Keynesianism's Long March to the Dustbin of History

By Gary North

We read on Wikipedia:

The phrase "ash heap of history" (or "dustbin of history") figuratively refers to the place to where persons, events, artifacts, ideologies, etc., are relegated upon losing currency and value as history. A notable usage was that of the Russian revolutionary Leon Trotsky referring to the Mensheviks: "You are pitiful, isolated individuals! You are bankrupts. Your role is played out. Go where you belong from now on -- into the dustbin of history!" in response to the Menshevik faction walking out of the All-Russian Congress of Soviets (25 October 1917) in Petrograd, which allowed the Bolshevik faction to dominate the party. In a speech to the British House of Commons (8 June 1982), U.S. President Ronald Reagan said that "freedom and democracy will leave Marxism and Leninism on the ash heap of history."

It is now the Keynesians' turn to join the losers of history.

They do not see it. Their critics do not see it. But it is a fact.

Allow me to shift metaphors away from the ashcan of history.

One of the most inspiring stories in the Bible is the story of the final night of the rule of the Babylonian Empire.

The Bible does not tell us what had happened. We know from secular history what happened. The general in command of the Medo-Persian forces had ordered his troops to redirect the Euphrates River to bypass the city. This left the river's entry point into the city undefended. The Army streamed into these undefended points and conquered the city.

The rulers of the city had not seen it coming. They should have seen it, but they didn't. They undoubtedly had reconnaissance information on the fact that the Medo-Persian army was at work up the river to redirect the river. But they did not respond fast enough. They did not see what was coming.

We may see this in retrospect as abnormal, but it is normal. Rulers at the end of the dynasty or an empire think it will go on forever. It may not last the night.

We are told that the King of Babylon invited the prophet Daniel to assess the situation. There follows one of the most famous incidents in the Bible.

At a banquet, a holy ghostly hand had written words on the wall. This terrified the king and his guests. He called in Daniel to explain. He had previously ignored Daniel.

25 And this is the writing that was written, Mene, Mene, Tekel, Upharsin.26 This is the interpretation of the thing: Mene; God hath numbered thy kingdom, and finished it.

27 Tekel; Thou art weighed in the balances, and art found wanting.

28 Peres; Thy kingdom is divided, and given to the Medes and Persians.

29 Then commanded Belshazzar, and they clothed Daniel with scarlet, and put a chain of gold about his neck, and made a proclamation concerning him, that he should be the third ruler in the kingdom.

30 In that night was Belshazzar the king of the Chaldeans slain.

31 And Darius the Median took the kingdom, being about threescore and two years old.

From this, we get the saying: "The handwriting is on the wall."

The handwriting is on the wall for Keynesianism.

THE POWER OF COMPOUNDING

In his remarkable 2001 article, "The Law of Accelerating Returns," Raymond Kurzweil described the decline in the cost of information, beginning in 1890, and extending to the year 2000. If he had taken it back to 1844, he could've made an even stronger case, but the data are less clear. He began with the census of 1890, which was the first census to use punch cards.

He said that the cost of information fell by 50% every three years from 1890 to about 1950. Then, with the development of vacuum tube technologies in computers, it fell by 50% every two years. Then, sometime around 1965, with the development of transistor technology, it began to fall by 50% every 18 months. He said in 2001 that he believed that it was falling by 50% every 12 months.

Nothing like this has ever happened in the history of man. There has been no compounding process that continued for this long a period. This process is now approaching what some people call a tipping point. Others call it an inflection point. Kurzweil called it the upward move of the exponential curve. Whatever we call it, we are now in the middle of it.

In a follow-up article in 2003, Kurzweil made a fundamental point that has not been recognized by free-market economists, Keynesians, or social theorist in general. The rate of change, meaning the compound decline in the cost of information, was in no way slowed during the Great Depression. The world economy stopped growing for a decade, but the compound decline in the cost of information continued throughout the decade. He said this also applied in both world wars.

We don't absolutely know what the future will bring, and if you look at the models, they're absolutely linear. We don't take into account this law of accelerating returns, which is absolutely a factor.If you look at the economy as a whole, either per capita or just the total economy, it is growing exponentially. But the various recessions, even the Great Depression, are relatively minor features that you really see in this chart that is a big exponential. And what's interesting is that when the recession is over, including the Great Depression, it starts back to where it would have been had that never occurred in the first place. It does not represent even a permanent slowing down or delay in the underlying exponential.

The really pervasive phenomena is the exponential growth. We have exponential growth in productivity. Even that is understated because we're measuring the value in dollars of what can be accomplished. But what can be accomplished for a dollar today is far greater than what could be accomplished for a dollar 10 years ago.

Computation is not the only technology that is growing exponentially. Communications, bandwidth, speed and price performance--both wireless and wired--are also doubling every year. Biological technologies, the price performance of base pair scanning, for example, have doubled every year.

