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the scientific method – Say No to Keynes

the scientific method

Posted by Ivo Cerckel on June 19th, 2009

Amazon.com publishes my review of

Friedrich August von Hayek,
Contra Keynes and Cambridge: Essays, Correspondence (Collected Works of F. A. Hayek) ,
Indianapolis: Liberty Fund Inc.; 2009 new ed.
http://www.amazon.com/Contra-Keynes-Cambridge-Correspondence-Collected/product-reviews/0865977445/ref=cm_cr_dp_all_helpful?ie=UTF8&coliid=&showViewpoints=1&colid=&sortBy=bySubmissionDateDescending

the scientific method

How can we have any knowledge of the world around us?

We possess a tool, reason, which allows our intellect to expand our knowledge of things, to expand our judgements of objective “Truth” about “Reality”.

Reason is at work in any science when the practitioner of the science associates her existing judgements and concepts in order to expand her judgements. Logic studies the laws with which the tool of reason has to comply to arrive at valid expansions of knowledge.

Logic is the tool of all sciences. Logic is itself a science. Science is the knowledge of conclusions demonstrated on the basis of some principles which are either assumed as hypotheses or taken from the evidence of experience. The scientific method is the orderly way of arriving at Truth in a given scientific discipline.

Realism presupposes, and thus entails for all further judgements, that the real is given to the subject, i.e., given to the practitioner of any science, and that the real is knowable by the subject, knowable at least to some extent, even if that extent is very limited. The realist thesis accepts that the real can be caught by thought. The result of the thing being caught by the intellect is ad-equation between the thing and the intellect, which is Saint Thomas’ definition of Truth.

Once realism has been accepted as a starting point, once it has been accepted that the real can be caught by thought, one can and must trust discursive thought as a truthful representation of reality, to the extent that reason elaborates or expands its primary knowledge of the real through reasoning in accordance with its own laws. It is the task of the science of logic to describe the laws with which reason has to comply when it, reason, is reasoning in order to expand its knowledge of the Truth.

Hayek agrees and accepts the realist thesis.

For Hayek, knowledge is based on experience. As man’s experience is limited, Hayek has a profound epistemological pessimism which leads him to a kind of stoicism regarding policy. (page 48)

Whereas Hayek agrees with realism, John Maynard Keynes does not agree.

For Keynes, it is not reality but intuition (page 248) that is caught in knowledge, or that is caught by the intellect when it arrives at Truth through ad-equating itself to or with the thing. His intuitions lead Keynes to thinking in “measurable” aggregates such as total demand, investment or output and to thinking that empirically established values of these presumed “constants” would enable us to make valid predictions. (page 242) Such intuitions conceal all that really matters. (page 246) His theories thereby neglect more fundamental “real” phenomena (page 197) and displace micro-economics by macro-economics. (page 60)

Contrast this Keynesian displacement of micro-economics by macro-economics to Hayek’s admission that the schemata of micro-economics do not claim to achieve the quantitative predictions at which the ambitions of macro-economics aim. The science of economics should, for Hayek, nevertheless content itself with the more modest aims of the former because we can thereby gain more insight into at least the principle on which the complex order of economic life operates. (page 246)

Once Keynes has decreed that it is his intuitive aggregates, and not reality, that are caught by true knowledge, no judgement that the real thing can be caught by the thought of intellect, no judgement that Truth in the sense Saint Thomas defined it is present, is any longer presupposed in ulterior judgements which, the latter, can be based on any intuition, even on an intuition contradictory to the intuition which originally displaced reality.

One such intuitions led Keynes to the peculiar fallacy of believing that a general crisis can be averted by extension of credit (page 119), the fallacy of believing that the creation of additional money will lead to the creation of the corresponding amount of goods, although such belief was bound to lead to the revival of more naive inflationist fallacies which we thought economics had once and for all exterminated. (page 243)

Contrast this to Hayek’s fundamental point that the business cycle is an unfortunate but an unavoidable concomitant of a credit economy. Attempts to eliminate the business cycle are likely to only intensify its effects. Hayek therefore put barriers to what others have done to advance in a path rather than supplying new ideas opening a path to new development. (page 31)

Contrast this again to Keynes who knows that something can be done at the level of his intuitive aggregates and therefore believes that it is possible to adapt the amount of money in circulation to what is necessary for the maintenance of existing contracts without upsetting the equilibrium between saving and investing. (page 144)

In the long run, we are all dead, aren’t we, Mr Keynes?

