The public debt crisis that has erupted in Greece is an excellent point of departure for us to examine the potentially dramatic consequences of unbridled public borrowing for the future of all democratic countries. What has happened in Greece is already beginning to happen in a number of the world’s most developed and powerful democracies. My assertion is that what lies behind the abandonment of economic rationality in management of the public finances of developed democracies is the predominance of Keynesian ideas, both in the immediate post-World War II period and in our day, with the resurgence of outdated and anachronistic Keynesianism as the most suitable economic policy for effective handling of the global financial crisis.
In the democratic West in the immediate aftermath of the Second World, despite the alternation in office of conservative and progressive governments, economic policy was constructed and exercised on the basis of Keynesianism. Whether social democrats or conservative paternalists, politicians were devotees of Keynes and Franklin Roosevelt, and they flooded the most up-to-date and developed democracies that had ever been seen in human history with continuously high fiscal deficits that went on accumulating ever greater, ever more pyramidal, ever more unsustainable public debts. It is no coincidence that the Republican Nixon who succeeded the Democrat Johnson, the American political architect of the Socialist great society, proclaimed that “we are now all Keynesians”!
These inauspicious developments in the West prompted the great free market philosopher and Nobel Prize-winning economist Hayek to write his book “The Road to Serfdom”, analyzing and highlighting the existing danger for the democratic West that Social Democracy and conservative paternalism could be the Trojan Horse for destruction of our liberties and their unconditional surrender to statism and bureaucracy. On the other hand the Nobel Prize-winning free market economist James Buchanan with his celebrated and prophetic book “Democracy in Deficit” warned as early as 1977 that Keynesian deficits not only represent a clearly ineffective long-term policy but are also the key ideological lever for undermining the integrity of the supreme social contract, the Constitution, and ultimately the self-sufficiency, autonomy and independence of the Republic.
If to the two above mentioned contributions we add those of all the other great free market champions of the 20th century, Milton Friedman, Ronald Coase, Gary Becker, George Stigler, Douglass North, Vernon Smith – all Nobel Prize-winners – but also many other free marketeers in scholarly disciplines other than economics, it becomes possible to state unequivocally that only the free market champions have emphasized in the most resounding fashion that the progress and stability of Democracy has its basis in the limited and frugal state, which rather than allowing itself to be eroded by high public deficits and heavy public debts is duty-bound to uphold and defend individual rights and extend the liberties of individuals and the self-regulating institutions brought into existence by free individuals, such as the market, price mechanisms, competition, property rights, contracts and agreements, the rule of law and the eternal and permanent moral conventions and customs that in the long course of history have come to embody the great virtues of social co-operation and intercourse.
The great free market thinkers of the 20th century overturned the historical trend towards social-democracy. With the powerful momentum that characterized them, their ideas overwhelmed and then overturned the traditional state paternalism in the conservative parties and finally won over their social democratic opponents politically, with the coming to power of Thatcher and Reagan who, in a series of dynamic reforms, restored development and progress to the democratic West, overcoming the stagnation and checking the inflation that had been so symptomatic of the post-war domination of the West by Keynesian policies of deficit and debt. The Political Economy of Fee Market has thus led to a general discrediting of Keynes and Roosevelt and the elevation of Hayek, Thatcher, Friedman and Reagan.
The Political Economy of Free Market has once again led the world into exceptional progress and economic growth, this time on a scale unprecedented, with continual and successive waves of innovation that through the mechanisms of the free market have been disseminated automatically to the whole planet, abolishing all borders and casting aside all obstacles, from simple tariff walls to the once impregnable iron curtains of every species of communism.
Notwithstanding all this, with the outbreak of the global financial crisis, the Political Economy of Free Market has once more been targeted as responsible. It has been openly inculpated and dropped like a hot brick, while its most significant and up-to-date scientific accomplishment, the efficient market theory, has become the butt of ironic remarks, even in academic circles. As a result, the global economy is being surrendered to the same old-fashioned, anachronistic Keynesianism that has led to the greatest global public debt crisis ever, to which Greece constitutes a mere footnote, the only anxiety it induces being that of the collapse of a section that could pull down the great walls of public debt that have been erected in the USA, in Japan, in the United Kingdom, in Italy, in Spain and other major countries of the global economic system.
The reappearance of Keynesianism in consequence of the global financial crisis and the electoral victory of the principal social-democratic political representative of our times, Barack Obama, is what I would give the name “The Great Regression”. As I analyzed in Economic Affairs, December 2009, “The 1930s and the Present Day – Crises Compared”, there can be no greater offence against democracy and economic rationality than the pyramidal public borrowing bring pursued by Obama, funded so profusely by the most blatant and unbridled monetary policy ever implemented by the FED, by the greatest imaginable zealot for printing fresh money, its director Ben Bernanke. If the post-war Keynesian policies of deficits and the generation of debt led to the collapse of Bretton Woods and stable exchange rates, the post-global-financial-crisis expansionism and out-of-control Keynesian fiscal and monetary policies will lead to total lack of credibility for state paper money (fiat money) and the return of the gold standard of Free Market Political Economy, as a new, technologically innovative medium of exchange.
In generating this global scenario of mountains of state debt to be accumulated by the world’s greatest economies, Greece is paradoxically playing a leading role on the front pages of the world’s largest and most reputable newspapers, as if it is the key protagonist. In reality of course it is merely a negligible afterthought, which for all that happens to be the critical weight on the scales, determining the direction (euro or dollar) and velocity with which one side will hit the bottom. If Obama is succumbing to the Greek problem of public debt, he is doing so because he brought the public debt of the United States to the maximum constitutionally permissible point, which is only a step away from the most shattering bankruptcy in the economic history of human civilization. If Papandreou remains excluded from the markets, the position of Obama vis à vis his creditors is no less problematic. He is required to justify the devaluation of the dollar and the flood of new bonds that his creditors must absorb to keep alive the debt-ridden American public sector.
Today’s well-mannered social-democrats are under siege from the results of the actions of theirs that have emerged from implementation of their mistaken ideas. Perhaps they revere Keynes and Roosevelt, but application of their ideas and policies has led them into the impasses of today. Today’s well-mannered social-democrats, like the well-mannered feudal lords of the old times, are up to their eyes in debt and deficits, and thus bereft of the traditional Keynesian economic tools for stimulating effective demand and reheating the economy. Under siege, trapped and disarmed, they are unable to deal with the crisis: all they can do is await their final downfall.
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