Thomas Carlyle, a Scottish philosopher and historian, termed economics “the dismal science” in the 19th century. Regardless of Carlyle’s reason for originating the phrase, today’s economics profession ensures that economics remains true to Carlyle’s sentiment. In an era of abundance, human ingenuity, and technological advancement beyond imagination, the economics profession has retreated behind an academic bulwark of confused hopelessness, protected and excused by their imaginary veil of “secular stagnation” and “conundrums”. This is “the dismal science” at its most dismal.
Today’s dismal science is a result of actions by the Federal Reserve based on Bernanke’s Great Depression thesis that expansionary monetary policy could have prevented the GD. This required abandoning the “golden fetters” of the gold standard, which the U.S. remained on until 1971. Bernanke’s response to the 2008 financial crisis was to unleash his thesis upon the world. Popularly entering the economic lexicon as quantitative easing, Bernanke’s liquidity flood resulted in ZIRP. The effect of zero interest rates has been enormous capital misallocation, economic distortion, and the collapse of future investment—now squandered in the present due to perverse economic incentives. The proverbial eating of the seed corn. IPOs are a rare event today with free money from the Fed resulting in a frenzy of mergers and acquisitions—when corporations are not buying back massive amounts of their stock.
When the Fed, the manager of the world’s reserve currency sneezes, the rest of world catches a cold, or much worse if one is in a developing economy. Now the world is moving to central bank manufactured negative interest rates. In what textbook or primer on economic history, are negative interest rates taught or advocated? This is an upside-down, bizarro economic world where central banks suspend common sense rules and toss them in the trash bin. Where savers pay banks to hold their money and banks pay borrowers to accept loans. Where governments attempt to ban cash to disallow citizens the economic freedom to circumvent such economic insanity. Negative interest rates are less an accepted economic destination and more the only path forward once central banks began their final journey down an economic dead-end.
When the economics profession start inventing new terms like “secular stagnation” to explain what they do not understand and excuse their lack of understanding by “conundrums”, the end of what is left of their intellectual integrity is near. This is less a plea for help by confused academics but more an admission that they have run out the string on their academic model.
The Keynesian demand-side model began as John Maynard Keynes’ explanation for the Great Depression in his unreadable tome, The General Theory of Employment, Interest, and Money. Keynes Magnum Opus is practically gibberish in its jumbled complexity. Written in 1936, the General Theory is open to so many interpretations that it produced multiple branches of “Keynesianism”. The gist of demand-side theory is that due to “irrational behavior”, “a bubble”, or some other unexplainable phenomenon, the stock market suddenly cratered in 1929 and goods piled up with a disparity between upper classes who desired to save and lower classes who had no money to buy. The solution, in hindsight, was for government to step in and buy the surplus goods by either borrowing from or taxing the upper class and distribute them to the lower class through public works. Monetarist predecessors, close kin of Keynesians, saw the huge pile of surplus goods and believed if only the Fed could expand the “money” in circulation, the excess goods could be purchased without deficit spending, taxing, or borrowing. The market failed and it was up to government to solve the problem unhindered by the automatic monetary constraints of the gold standard. Today, the demand-side model of active government intrusion into the market to stimulate aggregate demand dominates academia, financial media, political policy, and economic thought globally.
The demand-side economic model based on the consumer has always been errant, in the same way that the Ptolemaic model of earth centric astronomy was errant. The demand-side model conflicts with Say’s unalterable law of production. Mankind produces to exchange excess production with other producers. Supply creates its own demand. The consumer is not considered. This is the basis of classical economics. The world will work itself back to the classical economics producer based model that necessitates stable money, low taxes, beneficial regulation, small government, and rule of law. The world has no choice. After 80 years of demand-side interpretations of Keynes’ muddled General Theory, we have arrived at the outer limit of a failed model. This is the “conundrum” for demand-siders. Classical economics produces growth. Growth is not dismal and neither is economics.