Keynes was however never prepared to accept the implications of credit expansion. He never recognized that progressive inflation was needed in order that any growth in monetary demand could lastingly increase the employment of labour. (page 248)

How could, asks Hayek and I paraphrase, Keynes’s ideas continue to be accepted once it had become clear that the temporary gain in employment achieved by credit expansion had necessarily to be paid for by even more severe unemployment at a later stage? (page 248)

The answer has perhaps something to do with the fact once one gets, like Keynes, the opportunity to get away with the fallacy that it is intuition, not ad-equation between the thing and the intellect from which knowledge then has to be inferred, which gives us knowledge of the Truth concerning the world around us,
logic no longer provides the framework through which we filter common-sense data in order to arrive at an objective “Truth” about “Reality”.

At that stage, Keynes can get away with any new intuition even when the disastrous actual (long-term) results of the first intuitions become clear.

Science is then no longer the knowledge of conclusions demonstrated on the basis of some principles which are either assumed as hypotheses or taken from the evidence of experience. But the intuitive policy-recommendations of which Keynes had a-priori intuitive knowledge are then being presented as the conclusions from premises based on, or inferred from, principles which are fundamentally contradicted by experience.

The scientific method has thereby been repealed and, as a result, there is no more orderly way of arriving at Truth in a given scientific discipline, in this case in economics. The science of economics has thereby been displaced by “a” political economy, whatever the latter may be.

Ivo Cerckel
honestmoney@maktoob.com

Say No to Keynes

Posted by Ivo Cerckel on November 10th, 2008

The privileges of the dollar fraternity must be maintained at all cost.

The 15 November 2008 Group of 20 nations (G20) summit in Washington seems to be thinking about reviving Keynesianism. Keynes would have presented the solutions we need for the present crisis.

The International Monetary Fund (IMF) plans to use the conference to lobby nations for a big dose of Keynesian pump priming — running big budget deficits to cut taxes and boost spending. The USA has started in this direction, but many European countries are sceptical, says the Wall Street Journal this morning. (1)

Nobel prize laureate Friedrich von Hayek could occasionally discuss the crucial issues with Keynes. Hayek realised that Keynes was not a highly trained economist, that Keynes was not even centrally concerned with the development of economics as a science. Keynes was neither a full master of the body of economic theory then available nor did he really care to acquaint himself with it. Keynes’ aim was to influence current policy and economic theory was for him simply a tool for this purpose, says Hayek. (2)

Keynes’ entire system can be summarised in one sentence: A free market in labour and fall in wage rates is incapable of eliminating unemployment and mass unemployment is an inescapable feature of a capitalist economic system in modern conditions. (3)

Prior to the publication of Keynes’ book “The General Theory of Employment, Interest and Money” in 1936, people held the belief that monetary policy was a potent instrument for promoting economic stability (4) and economists had accepted the proposition that unemployment can be eliminated by a fall in wage rates. (5)

With Keynes, the belief shifted almost to the opposite extreme that “money does not matter”.

Keynes’ alternative provided both an appealing justification and a prescription for extensive government intervention. (6)

Whereas economists argue that purchasing power grows out of production (7), Keynes argued that general employment is always positively correlated with the  aggregate demand for consumer goods. (8)

The sum and substance of the “Keynesian Revolution” was the thesis that there CAN be an unemployment equilibrium on the free market. (9)

One grave and fundamental error is Keynes’ insistence to regard interest rates (10) as the price of money. (11)

Interest rates are not the price of money. Interest rates are the price spreads between the stages of production. The former is only a reflection of the latter. But it requires no Keynesian labyrinths to explain this phenomenon. (12)

As the Wall Street Journal is reporting this morning, organised deficit spending to the benefit of those who are on the receiving end of the free money causing the deficits has become the enlightened IMF policy of the day. By the same token, the central bank issuing the green paper is being established as the world central bank.

At the end of the day, that is now, this planet’s economy is a debt-driven political economy to the benefit of the same dollar fraternity.

Hence, the USA Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the US dollar, said Dallas Federal Reserve Bank President Richard Fisher last week on Tuesday. (13)

Keynes never recognised that progressive inflation was needed in order that any growth in monetary demand could lastingly increase the employment of labour (14), but thought that one can spend one’s way out of recession by boosting government spending. (15)

The IMF plans to use the 15 November 2008 Washington G20 conference to lobby for the dollar fraternity.

