Sunday, August 5, 2012

Freud, Keynes and Krugman

Spending or austerity… that is the most important policy debate of our time. So much so that I have often posted about it. Link here.

On one side Keynsians like Paul Krugman insist that we must spend our way out of the crisis. Others see austerity as the right prescription, even if, in the short run, it does not taste very good.

We have gotten into the current crisis by indulging in a world class orgy of profligate spending. We Americans, and not just us, spent far more than we earned. We borrowed with reckless abandon because we had been told that spending was healthy and that thrift was a form of repression.

It was not just the government that was running on these precepts. Everyday people did the same.

To my mind the principles have felt like warmed over Freud: the expression of sexual impulses is good; their repression makes you sick.

You might think that Freud is dead because his theories no longer have any real influence in the mental health fields. Yet, they live on through the aegis of John Maynard Keynes, a man who was suffered Freud’s influence, and through his disciple Paul Krugman.

Think of it: Freud lives, reincarnated as Paul Krugman.

Professor Ted Winslow has elaborated the connection between Freud and Keynes brilliantly.

Here he quotes a passage where Keynes psychoanalyzes Isaac Newton:

(...) “in vulgar modern terms Newton was profoundly neurotic of a not unfamiliar type, but – I should say from the records – a most extreme example. His deepest instincts were occult, esoteric, semantic – with profound shrinking from the world, a paralysing fear of exposing his thoughts, his beliefs, his discoveries in all nakedness to the inspection and criticism of the world”

Herein we find a Freudian tendency to slander great people, to reduce their success and achievement.

Keynes had another motive. Thinking that the cult to reason derived from an idolization of Newton’s rationality, Keynes was trying to undermine the claim that Newton was a rational thinker. This would help him to promote Freud's idea that human beings are fundamentally irrational.

In so doing, Winslow continues, Keynes was trying to detach economics from science and to make it a function of literature.

Keynes, like Freud preferred a fictional world to reality. In economic terms he had no use for the reality of a free market run by individuals making rational decisions. 

Winslow summarizes Keynes as a function of Freud:

Keynes’s understanding … is based on the assumptions that “there are insane and irrational springs of wickedness in most men” and that “the essential characteristic of capitalism” is “the dependence upon an intense appeal to” the expression of these “springs” found in “the money-making and money-loving instincts of individuals as the main motive force of the economic machine”. These “instincts” underpin his analysis of instability, both in the capitalist economy as a whole and in financial markets, in terms of “three fundamental psychological factors”: “the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets”.

Keynes believed that thrift was bad, roughly akin to sexual repression, or, in the case of the Freudian theory of money, to constipation.

He saw human beings as irrational, even wicked creatures. If so, they cannot be trusted to conduct themselves rationally in the marketplace. Their freedom is an illusion and their irrational behavior must be controlled by those older and wiser.

Keynes was especially torqued about the values of saving and thrift.

Winslow quotes Keynes:

“the duty of ‘saving’ became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment”

To Keynes Puritanism is akin to self-starvation. 

Since Freud compared money to excrement, the analogy with an ever growing but uneaten cake is not quite apposite. Still, Keynes is arguing that self-discipline and self-restraint are bad things because money that has been saved cannot be used for production or enjoyment.

In one sense he is right that you cannot have your cake and eat it too, but surely, saving money does not preclude eating an occasional piece of cake. To think otherwise is not to think. Tempering your appetite is not the same as suppressing or indulging it.

On the other side of the analogy one must point out that, thanks to Freud and Keynes, among others, we live in a culture where we give free reign to our appetites. The result: we are eating far too much cake. Americans seem to be eating nothing but cake, to the point where we have become the most obese people on the planet.

All things considered, the animal spirits need to be tamed. A little self-control and discipline will do everyone a lot of good.

Conflating the love of money with the sin of avarice Keynes offered a distinctly Freudian perspective on it when he called it:

… a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.

Thus, Keynes saw capitalism as anything but a virtuous enterprise.

Winslow quotes him:

The “essential characteristic of capitalism”, he [Keynes] claims, is “the dependence upon an intense appeal to the money-making and moneyloving instincts of individuals as the main motive force of the economic machine”

Of course, this is a Freudian interpretation. It is surely not the way Adam Smith saw the free markets.

It was not just that Keynes did not trust the markets; he bought into Freud’s fundamental distaste for human beings.

Keynes is trying to undermine free markets by reducing them to an impulse to accumulate money, an impulse to commit the deadly sin of avarice.

One might reply that capitalism is not really about accumulating money. It’s about making money work in the market.

In an inflationary environment hoarding money means losing money, and no capitalist wants to do that.

In a deflationary environment hoarding money means making money. All capitalists want to do that.

Thus, when Krugman prescribes inflation as the cure to all of our problems, he is saying that he wants to force people to spend money, because, were it not for inflation, everyone would merely hoard their money.

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