away Do We Place Blame?

Michael Shaughnessy EducationViews Senior Columnist
An Interview with George Leef : How Far Away Do We Place Blame?

1) Washington Post writer E. J. Dionne recently wrote about blaming someone else for our economic quagmire entitled “An economic school has led to gridlock in Washington.” How the heck can he blame an economic school of thought for what our politicians in Washington have done to our economy?

Dionne’s column was an atrocious, ill-informed, emotional blast at the Austrian School of economics. I wrote about that column in this recent Forbes piece. Dionne lashed out at the Austrians (called that because the first economists to develop that line of analysis were from Austria, but now there are “Austrians” all over the world) because they consistently argue that most of what the federal government does is counter-productive. Dionne is a true believer in expanding government, impervious to arguments that it wastes resources, creates perverse incentives, and leads to corruption.

2) The most famous Austrian is F.A. Hayek, who apparently garnered the 1974 Nobel Prize in economics. He wrote, many books,but his most famous is The Road to Serfdom (1944). However, times have changed, and I would think that economic thinking has changed also since 1944. Or am I off on this ?

Hayek’s famous book really was not about economics per se. It was a warning (addressed to “socialists of all parties”) that once a government departed from the classical liberal (and that’s how Hayek thought of himself, not a “conservative”) order-keeping functions and became a source of welfare benefits, it would keep expanding. Politicians would start outbidding each other on who could deliver more. The power of government would always ratchet up and increasingly unscrupulous people would be drawn into “public service.”


    How’s that for predicting?

3) As a society , we do have some type of moral obligation to care for the blind, help the deaf, assist those with intellectual disability. However, once we being to offer government welfare, it seems that there are more and more people who want or demand, or believe they are ( gasp !) entitled to it. What are politicians to do ?

In my view, politicians who really care about the needs of the poor would encourage private sector efforts at assisting the needy. We used to have a remarkable “welfare system” completely apart from government. Historian David Beito has done excellent work in that regard – see his book The Voluntary City. Private assistance is much better at targeting aid to those who actually need it and not wasting it on people who just want to “game the system.” Sadly, many politicians realize that it is in their own interest to appear to be compassionate and generous (with other people’s money) so they push for government welfare programs they can take credit for.

4) There do seem to be some government programs that do more harm than good- rescuing banks and companies that should close due to poor management, and the like. What ever happened to natural consequences? If I open a pizza place and sell lousy tasting pizza- should I not go out of business eventually ?

If you really grasp Austrian thinking, almost everything the government does leads to more harm than good! Bailing out companies that are said to be “too big to fail” is one good example. No company is too big to fail. All that phrase means is that a lot of people will temporarily feel distress if a firm goes out of business. Firms go out of business every day and the underlying reason is always that they are making inefficient use of resources – the value of their output is less than the value of the resources used. Bailing any company out is a misuse of tax dollars and it also sets a bad precedent.

5) The Austrians and some Europeans do have some common sense. I bet that we would not have had that recent “ housing bubble “ if some common sense had been applied to various loan programs ( in Europe as I understand, a much larger down payment for a home is expected ). Your thoughts?

The housing bubble is a perfect example of the damage that government does by interfering with the spontaneous order of the free market. If it had not been for artificially low interest rates and federal regulations that pushed home ownership as if it were somehow a bad thing for people to rent, we would not have had that bubble. Only a few Austrians warned about the looming disaster in the years 2002-2006. Had their advice been heeded, the government would have left housing alone and we wouldn’t have suffered the economic pain when the bubble burst.


    Everyone should own his dwelling, but everyone is not capable of maintaining his dwelling. For evidence I present the high rises “built for the poor” after World War 2 and demolished after 20 years. Apparently, peeing in stairwells, not worrying about plumbing backups and lack of routine maintenance has a bad effect on “housing stock.”, as the bureaucrats call it.

6) I can still clearly recall reading Paul Samuelson’s book on Economics when I took the class with Professor Kingkade. Is there anyone in Washington who reads micro and macro economics and is able to talk about these things realistically?

I’m afraid that very few politicians have any deep understanding of economics. Ron Paul and his son Rand have read the Austrians and a few others may have gleaned a bit of their wisdom. Quite a few Republicans have at least heard of Milton Friedman who favored minimal government. (Friedman and the Austrians differ mainly over money; Friedman was OK with the Fed, while the Austrians would allow a free market in money. One of Hayek’s papers was entitled The Denationalization of Money.) Sadly, most politicians of both parties have Keynesian notions implanted through Samuelson in their heads and thus believe that the federal government must control and regulate the economy. That’s exactly what the Austrians argue will lead to trouble.


    The most widely believed and practiced economic theory is the most wrong. To those who don’t believe in gradations of “wrongness”, I present the following argument from The Big Bang Theory. “Calling a tomato a vegetable would be wrong, but calling it a suspension bridge would be more wrong.”

7) At some point- borrowing is not the answer- unless you raise taxes, or maybe sell Rhode Island to the Chinese as payment. Are there any long term thinkers in Washington? Or is there a gridlock in thinking ?

No, we can’t keep borrowing to cover deficits forever. Eventually we will ruin our credit. That has happened to governments before and the US is not in a unique category. There are a few long-term thinkers in Washington (and elsewhere in the country) but the problem is that politics is inherently short-sighted. It is so much better politically to just put off the day of reckoning and keep as many voters content as you can than to downsize the government so we don’t have to keep borrowing.

8) Can you provide some more reference material for individuals to read to grasp the subtle nuances of this argument? And can you link us to your original Forbes piece ?

Readers who want to delve into the Austrian School will find a great deal of material in this list compiled by Professor Richard Ebeling:



    The “Austrians” basically say that politicians should run very little. Will Rogers said that Congress in session was like a baby playing with a hammer. One hoped to take it away as soon as possible while praying he did little damage while in possession.

Lord Acton: Liberty is not a means to a higher political end. It is itself the highest political end.

To order my novel, “Days of Songs and Mirrors: A Jacobite in the ‘45”, click here.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson
Cui Bono–Cherchez les Contingencies


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