Ivo Cerckel
Siquijor, 10 November 2008

NOTES

(1)
Nations Strive for Unity on Financial Crisis
By BOB DAVIS
NOVEMBER 10, 2008
http://online.wsj.com/article/SB122628033558712405.html?mod=googlenews_wsj
SNIP
The IMF plans to use the conference to lobby nations for a big dose of Keynesian pump priming — running big budget deficits to cut taxes and boost spending. The U.S. has started in this direction, but many European countries are skeptical.

(2)
Friedrich A. von Hayek, “The Keynes Centenary – The Austrian Critique”, in Hayek,  Chiaki Nishiyama and Kurt Leube, eds.), “The Essence of Hayek” ,Hoover Institution Press, 1984), 43,,  p. 44-45

(3)
George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois, Jameson books, 1998. 3rd ed., p 864

(4)
Milton and Rose Friedman, “Free to Choose – A Personal Statement”, New York and London, Harcourt Brace Jovanovich, 1980,  p. 70-71

(5)
Reisman, op. cit., p. 864

(6)
Friedman, op. cit., loc. cit.

(7)
Benjamin M. Anderson, “Economics and the Public Welfare – A Financial and Economic History of the United States, 1914-46”, Indianapolis, Liberty Press, 1979, 2nd ed., (first ed. published in 1949 by D. Van Nostrand Company), p. 384

(8)
Hayek, art. cit., p. 43

(9)
Murray N. Rothbard, “Man, Economy, and State – A Treatise on Economics”, Auburn, Alabama: Ludwig von Mises Institute 2001, (originally published 1962).,  p. 685

(10)
Rothbard, op. cit., p. 691

(11)
Reisman, op. cit., p. 863

(12)
Rothbard, op. cit., p. 691

(13)
http://news.goldseek.com/GoldSeek/1225998899.php

(14)
Hayek, art. cit., p. 44bard, op. cit., p. 691

(15)
Gordon Brown and his cohorts go back to their Keynesian default setting
By Liam Halligan
Last Updated: 12:33am BST 10/08/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/10/ccliam110.xml
SNIP
I hesitate to admit this, but one of my earliest memories is a political speech. I distinctly remember, as a pyjama-clad seven-year old, hearing the following words. “We used to think you could spend your way out of recession by boosting government spending. I tell you, in all candour, that option no longer exists. And in so far as it did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by higher unemployment as the next step…” Jim Callaghan on News at Ten  1976 Labour party conference.

ECB and G20 opt for Thalidomide Keynesianism

Posted by Ivo Cerckel on April 3rd, 2009

“Imagine there’s no countries. It isn’t hard to do. Nothing to kill or die for …”
(John Lennon)

I make NO apologies for this post. Veritas [est] adaequatio rei et intellectus, said Saint Thomas. This farce must come to an end. Quousque tandem?, asked Cicero.

“They” know that Keynesianism doesn’t work.

In May 2009, the European Central Bank could announce non-standard measures to permit the banking system to lend, said Jean-Claude Trichet, ECB president, yesterday Thursday 2 April 2009 at his press conference following the decision of the governing council of the ECB to cut its main lending rate from 1.5% to 1.25% and join the quantitative easing (1) clique by ‘turning on the money printing press’

Yesterday also, the Group of 20 Leviathans (G20) meeting in London under the chairmanship of Gordon Brown, prime minister of the Queen of England, agreed a sweeping package of measures to fight the global recession, including a $250bn increase in the international money supply and an additional $1.1 trillion of support to the world economy.

Mr Trichet said the bank would announce “full details” of possible further non-standard, [read: Keynesian] measures in May.

“This is the day that the world came together to fight back against the global recession, not with words but with a plan for global recovery and reform,” said Mr Brown. “Today’s {Keynesian] decisions, of course, will not immediately solve the crisis but we have begun the process by which it will be solved.”

Even the outright advocates of Keynesianism conclude “their” “The Cambridge Companion to Keynes” as follows:
We may have settled into a world where the responsible use of demand management tools can sometimes occur, much as Keynes had hoped. There is of course NO GUARANTEE [capitalisation mine] of their responsible use, but we have seen that demand management can be used responsibly and that it does not necessarily lead to the ruin of an economy. The world is more complex than the straw men that economists of all stripes are wont to use. Perhaps in the shadow of that knowledge, we can now turn to a fuller understanding of Keynes’s actual policy arguments, as opposed to his rhetoric, and begin to use those arguments to help in the formation of policies to avoid inflation and unemployment. (2)

Even the advocates of Keynesianism know that their policies are doomed to fail, just like the promoters of Thalidomide 50 years ago knew that the wonder pill caused birth defects. (3)

Keynes’ advocacy of constant and increasing deficits and his advocacy of a rapidly growing governmental sector resulted from “his belief that, in most cases, there was “something” that could be done that would improve the current situation. In this sense, it is perfectly appropriate that he is so widely associated  with his famous dictum ‘in the long run, we are all dead’; he did believe in most cases that  there were ways to improve the short-run performance of the economy”. (4)

Contrast this to Henry Hazlitt who taught 60 years ago that the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. (5)

Contrast now Henry Hazlitt again to Keynes. For Keynes, in the long term, we are all dead, so we can adopt some short-term stimulus whatever the long-term consequences for all groups in society.

