Why Does the Internet Hate Keynes?

One of the great mysteries of the Internet -- right after Hitler or cats (or Hitler cats) -- is why the Internet hates John Maynard Keynes so much.

When Foolish fund manager Bill Mann innocently pointed out Keynes' awesome value investing track record -- which has nothing to do with Keynes' macro theory -- the comments quickly devolve into name-calling Keynesian economics. Mann's experience has not been unique. I find this animosity especially puzzling given that the Keynesians have done, as far as I can tell, the most accurate job of describing the crisis we currently face. 

I believe the animosity is due to five sources:

1. The Internet has a straw-man vision of Keynes
There seems to be a perception on the Internet that Keynes was a "tax and spend liberal" who believed in unlimited deficit spending all the time. This isn't really correct. Keynes argued in favor of government spending during recessions, but thought that deficits should be paid off during boom times. Perpetual deficits were never a part of the Keynesian agenda (though some politicians have interpreted it that way).

Similarly, Keynes was skeptical that you could really do much with monetary policy when in a "liquidity trap," i.e., when interest rates approach zero but yet corporations and individuals sit on cash. So I don't think it's correct to ascribe quantitative easing to him. It is true, however, that Keynes was a fan of fiat money and thought gold a "barbarous relic."

Furthermore, if one reads Keynes, it's clear that he doesn't want to destroy capitalism and impose some Marxist hegemonic government. Being trained in the classical model, Keynes had great respect for it, but at the same time he realized that during recessions the government should become the customer of last resort, i.e., spend when no one else would. This is a modification of classical thought, not a wholesale rejection of free-market capitalism. 

To those of you who have actually read Keynes, but still have some objections -- I'm thinking John Cochrane or Greg Mankiw -- your criticism is likely of the more measured sort and you are not really the subject of this piece. 

2. The Internet wants to ascribe meaning to suffering 
One of the implications of Keynesian Economics is that suffering during recessions is largely self-imposed and can be fixed. Hence Paul Krugman's outrage in his book End This Depression Now!

Since people do suffer during recessions, I think there is a tendency to want to say that it wasn't all for naught, when Keynesianism says it largely is.

3. The Internet loves to punish
As a corollary to the above, we want to believe that the pain of recession is serving a purpose in punishing the wrongdoers: All those foolish people who bought homes they couldn't afford should get what's coming to them. General Motors  (NYSE: GM  ) shouldn't have been bailed out when it made bad business decisions. Those greedy bankers who made foolish loans should experience damnation and hellfire. Justice should be served. In Peter Schiff's lingo, "We need a day of reckoning." 

This "economics as morality tale," however, often runs contrary to our self-interest. As Warren Buffett pointed out, without TARP we probably would all be up a creek. As much as people (including Krugman) love to hate on Citigroup (NYSE: C  ) or Goldman Sachs (NYSE: GS  ) , they do serve a purpose to our economy that would be hard to replicate. The alternative to TARP would, I think, have been a full-scale nationalization of the banks, and I have a feeling the libertarian sect wouldn't be too happy with that, either. 

But still, we insist on punishing even when it's contrary to our well-being. This isn't surprising. 

Behavior economists have run real-life tests of what is known as the "Ultimatum Game": In this game there are two players. One of the players is given $100 and asked to split it between him (or her) and the other player. The player can take $99 and give $1 to the other player, split it 50/50, give it all to the other player, or anything in between. But there is a catch -- the second player must approve of the deal, or neither player gets anything

It's in the best interest of the second player to take whatever offer the first player offers. Even if the first player only offers $1 to the second player, the second should still take the deal and be $1 richer. It should not matter to the second player that the first player is taking $99 for himself, because to reject the deal would be to opt to receive nothing instead of $1. 

But of course, when economists test this out, that's not how people behave in the real world. They'll reject the $1 deal in order to punish the first player, even though it's against their own self-interest.

4. The Internet thinks debt is a four-letter word
Well, strictly speaking, debt is a four-letter word. But you know what I'm talking about.

There is, I think, a puritanical impulse against debt. Our moms and dads told us that debt is bad. So when Keynesians tell us that the government needs to go deep into debt to revive the economy, it seems contrary to what mommy and daddy taught us. 

The fact is debt can be bad. Excessive leverage was no doubt a major problem for Citigroup, Goldman Sachs, Bank Of America (NYSE: BAC  ) , et al. It also, no doubt, helped get automakers and homeowners into trouble. And carrying high-interest credit debt -- the kind your mom and dad were likely thinking of -- is almost never a good thing.

But it's important to realize that what may be good or bad for an individual person or company may not be good for the economy as a whole. This is the basic idea behind Keynes' "paradox of thrift." It may be good for an individual to be thrifty and save, but if everyone does it, we'll all be poorer (because there will be less economic activity), and there will ironically be less to save. 

