Economists Prove That Capitalism Is Unnecessary

Several readers sent me a link to Economists Prove That Capitalism Is Unnecessary.

The title was hardly surprising, given that is what many economic illiterates think. However, I was startled to find out it was written by Steve Keen, one of my favorite economists.

Did Steve Keen really propose such a thing?  Thankfully, he didn’t.

The first sentence of his article reads “Actually they’ve done no such thing. But they do effectively assume that it’s unnecessary all the time. … I’ve read this sort of nonsense in dozens of mainstream academic papers over the years, and railed against it in an academic sort of way.

With that, I was more than a bit relieved. And in regards to central planning and ability of bureaucrats to spot bubbles, bad planning, and instability, Keen says …

And how would economic agents notice this instability? They would realize that a pattern of relative prices that had occurred once before in the past happened again. Hmmm. O.K.A.Y.

Getting to the heart of the matter, Keen praises Hayek …

The strength of a market economy was how it let people combine fragmented and incomplete knowledge in a way that no centralized system could do. Hayek’s main target here were socialists who believed that a complex economy could be centrally planned—thus doing away with markets institutionally.

Keen vs. Keen

In his Debtwatch Manifesto Keen proposes three mechanisms for dealing with the debt crisis. The first is a debt jubilee. The second is a mechanism that would act to restrict share prices.

In his third proposal, Keen states “Lenders would only be able to lend up to a fixed multiple of the income-earning capacity of the property being purchased—regardless of the income of the borrower. A useful multiple would be 10, so that if a property rented for $30,000 p.a., the maximum amount of money that could be borrowed to purchase it would be $300,000.

Hmm. How can Keen, me, or anyone else discern the correct “useful multiple“? Shouldn’t this be left to the free market? 

Keen also discusses full reserve proposals, one by Irving Fisher, the other HR2990 a bill Proposed by Congressman Dennis Kucinich in 2011.

Keen: Technically, both these [full reserve] proposals would work. I won’t go into great detail on them here, other than to note my reservation about them, which is that I don’t see the banking system’s capacity to create money as the causa causans of crises, so much as the uses to which that money is put. The problem comes when that money is created instead for Ponzi Finance reasons, and inflates asset prices rather than enabling the creation of new assets.

Mish: I propose, the system’s capacity to create money at will is the very problem. The fact of the matter is central banks can create money but not dictate where it goes. Curiously, Keen is willing to let bureaucrats decide what constitutes Ponzi financing, even though history shows government bodies and central banks have a 100% failure rate at identifying bubbles. Keen is concerned about “where the money goes”, yet is willing to trust bureaucrats more than the free market. To quote Keen directly … “And how would economic agents notice this instability? They would realize that a pattern of relative prices that had occurred once before in the past happened again. Hmmm. O.K.A.Y.

Keen: Though I am a proponent of government counter-cyclical spending, I am skeptical about the capacity of government agencies to get the creation of money right at all times.

Mish: Keen is a proponent of government counter-cyclical spending, but what government? A socialist one? A communist one? Republican? Democrat? Keenian? Mishian? Who decides what is cyclical and what is counter-cyclical? Keen? Bernanke? Hillary? Me?

Given central banks and government bodies have a 0% success of spotting bubbles, Keen’s statement about inability of government agencies to get the creation of money right at all times is more than a bit curious.

The simple fact of the matter is that no one needs to sit back and declare what is money and what isn’t. No one needs to decide the correct money supply.

Free Market is the Solution

The free market, left on its own accord will decide nicely. The problem is not lack of regulation, the problem is regulation.

The Fed is part of the problem. Bureaucrats wasting money is part of the problem. Corporate cronyism is part of the problem. Free markets, not bureaucratic intervention is the solution.

Those who believe differently need to explain debt bubble boom and busts of ever increasing amplitude.

One either has faith in free markets, or one doesn’t!

So, why should government, any government decide what is money and what isn’t? Why should any government or any bureaucratic body like the Fed have such powers?

Will the Real Steve Keen Please Stand Up?

In his Forbes article, Keen mostly argues in favor of capitalism and free markets. In his Debt Manifesto, Keen argues for central planning and controls.

I am a big fan of Steve Keen. He has taught me much about debt deflation. Our differences primarily lay in what to do about things.

Free markets are often criticized for causing problems, but can someone, anyone, tell me when they have ever been tried? 

In his latest Forbes article Keen nearly gets things correct. He is wrong about the “system’s capacity to create money at will” not being the essential problem, yet he hints at it.

That is a start. Now, Keen needs to go through his Debt Manifesto one more time to figure out what is and what is not “central planning” and eliminate everything that isn’t.

Steve, what’s left?

Mike “Mish” Shedlock