Nobel prize laureate Friedrich von Hayek could occasionally discuss the crucial issues with Keynes. Hayek realised that Keynes was not a highly trained economist, that Keynes was not even centrally concerned with the development of economics as a science. Keynes was neither a full master of the body of economic theory then available nor did he really care to acquaint himself with it. Keynes’ aim was to influence current policy and economic theory was for him simply a tool for this purpose, says Hayek. (6)

Although Hayek thus had the opportunity to realise that Keynes was not an economist, Robert Skidelsky comes arguing in his “Hayek versus Keynes; the road to reconciliation” chapter in “The Cambridge Companion to Hayek” (Edward Feser, ed., Cambridge University Press, 2006) that Keynes’ early death had removed the possibility of what would have been one of the most thrilling, and necessary, intellectual encounters of the twentieth century. (7)

No joke, on the back cover of and in the final chapter “Keynes and Keynesianism” in “The Cambridge Companion to Keynes” (Cambridge University Press, 2006)  which he co-edited which Roger E. Backhouse, Bradley W. Bateman argues that Keynes was the most important economist of the twentieth century.

Here’s why Keynes is a brilliant economist:

Keynes’ entire system can be summarised in one sentence: A free market in labour and fall in wage rates is incapable of eliminating unemployment and mass unemployment is an inescapable feature of a capitalist economic system in modern conditions. (8)

Prior to the publication of Keynes’ book “The General Theory of Employment, Interest and Money” in 1936, people held the belief that monetary policy was a potent instrument for promoting economic stability (9) and economists had accepted the proposition that unemployment can be eliminated by a fall in wage rates. (10)

With Keynes, the belief shifted almost to the opposite extreme that “money does not matter”.
Keynes’ alternative provided both an appealing justification and a prescription for extensive government intervention. (11)

Whereas economists argue that purchasing power grows out of production (12), Keynes argued that general employment is always positively correlated with the aggregate demand for consumer goods. (13)

The sum and substance of the “Keynesian Revolution” was the thesis that there CAN be an unemployment equilibrium on the free market. (14)

One grave and fundamental error is Keynes’ insistence to regard interest rates (15) as the price of money. (16)

Interest rates are not the price of money. Interest rates are the price spreads between the stages of production. The former is only a reflection of the latter. But it requires no Keynesian labyrinths to explain this phenomenon. (17)

Keynes never recognised that progressive inflation was needed in order that any growth in monetary demand could lastingly increase the employment of labour (18), but thought that one can spend one’s way out of recession by boosting government spending. (19)

We know that Keynesianism does not work, just like “we” knew 50 years ago that the wonder pill caused birth defects.

Still some continue to prescribe both Keynesianism and Thalidomide.

Ophthalmological or other quacks prescribing any of these wonder pills forget that human nature is constituted as such that some individuals who have inside knowledge about the effects drugs will ‘always’ deliberately and unnoticeably cause the serious harm Keynesianism and Thalidomide can ‘so easily’ cause.

Ivo Cerckel
ivocerckel@siquijor.ws

“Imagine there’s no countries. It isn’t hard to do. Nothing to kill or die for …”
(John Lennon)

NOTES

(1)
Quantitative easing
guardian.co.uk, Tuesday 14 October 2008 12.10 BST
http://www.guardian.co.uk/business/2008/oct/14/businessglossary
Quantitative easing is what non-economists call ‘turning on the printing press’.
In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital.
Ben Bernanke, the chairman of the Fed, won the nickname ‘helicopter Ben’ when he floated just such an idea earlier this decade. US economist Milton Friedman had originally said it would be theoretically possible for governments to drop large amounts of cash out of helicopters for the public to pick up and spend.

http://en.wikipedia.org/wiki/Quantitative_easing
Quantitative easing is a tool of monetary policy. It effectively means that the central bank injects new money into the financial system, in order to increase the supply of money. ‘Quantitative’ refers to the money supply; ‘easing’ refers to reducing the pressure on banks.

