VI. What of the Future?

SOME PERSONS argue that the Keynesian theory is useful in business forecasting, especially in our present managed-currency world, even though it is unsound as a basis for government policy.

I believe this is a fallacy.

Forecasting is necessary for all business, but stock market gyrations of the past fifty years have centered attention on a kind of forecasting that is of relatively little use, if it is not actually misleading. Business success, large or small, comes mainly from the kind of prevision Henry Ford showed in putting his time and capital into producing a cheap car, or that John Wanamaker had when he introduced the policies of one price and the money-back guarantee into retail trade. Such foresight is not based on quantitative studies of national income, but on qualitative insight into the opinions and feelings, hopes and abilities, of other people.

Keynesian theory not helpful in forecasting

Certainly, any analysis based on notions that savings cause business depression and that debt-creation is the right cure for unemployment is worse than useless as a basis for business planning. Dr. Benjamin Anderson contends that the Keynesian analysis always leads to precisely wrong conclusions. Dr. Rufus Tucker, in an essay entitled, “Mr. Keynes’ Theories Considered in the Light of Experience,”⁵⁰ some years ago gave numerous illustrations supporting Anderson’s view.

The statistician can measure and record certain factors in a situation. His charts and formulas can present a few relationships which held good in the past. Some of these relationships are sufficiently stable that they have to be taken into account in estimating future trends. Statistical studies of the situation in regard to particular industries have considerable value.

But “national-income analysis,” even when not based on Keynesian assumptions, is fundamentally defective as a method of business forecasting because it involves a pseudo-scientific, mechanistic view of economics that is wholly unrealistic and dangerously misleading.

What income statistics do not record

What Farmer Jones and Tailor Brown will produce and earn, consume and save, next month or next year, does not mainly depend on what they did last month or last year. Their future efforts depend on decisions which they are making now and which they must make in the future; and the changes in their ideas and behavior are determined mainly by things which the statistician can hardly measure.

Could any national-income figures prior to United States’ entry into the Korean War have indicated the business fluctuations which were to follow? True, the period from, say, June to October, 1950, was not typical, but what period is typical? Each period in history is like other periods in some ways, but what people think and want are different in every case, therefore what they do is different.

Free markets are not automatic

Success in forecasting depends on what one knows of other people’s plans. Knowledge of past and present operations helps in judging capacity to carry out these plans. This is where statistical facts are helpful. But there are always changing human purposes which cannot be tabulated or measured statistically. As Professor Mises says:

No “automatic” and “anonymous” forces actuate the “mechanism” of the market. The only factors directing the market and determining prices are purposive acts of men. There is no automatism; there are men consciously aiming at ends chosen and deliberately resorting to definite means for the attainment of these ends. There are no mysterious mechanical forces; there is only the will of every individual to satisfy his demand for various goods.⁵¹

For this reason, none of the quantities, formulas, or relationships used in national-income analysis is fixed or stable, not even the “propensity to save’‘’ or the rate of turnover of funds. This alone makes the “multiplier” worthless for forecasting, not to mention the fallacious assumptions on which it is based.

National-income analysis is supposedly most useful for predicting changes in employment. Yet the increase or decrease in amount of national income per employee added to the working force or subtracted from it varies from year to year by 100 per cent or more. In some years, employment has actually gone up while national income has gone down. In other years, employment fell while total national income rose. In the field for which it was especially designed, therefore, this approach is useless as a tool for forecasting.

National-income figures are useless for forecasting because they cannot record and weigh the infinite variety of conditions which self-determining individuals take into account in building their futures.

This national-income approach, moreover, promotes the notion of the business “cycle.” This mechanistic concept has not only been a nuisance in business forecasting, but it has supported the socialistic idea that business fluctuations are the natural and necessary consequences of free markets. Under the influence of this notion, as exemplified in Keynesian theory, governments are more and more pursuing managed-economy policies that are the chief causes of business instability and war.

Government “planning” increases instability

As far as anyone knows, man’s conduct is not predetermined, therefore is not predictable in the way that certain natural phenomena, like the weather, may be. Yet, in freedom, human conduct is increasingly rational and cooperative. Therefore, it provides a basis for hopeful planning. This was the truth behind the adage, “Never sell America short!” In voluntary enterprise, success goes to those who bet on increasing opportunities for economic cooperation and who judge more or less correctly what other people want to buy or sell.

