The blame for the mess we are in lies with John Maynard Keynes.
The head of the IMF , Christine Lagarde, recently warned that falling prices are threatening a fragile recovery: “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery.” Her concern echoes that of the European Central Bank head, Mario Draghi, who spoke around the same time about deflation risks and declared that the ECB will remain “accommodative.”
Classical economists going back to Adam Smith have regarded the production of products and services as the “real economy” and money and credit as the “symbol economy.” In other words, money reflects what people are doing in the marketplace. Money and credit are tools of commerce. Keynes turned that thinking on its head, audaciously asserting that money and credit are the real drivers of the economy. Control money and you control the production of products and services. To classical economists this is like stating that the sun rises in the West and sets in the East. But thanks to the Great Depression, Keynes’ heresy became orthodoxy. Monetarism is a Keynesian offspring.
Keynes famously observed: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” Unfortunately too many government officials and economists, while not pretending to be exempt from ideas, are today slaves of Keynes’ misguided monetary notions. Hence the current orthodoxy: Pump out enough money, and all will be well. The impact of high tax rates, regulations that hamper enterprise and gum up the flexibility of labor markets, and bloated public sectors, which absorb and waste resources that could be productively put to work for everyone’s benefit by businesspeople and investors, are downplayed or ignored.
What Keynes posited was the equivalent of saying that manipulating scales is the way to attack obesity.