(2)
Bradley W. Bateman, “Keynes and Keynesianism’” in Roger E. Backhouse and  Bradley W. Bateman, eds., “The Cambridge Companion to Keynes” Cambridge University Press, 2006, 271, p. 288

(3)
HUMAN TESTING
http://bphouse.com/honest_money/human-testing/

SNIP

“Imagine there’s no countries. It isn’t hard to do. Nothing to kill or die for …”
(John Lennon)

ABSTRACT
Thalidomide had been tested before use.
Thalidomide was created by the Nazis.
Its origins go back to 1938 and one Frances Oldham Kelsey.
Thalidomide was marketed since 1957. Kelsey was only appointed to the US of A Food and Drug Administration (FDA) after the 30 April- 1 May 1960 Duesseldorf Congress of neurologists warning of the dangers of thalidomide.
In 1938 the name of Frances Oldham Kelsey, at the ripe old age of 24, appeared at the FDA in connection with the Elixir Sulfanilamide disaster.
Upon Kelsey feigning to ignore the April-May 1960 Duesseldorf Congress, US of A President John F. Kennedy honoured Kelsey in 1962 with a Presidential award for having saved his country from her product.
Now they are saying that thalidomide is useful in ophthalmology. Thanks to thalidomide, this thalidomide monster has serious ophthalmological problems. Hence, some ophthalmologists will do everything they can to prevent losing him as a paying guinea pig.
Every mother knows that her child should not play with a toy the child does not understand. The mechanism of the biological action of thalidomide is still being debated.
Human nature is constituted as such that some individuals who have inside knowledge about the effects of thalidomide will ‘always’ deliberately and unnoticeably cause the serious harm thalidomide can ‘so easily’ cause. They do that precisely because the damage is so serious to the mother and to the child and because they can do that so easily and without being noticed. It may be that ‘in clinical trials’, thalidomide is shown to be effective against many things. But ‘in real life’, it is given to unsuspecting girls. This can be reconciled with John Lennon if one remembers that thalidomide was created by the Nazis.
Ivo Cerckel, 25 March 2009
http://bphouse.com/honest_money/human-testing/
END OF ABSTRACT

(4)
Bradley W. Bateman, art. cit., p. 275

(5)
Henry Hazlitt, “Economics in One Lesson”, New York: Arlington House Publishers, 1978, 2nd ed. (first ed. published 1946 by Harper and Brothers), p. 17
http://jim.com/econ/chap01p1.html

(6)
Friedrich A. von Hayek, “The Keynes Centenary – The Austrian Critique”, in Hayek, (Chiaki Nishiyama and Kurt Leube, eds.), “The Essence of Hayek”, Hoover Institution Press, 1984, 43,,  p. 44-45

(7)
Robert Skidelsky, “Hayek versus Keynes; the road to reconciliation” in: Edward Feser, ed.,“The Cambridge Companion to Hayek”, Cambridge University Press, 2006, 82, p. 108

(8)
George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois: Jameson books, 1998. 3rd ed., p. 864

(9)
Milton and Rose Friedman, “Free to Choose – A Personal Statement”, New York and London, Harcourt Brace Jovanovich, 1980, p. 70-71

(10)
Reisman, op. cit., p. 864

(11)
Friedman, op. cit., loc. cit.

(12)
Benjamin M. Anderson, “Economics and the Public Welfare – A Financial and Economic History of the United States, 1914-46”, Indianapolis, Liberty Press, 1979, 2nd ed., (first ed. published in 1949 by D. Van Nostrand Company), p. 384

(13)
Hayek, art. cit., p. 43

(14)
Murray N. Rothbard, “Man, Economy, and State – A Treatise on Economics”, Auburn, Alabama: Ludwig von Mises Institute 2001, (originally published 1962).,  p. 685

(15)
Rothbard, op. cit., p. 691

(16)
Reisman, op. cit., p. 863

(17)
Rothbard, op. cit., p. 691

(18)
Hayek, art. cit., p. 44

(19)
Gordon Brown and his cohorts go back to their Keynesian default setting
By Liam Halligan
Last Updated: 12:33am BST 10/08/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/10/ccliam110.xml
SNIP
I hesitate to admit this, but one of my earliest memories is a political speech. I distinctly remember, as a pyjama-clad seven-year old, hearing the following words. “We used to think you could spend your way out of recession by boosting government spending. I tell you, in all candour, that option no longer exists. And in so far as it did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by higher unemployment as the next step…” Jim Callaghan on News at Ten  1976 Labour party conference.

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