In the same way, deleveraging may be good for Citigroup or your Uncle Cletus, but if everyone tries to do it at the same time we run into problems. To paraphrase Warren Buffett, if everyone is trying to get liquid then someone else needs to lever up. And the only entity powerful enough to handle that is Uncle Sam. 

And finally...

5. The Internet fetishizes the natural
I think this is most encompassing objection. The Internet seems to fetishize the natural, and view things that are "artificial" with great suspicion. You can see it in the popularity of "natural" health sites and blogs, homeopathy, vaccine denialism, the rage for banning circumcision and all-natural attachment parenting, and finally the suspicion surrounding fiat money.

Keynesian, by design, involves a lot of artifice. It involves fiat money, it involves government-imposed stimulus, "manipulation by the Fed," and it involves admitting that the all-natural free markets sometime need artificial growth hormones.

This has not been lost on the goldbug sect. Peter Schiff throws around the word "artificial" when describing government action to save economy (he says we should just "Let it all implode"). Jim Grant -- who I have great respect for -- likens our economy to the fake canvas sky in The Truman Show.

This anti-artificial streak in the Internet and against elite institutions has led it squarely into the arms of gold and the Gold ETF (NYSE: GLD  ) -- something Keynes despised. The goldbugs return the sentiment.

But I think they forget that there is much that is artificial that we rely on to fix problems, including WD-40, duct tape, the police, white lies, and life-saving medicine.  

We trust our bodies to cure themselves most of the time, but not all of the time. The same should be true with our economy.

Fool contributor Chris Baines is a value investor. Follow him on Twitter, where he goes by @askchrisbainesChris' stock picks and pans have outperformed 96% of players on CAPS. He owns no shares of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2012, at 3:20 PM, AgAuMoney wrote:

    It seems most people don't realize that Keynes required governments to practice austerity the rest of the time (when not in a recession/depression).

    However even then Keynes theories do not work. Government spending has (according to several studies) far less effect on the economy that previously assumed. Some studies even came up with a result less than unity. In other words, government spending $1 is comparable to private sector spending less than $1.

    A typical response is "so gov't just needs to spend more." That's broken thinking. Where does the government get the money to spend? It either takes it directly from the private sector via taxes or borrowing, or it takes it from the private sector by inflation thru "creating" money. There is no other way. Therefore, when gov't "spends more" it means the private sector spends less. If the private sector can spend it with more benefit to the economy than can government, why would we want to take money from the private sector?

    Finally, if you think Keynesian philosophy best describes the current situation you need to read more. A LOT more WIDELY. Start with the Austrian school. Best single resource is mises.org (the Ludwig von Mises Institute).

  • Report this Comment On July 20, 2012, at 3:45 PM, wengem wrote:

    The problem is that the ratio of debt to GDP is too high (hello, Greece). It's that fiat money allows the government to tax us in the most insidious way possible... by slowly devaluing the money we've earned and socked away. It wouldn't be a problem if our debt and obligations weren't sky high and if the government acted responsibly with the fiat money... but they are and it doesn't.

  • Report this Comment On July 20, 2012, at 5:28 PM, ScottPletcher wrote:

    ~~As Warren Buffett pointed out, without TARP we probably would all be up a creek.~~

    I'm not so sure about that. Buffett's *investments* would have been hurt, but I'm not so sure about the rest of us.

    Allowing the bad to fail clears things up *vastly* faster, and we could be seeing a nice recovery instead of this half-decade (so far) of limping along.

    I'm a libertarian. We should not have saved the bankers, insurance companies, mortgage companies, etc., from their own follies just to save big investors.

    *We* are NOT the ones "punishing" them, their own foolish investments did that.

  • Report this Comment On July 20, 2012, at 5:53 PM, emferguson wrote:

    I've seen the anti-Keynes hatred too, and there's nothing analytical about it. It seems the problem is just that it doesn't fit conservative ideology, and worse, we steered away from the second Great Depression only through massive government intervention, which Keynes called for and is the opposite of conservative economics. If you're a conservative, you saw your theories applied to real life, and the result was disaster. That would explain the visceral reactions and the holding on to zombie myths. We even saw an example of a zombie myth in the first comment, about Keynes being wrong because if the government spends more, that takes resources the private sector would have used. Except we know, not from theory but hard experience, that the private sector isn't using the resources. That's just the problem. The private sector isn't using it's resources, so there is no displacement. How many times to we have to see this happen before we accept reality?

    Maybe there are conservatives who really don't know Keynes prescriptions were about recessions and depressions ,not normal economies, but honestly, it seems few conservatives care about the distinction. My guess why is because if Keynesianism is tried and succeeds, and rights after conservative economics failed so miserably, some people have to rethink whole worldviews, and that's hard for anyone.