In freedom, people cooperate in hope of reward. This means that each person gets the aid of others by offering sufficient inducement to enlist their will — their determination — to do what he wants and expects. Under such conditions, people are more likely to keep their promises and carry out their announced plans than when they are being coerced into something against their will. For this simple reason, business forecasting is much easier in proportion as people are free.

Government intervention, or “management,” in economic affairs introduces the element of legalized coercion. Coercion, whether legal or illegal, means abandonment of reason and of appeals to reason as means of getting cooperation. It does not mean merely substituting force for reason. Rather it means suppressing such cooperation as the coercive authority considers undesirable or unnecessary. Thus, for example, taxes suppress the cooperation which private spending would have supported; currency “management” suppresses some kinds of money (e.g., gold) and monetary arrangements in favor of others; government ownership involves prohibitions against competing enterprises or forced levies upon them.

Coercion destroys cooperation

Such coercion and suppression arouses anger or fear, opposition or discouragement, rather than hope and approval. Whether legal or illegal, it arouses the desire to escape and evade (e.g., “flight of capital”), or to resist and disobey (e.g., “black markets”), rather than to cooperate. It can accomplish its purpose only as it closes avenues of escape and crushes opposition. Up to that point, the victims use their ingenuity to thwart the will of the coercionists. Beyond that point, the victims become hopeless, apathetic, and uncreative. At either stage the results are declining output, trade, and prosperity.

Authors of managed-economy policies are continually coming up against these unpleasant results, which upset their calculations. The remedy which the Keynesian planners urge is currency inflation. But this inflation liquidates the creditor interest which is most opposed to unproductive spending and investment and most opposed to restriction of output which reduces the purchasing power of the currency. At the same time, the currency inflation is used to provide subsidies and support for those who favor unproductive lending and spending and who seek to impose restraints on production and trade. Consequently, larger and larger doses of currency inflation are necessary to overcome the stagnation of trade brought on by government’s interventionism, that is, to trick producers into working and exchanging their goods for the depreciating paper promises in the face of rising taxes and increasing restrictions.

Fiat currency nurtures stateism

This use of fiat currency finances the growth of the unproductive, collectivist, and restrictionist State. It liquidates the productive and stabilizing elements. Thus it clears the way for reactionary revolutions, such as the Bolshevik Revolution in Russia, the Fascist Revolution in Italy, the militaristic revolution in Japan, and the Nazi Revolution in Germany. As Keynes himself said before he became a full-fledged “Keynesian”:

There is no subtler, no surer means of overturning the existing bases of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.⁵²

Keynes and his followers, by urging a “managed currency” and “compensatory fiscal policy,” have helped to build in nearly every nation a Frankenstein monster — a bureaucracy greedy for power, growing daily more aware of its coercive authority and more hostile toward individual liberty. To that bureaucracy, the “new economics” now teaches, we should give still more authority to tax and borrow, spend and lend, coerce and restrict, in order that it may make our jobs and prosperity more safe and secure.

What grounds are there for thinking that this abdication of individual right will not mean another retreat toward individual irresponsibility?

The Keynesian revolution in economics concerns everyone in the most intimate details of his daily life. This is not only because of the way the revolution may affect votes and government policies. It must affect also the attitudes and conduct of individuals toward one another. It must determine their personalities and characters.

As a man thinks, so he is

The individual’s view of man and society determines the way he feels and acts toward his fellows. His view of other people’s rights determines the way he discharges his own responsibilities. His view of his responsibilities determines what he expects from others and how he tries to get it. A teacher may profess to deal only with government policy in regard to money and credit, taxes and spending, not with individual conduct and morality. But how can government control spending and lending, saving and investing, without affecting individual rights and responsibilities in use of money?

In making out their case for government control of private lending, spending, saving, and investing, Keynesian economists must belittle the wisdom with which individuals act when free. They must especially disparage the competence of those private citizens who handle relatively more money than their fellows: the well-to-do and the managers of business enterprise. They imply that American business leaders in the past owed their success to good fortune in being born into a new country with rich, undeveloped resources, or else that they owed it to monopoly, special privilege, near-fraudulent advertising, lucky speculations, and the free labor market which permitted “exploitation” of wage earners.

Is this view of business enterprise likely to make young men more ambitious for business success? Is it likely to encourage honesty, industry, and prudence in those entering upon a business career?