George Orwell was correct: we find it difficult to see what is under our noses. let me briefly mention what has been under my nose ever since I read this article over a decade ago. It means that, with respect to the most important transformation of modern times, the exponential declining cost of digital technologies, Keynesianism has not been able to deflect the spread of these technologies.

Keynesianism can affect which special-interest groups benefit and lose as a result of these technologies, because Keynesianism can control the allocation of physical resources. But Keynesianism cannot control the spread of information itself. This means that, at the core of the economic system, Keynesianism is impotent.

As bad as Keynesianism is, and as bad as regulation is, it can only marginally affect the transformations that are taking place today. These regulations can have major affect when they apply to individuals who are caught in the web of regulation. These regulations can affect the supply and quality of goods that are produced through large-scale physical production systems. The regulators can squeeze large companies. They can put small companies out of business. But what they cannot do is in any way retard the compound growth effects of information technology.

So, it really does not matter for the long run that the Keynesians are in charge. They can stretch out their control with respect to certain kinds of physical production. They can stretch it out with respect to certain kinds of licensing and regulation. But the steady compounding effects of the decline in the cost of information are going to overwhelm all attempts by all governments to keep social and economic change on government approved pathways. There really is no way for governments to do anything, including fighting a war, to stop the progress of digital technologies.

Regulatory actions can and do affect the kinds of innovations that take place. It especially can affect the kinds of applications of new digital technologies. These statist interventions are almost always negative. They protect some special-interest group. But, in the long run, meaning over the next 40 years, the whole Keynesian regulatory structure is going to collapse. Why? Because we are reaching an inflection point. We are reaching the point at which the exponential curve turns sharply upward. There is no way for the regulatory agencies to keep up with what is now taking place under their noses.

I see this as good news. It is good news for liberty, and it is bad news for the arrogant theorists of Keynesian central planning, the arrogant tenured bureaucrats of central banks, and the protected employees of virtually every other government-regulated industry or profession. These people are going to be replaced, and they are going to be replaced within three decades, or four at the most. They are presiding over the final stages of the illusion of central planning.

It has already happened to the socialists. History tossed them into the dustbin when the Soviet Union went belly-up in 1991. It was all over but the shouting at that point. Almost nobody defends socialism as an ideology these days. Nobody gets a hearing. They want to call themselves liberals. They want to call themselves Progressives.

The central planners cannot stop the arrival of the exponential curve of liberty and voluntarism. Maybe they can slow it down at the margin, but I doubt it. If the Great Depression did not slow it down, Janet Yellen cannot slow it down. Janet Yellen and her crew of bureaucrats are the only ones in a position to slow it down. The politicians can barely affect the process.

This should be under your nose. Think through your own profession, your own career prospects, and the legacy you expect to leave behind. Think it through in terms of an increase in the rate of technological change, and a decrease in the products of all digital technologies.

The days of wine and roses are coming to an end for the Keynesians. The ashcan of history awaits them. I will do what I can to speed up the process, but I don't think I can speed up the process. I can only prepare you and other readers by pointing out what should be obvious.

UNDER THE NOSES OF INSIDERS

I want to discuss a couple of examples in history of entire industries that did not see what was coming, even while it was almost upon them. Like a tsunami that pulls the tide out rapidly just before it hits, people playing on the beach do not notice what is happening, and do not run for cover from what will soon follow.

I teach a course in the history of American literature for the Ron Paul Curriculum. After 1912, I focus entirely on movies. Movies are the way in which storytellers affect tens of millions of people. Movies have displaced novels and short stories as the way to tell stories, which in turn are the foundations of literature.

Beginning with the 1915 movie, The Birth of a Nation I cover only films. My course has a 15-year gap: 1915-1930.

The movie industry had a warning. It was the equivalent of the tide that sweeps out rapidly. That was The Jazz Singer (1927). It had sound. It had sound only for Al Jolson's songs. The movie was not really a talkie. It was a "singie."

From the day that this movie was released, silent movies faced the handwriting on the wall. Yet even in 1928, movie producers still tried to get the public to attend silent films. In 1929, the deluge overwhelmed the entire industry.

My next piece of literature after Birth of a Nation is All Quiet on the Western Front (1930). The soundtrack is good. The photography is good. The story line, based on the best-selling novel by Remarque, is excellent. It won the Academy Award as the best picture in 1931. The director also won the Academy Award. The movie was highly successful, both artistically and at the box office.

Consider that transition. It took basically three years: from 1927 to 1930. Basically, 1929 was the year of the transition. This gets little attention in the textbooks, because 1929 was the year of the stock market crash. The stock market crash gets a great deal of attention, crowding out almost everything else.

I think of the two as related. Herbert Hoover was elected in 1928. That was the last year in which anybody could make money producing silent movies. In 1929, talking pictures overwhelmed silent movies, and the first stage of the depression overwhelmed Hoover's administration. Hoover suffered the equivalence of what silent movies suffered in 1929. But the great smash happened much more rapidly to silent movies than it did to Hoover.