  • Report this Comment On July 20, 2012, at 6:35 PM, umh wrote:

    Most people don't really dislike Keynes. Most people dislike what has been done in his name.

  • Report this Comment On July 20, 2012, at 8:45 PM, lbruch wrote:

    Ever since the late 1800's / early 1900's, there's been the same ideological arguement between those arguing to let the frequent panics/recessions/depressions take their natural course and let the pain happen, and those believing they can be effectively ameliorated by governments.

    It's all about ideology, not about science or proof. It people looked at evidence the arguement would be over.

    Almost universally, the periods where Keynsians or similar held sway were followed by periods of expansion and robust markets and economies. Where their opponents held sway were followed by periods of economic collapse

  • Report this Comment On July 20, 2012, at 10:16 PM, jarllopart wrote:

    My favorite take on the Keynes-Hayek can be found on econstories.tv:

    http://econstories.tv/2010/06/22/fear-the-boom-and-bust/

  • Report this Comment On July 21, 2012, at 12:51 AM, JULPAC wrote:

    One economist says, "Keynes is great!" another says, "Keynes is bad!" Who are we to believe?

    I'm no economist, but I know a bad deal when I see one. I believe that government bailouts are an impediment to capitalism. Why? Not because it prevents "punishment" from occuring, but because it prevents a possible better business from springing in its place.

    Just like the Phoenix is reborn out of ashes, so too are businesses. Just because a company goes under it doesn't mean that it's business ceases to exist. A smart entrepreneur will see the void & offer the same product or service at hopefully a better price.

    Government intervention only slows down the inevitable - businesses will eventually fail - newer & better businesses will take over in its place. This is natural.

  • Report this Comment On July 22, 2012, at 12:00 AM, Melaschasm wrote:

    While the article probably explains some opposition to Keynes, it ignores those who support one of several equally valid schools of economic thought.

    There is significant evidence that the supply siders are correct that tax cuts are more effective than spending increases during a recession.

    There is also a strong case to be made for the austrian school of economics.

    Finally, there is valid reason to complain that Keynesian policy is just an excuse to always spend more money, rather than to spend more during recessions and cut spending during booms. If the democrats would cut spending during economic booms, there would be far less opposition to Keynes.

    For example Obama said "we are all keynesians now", but he has not followed through with spending cuts now that the economy is growing. Obama's long term budget calls for faster than inflation spending increases during the entire economic boom that assumed over the next ten years.

    If Keynesian economists want to be taken seriously they need to loudly demand spending cuts over the next several years.

  • Report this Comment On July 22, 2012, at 1:33 AM, NOTvuffett wrote:

    Melaschasm, I am not sure where you are getting your numbers from. Last year the federal govt. took in something like 2.2 trillion but it spent something like 3.6 trillion. Did we see an economic boom from this excessive govt. spending? No, the numbers are dismal. As a trader, I would prefer to have either a crash or robust growth instead of the current situation of weak growth.

  • Report this Comment On July 22, 2012, at 2:19 AM, NOTvuffett wrote:

    As a bussinessman, of course I would prefer robust growth. There is nothing harder in business to me than having to lay off good employees. Our current policy of 'stimulating' the economy by injecting money through the fed seems inflationary and pretty stupid to me.

  • Report this Comment On July 22, 2012, at 8:59 AM, ETFsRule wrote:

    "There is significant evidence that the supply siders are correct that tax cuts are more effective than spending increases during a recession."

    Interesting. Where is this evidence?

  • Report this Comment On July 22, 2012, at 9:21 AM, ravens9111 wrote:

    Let's just break some windows, wait for another devastating hurricane to destroy another city, another earthquake to cause a tsunami, and then we will see if Keynes is correct. After all, with such devastating natural disasters, that would be good for the economy since we would have rebuild, right? If that were the case, the broken window theory would work too. Just break something and then fix it to boost the economy.

  • Report this Comment On July 22, 2012, at 6:42 PM, NOTvuffett wrote:

    lets only break the windows of the rich republican pigs then we will be ok, lol.

  • Report this Comment On July 23, 2012, at 9:47 AM, footej wrote:

    Keynes macroeconomic theory was discredited back in the 70s when a Keynsian impossibilility known as "stagflation" reared it's head for all to see. Few if any academics believe in Keynesian economics. Non- economists only have to apply the common sense test known as "there is no such thing as a free lunch" to see how uterly stupid the whole theory is.

    The only groups that believe in Keynsian economics are politicians (who love to think they can fix things with public money), Warren Buffet (who is no economist, thank you), and apparantly some writers at the Fool who evidently never took an college level upper division economics course.

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