Robinson: …[N]ow you’re saying that multiculturalists [who argue for] bringing kids into [academic] institutions for which they’re ill-qualified — you take bright, hard-working, otherwise perfectly well-qualified students and put them in the wrong institution and you set them back in life.
Sowell: Yes.
R: And they’re culpable as well. They had ought to know better.
S: Yes.
R: Intellectuals and Race, quote: “The Intelligencia pay no price for being wrong.”
S: I think that’s the secret of their influence.
R: How’s that?
S: Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.
R: Tom, you’re coming pretty close to saying that intellectuals aren’t very smart.
S: [Laughs.] They are very smart in very limited areas. And they don’t realize [it]. That’s the problem.

Although Sowell’s book isn’t explicitly about epistemology, it does deal with critiques Austrians have long made to understand why false ideas persist. For instance, Keynesian ideas persist among intellectuals in large part because so many intellectuals accept them uncritically. Indeed, to point out the failures of massive Keynesian stimulus since 2008 is the intellectual equivalent today of pointing out the emperor is not wearing any clothes. In both cases, too many careers and incomes depend on ignoring what is actually quite obvious. Mises pointed this out in Human Action (Scholar’s Edition, p. 868) as well when he noted that “[t]ax-supported universities are under the sway of the party in power. The authorities try to appoint only professors who are ready to advance ideas of which they themselves approve.”

The result is a herd mentality that affects the tenor and quality of much discourse in higher education today, whether it is about race, economics, the environment, marriage and the family, or “good citizenship.” The irony is that the Keynesian notion of animal spirits is actually strongest within the marketplace of ideas where, at present, state-supported research institutions exert the most influence.

For more, see Mises’ Epistemological Problems in Economics and Hayek’s Counter-Revolution of Science. For a personal account of these issues, also see Bill Anderson’s short article, “Austrian Economics and the ‘Market Test’: A Comment of Laband and Tollison”.

For example, he said in the Communist Manifesto  that: “The cheap prices of its commodities are the heavy artillery with which [ the profit system]…compels all nations, on pain of extinction, to adopt the  [ profit]… mode of production.” President Obama evidently missed that passage, since he claimed in a debate with Mitt Romney that the government could provide health services more cheaply because it did not have to earn a profit. The truth, as even Marx understood, is that  the search for profit  drives prices down.

One of the few things Keynes got right was his dismissal of Marx. He told his student Michael Straight: ” Marxism was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523] Curiously, Marx had already said much the same about Keynesianism, even before Keynes was born. His scorn for Keynesianism was of course possible because there wasn’t anything particularly new about what Keynes said.

Here is the passage from Capital [ P. 827-29] in which Marx seems to be anticipating the Keynesian  system:

“The only part of the so-called national wealth that actually enters into the collective possessions of modern people is– their national debt. Hence,…the modern doctrine that a nation becomes richer the more deeply it is in debt. Public debt becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of blasphemy against the Holy Ghost….

As with the stroke of the enchanter’s wand…, [ the public debt] endows barren money with the power of breeding and thus turns it into capital.”… [But] modern fiscal policy…contains within itself the germ of automatic progression. Overtaxation is not an accident, but rather a principle.”

It would be fitting punishment for Marx and Keynes to have to debate each other face to face forever  in some gloomy spot beyond the River Styx.

Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions. . . . monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems.

Unfortunately, President Bullard did not articulate those “more direct labor market policies,” but they would include: the repeal of minimum-wage legislation, which destroys jobs for the unskilled; the repeal of the National Labor Relations Act, which coerces employers into collective bargaining and privileges union “insiders” against non-union “outsiders” causing unemployment or lower wage rates among the latter; and the phasing out of unemployment “insurance,” which encourages unemployed workers to spend an excessive amount of time in “searching” for jobs.

The full PowerPoint presentation of Bullard’s speech can be found here.

The Great Deformation is an indispensable book, packed with insights and careful historical analysis. The massive bailouts injected into the economy by the Bush Administration in response to the 2008 crisis were not needed to stave off a collapse of the monetary system. To the contrary, Stockman shows, they were a triumph of “crony capitalism”. This nefarious system, based on massive government debt, has deep roots in twentieth-century economic history. Stockman offers one of the best discussions I have ever read of Roosevelt’s New Deal, and the vital role of Richard Nixon on our road to financial ruin receives much needed stress. Neither Keynes nor Milton Friedman fares very well here, and readers will learn why the policies of both of them have led to disaster. The Great Deformation is a magnificent defense of a free economy and sound money.

I also like the way Luigi Zingales put it in 2009:

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

See also my comments here.