In effect, Keynesian economists teach that Americans are too thrifty, at least much of the time. In order to discourage this thrift they propose that government relieve individuals of their responsibility in providing for the emergencies of life, like old age, unemployment, and sickness. Is that brand of thinking likely to make students eager to become more self-reliant and enterprising?

Keynesian economists may not intend to make their students spendthrift and irresponsible, greedy and covetous; but they provide a rational basis for these attitudes. There can be no question but that their theories imply disparagement of thrift, self-reliance, enterprise, and respect for property rights.

Are these virtues less necessary now than formerly? Some of us, at least, believe that these qualities of character were never so necessary as when the rise of the “Welfare State” is discouraging and destroying them.

“The way to security”

In his latest book, The Way to Security, Dr. Henry C. Link points out that human progress and true security come only as individuals develop self-reliance, enterprise, diligence and thrift.

The security which man wants and needs, he says, is first of all spiritual rather than material, a matter of internal feeling rather than external conditions. It depends, not on freedom from fear, but on freedom to fear, together with freedom to develop the means for overcoming fear. By shielding an individual from life’s problems, we keep him from acquiring the ability to solve them. By standing between a man and life’s fears, we prevent him from cultivating the power to overcome fear. He writes:

. . . a government cannot assume responsibility for people’s welfare without profoundly affecting their moral fiber. To the extent that government takes care of him, to that extent the adult citizen is deprived of the moral responsibility for himself. . . . The net result is the progressive breakdown in the moral standards of all who participate in the welfare state. The material effect of this breakdown has already been seen in the great depreciation of the dollar. The spiritual and emotional effects are just beginning to receive recognition. . . .⁵³

And again:

If experience and history prove anything, it is that social insecurity may stimulate people to action, to adventure, and so to progress. Social security, on the other hand, lulls people into a state of inaction and stagnation which develops, in time, into a state of jitters.

For this reason, he says, “social security creates the very fears and worries it was intended to cure.”⁵⁴

On the other hand, the man who disciplines himself, who denies himself present comforts in order to buy security for his family and himself by his savings and investments, builds spiritual security at the same time as material security. He gains power that gives him a feeling of security now at the same time he gains credits that will take care of his needs later.

Furthermore, says Link, the strength of character which individuals develop in liberty is the only possible foundation for the high output, firm contracts, and stable currency necessary for true social security as distinct from the false government security.

And only in liberty do we find growth in those traits of sympathy and understanding that are necessary for genuine philanthropy. The plight of the weak and unfortunate in regimented and collectivist societies is notoriously insecure and wretched.

Coercion decreases security

Increasingly the Keynesian economists are coming to admit the difficulty of preventing currency depreciation under the full-employment policies they advocate. And they know that continuing inflation may destroy security for all. They see also a growing indifference to the public welfare, as, for example, in trade union policies and government’s parity price programs for agriculture. They know that this threatens a breakdown of cooperation and that it means less, not more, security for all.

What they cannot admit without repudiating their own program, however, is that the root cause of inflation and of the growing indifference to the public welfare is the deterioration of individual character and morality which Link contends must result from managed-currency policies.

Keynes and his disciples may be right in saying that we cannot reverse the political trend and return to free markets and the gold standard, at least in any foreseeable future.

But if this is so, what is the likelihood that individuals will grow more self-reliant, more far-sighted, more honest and industrious, or more sensitive to the needs of their fellow men? Will Keynesian teachings and policies help develop these qualities? What is the probability that the value of money will become more stable, that governments will become less burdensome and oppressive, or that people will feel more secure? Will a fiat currency and a “compensatory fiscal and monetary policy” bring these conditions about?

Very different from the “note of profound optimism” with which Professor Samuelson concludes his popular textbook, is the view of Professor Link:

The present scramble for security does not represent the ambition to attain security so much as the nostalgia of a people that wish to retain it! It is not a revival of the spirit of adventure and self-reliance, but the psychology of a nation which has grown soft, a nation which is living on the moral momentum of its past. It does not mean that we are awake to the dangers now threatening our security; rather it means that we are still in a dream world and do not wish to be disturbed. It means, above all, that we have come to think of security almost entirely in terms of material things and have almost wholly lost our understanding of spiritual security.⁵⁵

Not all revolutions bring progress. Ofttimes they are a retreat to a lower level of individual character and social organization. Which are we to expect from the Keynesian revolution in the teaching of economics in American colleges and universities?

We ought to be concerned about the answer. For the revolution aims at the heart of American institutions. It strikes at the roots of individual character.

And it has already proceeded far.