Modern Prophets: Schumpeter or Keynes? - Page 3

For Keynes, the main problems of economics are the relationship between the "real economy" of goods and services and the "symbol economy" of money and credit; the relationship between individuals and businesses and the "macro economy" of the nation-state; and finally, whether production (that is, supply) or consumption (that is, demand) provides the driving force of the economy. In this sense Keynes was in a direct line with Ricardo, John Stuart Mill, the "Austrians," and Alfred Marshall. However much they differed otherwise, most of these nineteenth-century economists, and that includes Marx, had given the same answers to these questions: The "real economy" controls, and money is only the "will of things," the micro economy of individuals and businesses determines, and government can, at best, correct minor discrepancies and, at worst, create dislocations; and supply controls, with demand a function of it.

Keynes asked the same questions that Ricardo, Mill, Marx, the "Austrians," and Marshall had asked but, with unprecedented audacity, turned every one of the answers upside down. In the Keynesian system, the "symbol economy" of money and credit are "real," and goods and services dependent on it and its shadows. The macro economy - the economy of the nation-state - is everything, with individuals and firms having neither power to influence, let alone to direct, the economy nor the ability to make effective decisions counter to the forces of the macro economy. And economic phenomena, capital formation, productivity, and employment are functions of demand.

By now we know, as Schumpeter knew fifty years ago, that every one of these Keynesian answers is the wrong answer. At least they are valid only for special cases and within fairly narrow ranges. Take, for instance, Keynes's key theorem: that monetary events - government deficits, interest rates, credit volume, and volume of money in circulation - determine demand and with it economic conditions. This assumes, as Keynes himself stressed, that the turnover velocity of money is constant and not capable of being changed over the short term by individuals or firms. Schumpeter pointed out fifty years ago that all evidence negates this assumption. And indeed, whenever tried, Keynesian economic policies, whether in the original Keynesian or in the modified Friedman version, have been defeated by the micro economy of business and individuals, unpredictably and without warning, changing the turnover velocity of money almost overnight.