Midweek Musical Interlude - Fear the Boom & Bust

"Fear the Boom & Bust," a Hayek vs. Keynes Rap Anthem -- a beginner's explanation, guide, and interpretation.


Created by John Pappola and Russ Roberts, see their site.

Overall a fantastic effort with surprisingly high production values.  Entertaining even for the non-economically inclined.  Read on for relevant notes and quotes from the video.

"I am the agenda."  Later, Hayek finds a copy of The General Theory in his hotel dresser, a la the Gideon Bible.

Unfortunately, such is the state of economic thought in the world today.  Keynes is the man, at least in government and most of academia.  How has such an abomination come to be?  A difficult question, but consider that Keynes' theories support government intervention in markets, including central banking.  Most academic departments and their research are funded by... guess who?  The government.  Who controls the government?  The moneyed elite and bankers.  Is it all starting to make sense?

"Have a seat and I’ll school you in one simple lesson."

Keynes' posthumous dig at Henry Hazlitt's Economics in One Lesson, a book described at the Mises Institute store as "most important economics book ever written in the sense that it offers the greatest hope to educating everyone about the meaning of the science."  Obviously, Hazlitt was no fan of Keynes.  His insights are free-market/Austrian.

"Like I said, in the long run—we’re all dead."

According to Wikiquote, "many have thought this meant Keynes supported short terms gains against long term economic performance, but he was actually criticizing the belief that inflation would acceptably control itself without government intervention."  Ridiculous, considering that inflation is created by government itself through central banking and fiat money.  It's why the dollar you hold in your hand today buys about $0.04 worth of goods priced in 1913 dollars.  In the absence of these institutions, the only way to create inflation is to dig up more gold and silver (or create whatever free-market money a society uses) than the increase in human productivity over the same time period.

"Even a broken window helps the glass man have some wealth."

Reference to Bastiat's parable of the broken window.  Basically, Bastiat uses the parable to illustrate the ridiculous notion that since the glazier's income increases, which he in turns spends at other businesses, the economy is stimulated.  In reality, when the window is broken, wealth is destroyed.   The shards of glass are worth much less than the window itself.  The money the owner of the window could have kept and put to more productive uses is not accounted for, or not seen.  Bastiat titled his collection That Which Is Seen, and That Which Is Not Seen.  Meanwhile Keynes advocates pyramid building as a route to societal wealth.  Similarly, there are those who believe that war stimulates the economy.  Sure, we've got bombs, and the bomb makers get paid (that which is seen).  But the taxpayers have less to save and invest in other industries that generate true wealth -- products or services that increase their standard of living (that which is not seen).

"Say it loud, say it proud, we’re all Keynesians now."

Wrongly attributed to Nixon, who actually said "I am now a Keynesian" in 1971, the year he "closed the gold window," or suspended conversion of US dollars into gold by foreign central banks.  Common serfs were denied the right by FDR way back in 1933.  In fact, their gold was confiscated at the rate of $20 per ounce, then repriced at $35 per ounce, thereby devaluing their dollars and confiscating their wealth at one stroke by nearly fifty percent.  Ever since, the Fed has had no meaningful limits on its ability to inflate.  For a much more detailed account, I strongly encourage you to read Murray Rothbard's book What Has Government Done to Our Money (full text online and link to free, easy to read 112 page PDF).  Economist Milton Friedman did say "we're all Keynesians now," disparaging the woeful state of the profession.

"That simple equation, too much aggregation
Ignores human action and motivation."

Keynesians believe that economics can be reduced to a series of ever more intricate formulas.  "Advanced" concepts in economics require higher level mathematics.  Austrian economists reject these notions, none more notably than Ludwig von Mises in his masterpiece Human Action, referred to here by Hayek.

"You provide them with cover to sell us a free lunch."

As mentioned above, Keynes' work is cited to justify pandering politicians and their government handouts.

"Don’t look for cure from the hair of the dog."  While we see Keynes hungover (the bust) from his night on the town (the boom).

Keynes and his disciples, including Paul Krugman, believe that the cure for the economy's problems is always more of the same (the hair of the dog), more government spending, when in reality it is the spending that is the problem.  As evidence, Krugman recently went ballistic regarding Obama's proposed spending freeze.  He also believed that the stimulus should have been much larger!  Austrian business cycle theory explains the entire phenomenon.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

F.A. Hayek, The Fatal Conceit

For more on Hayek the scholar, see Hayek and the Nobel Prize, by Murray Rothbard.

Full lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest

Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepare to get schooled in my Austrian perspective

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits


“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

John Maynard Keynes
The General Theory of Employment, Interest and Money


“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

F A Hayek
The Fatal Conceit