In Hollywood in 1928, there were still people in the movie industry who were convinced that talking pictures were a fad. For those of you who have seen Aviator, you know the story of Howard Hughes. He had almost completed his nearly bankrupting movie, Hell's Angels. Then he started over. He added sound. The Wikipedia entry is accurate.

Hell's Angels is a 1930 American war film, directed and produced by Howard Hughes and starring Ben Lyon, James Hall and Jean Harlow. The film, which was written by Harry Behn and Howard Estabrook, centers on the combat pilots of World War I. The picture was released by United Artists and, despite its initial poor performance at the box office, eventually earned its production costs twice over . . .Originally shot as a silent film, Hughes retooled the film over a lengthy gestation period. Most of the film is in black and white, but there is one color sequence--the only color footage of Harlow's career. Hell's Angels is now hailed as one of the first sound blockbuster action films.

As we saw in Aviator, everybody in Hughes' tool company was opposed to his decision to retool the movie so that it would have sound. It should have been obvious to everybody in late 1929 that this was mandatory, but it wasn't obvious.

Hughes risked everything on the success of the movie. He knew that it had to have sound. He knew that it would be a failure if it did not have sound. He had sunk a fortune into the movie, and yet he dared not release it on time. It had to be delayed. It had to have sound. He was right. His critics were wrong. The entire movie industry was wrong.

I point this out for a reason. Sometimes, without any warning, a new technology completely changes an industry.

Consider Google. The Wikipedia entry on the history of Google says:

By the end of 1998, Google had an index of about 60 million pages. The home page was still marked "BETA", but an article in Salon.com already argued that Google's search results were better than those of competitors like Hotbot or Excite.com, and praised it for being more technologically innovative than the overloaded portal sites (like Yahoo!, Excite.com, Lycos, Netscape's Netcenter, AOL.com, Go.com and MSN.com) which at that time, during the growing dot-com bubble, were seen as "the future of the Web", especially by stock market investors.

I used Alta Vista from 1996 until about 2002. It may have been 2001. Then I switched to Google. Wikipedia writes:

AltaVista was an early web search engine established in 1995. It was once one of the most popular search engines, but it lost ground to Google and was purchased by Yahoo! in 2003, which retained the brand but based all AltaVista searches on its own search engine. On July 8, 2013, the service was shut down by Yahoo! and since then, the domain has redirected to Yahoo!'s own search site.

And then there is Wikipedia. It has put out of business all physically published general encyclopedias. Encyclopaedia Britannica still exists online, but I would never use it, and I can't imagine anybody else using it. Wikipedia has simply destroyed all rival general encyclopedias. It did it without any advertising. It did it without any warning.

New technologies can transform societies in short periods of time. Not many of them ever do this, but a handful can.

STEADY GROWTH, RADICAL CHANGE.

Digital technologies have transformed our lives through steady improvements. The cost of information keeps dropping. This is the Steady Eddie change that, without any fanfare, transforms people's lives so slowly that they do not perceive what is happening to them and their environment.

If Kurzweil is right, this is going to happen to the cost of solar power. He thinks it is going to happen a lot faster than I do, because he is concentrating on solar panel technology, but solar panel technology constitutes only about 20% of what goes into an electrical power grid, whether local or national. The cost of the other components is not declining at anything like the decline in the cost per watt of solar panels. Nevertheless, there is a steady improvement, and it does not look as though this is going to be reversed. To the extent that panels can become less dependent on physical paraphernalia, the more rapidly this substitution process will take place.

My assessment is that YouTube will not be replaced by anything anytime soon. There will be steady improvements in YouTube, and these will produce steady transformations of those aspects of society that are dependent on digital viewing. I cannot imagine any rival company to YouTube. It is backed up by the income produced by Google searching, and it has no serious rivals today. There is not that much that we want to get out of videos. They consume a lot of time, and they consume a lot of bandwidth, but the cost of bandwidth keeps declining, unlike the value of our time.

There may be 3-D videos at some point. There may be high definition 3-D videos that can be projected on a wall. But my guess is this: they will be YouTube videos. It is very difficult to compete against "free."

We can see that YouTube is not going to be reversed or replaced. We see no swift movement of the video tide. Now the trick is to figure out how YouTube is going to transform the way we do things. It is certainly transforming education. This is not going to stop. This is going to accelerate. Yet there are teachers who do not see the handwriting on the wall. They are like people in the movie industry in 1928. They ought to be able to see what is going to happen, but they don't. They are going to be overwhelmed.

They are like IBM executives in 1982. They could see that Moore's law was going to enable the IBM PC's to overwhelm the minicomputer market. The idiots at Armonk forbade the innovators in Boca Raton to adopt Intel's 386 chip. They thought a 386-based computer would wipe out the market for the entry-level minicomputers sold by IBM's main branch. So, Compaq adopted the 386 computer, and destroyed the minicomputer market. IBM never caught up.

We do not want to admit what is going to happen to us, even when we can see what is going to happen to us. We think that something is going to save us. Nothing is going to save us, other than the government. The government can protect an industry or a profession, but the free market does not. Then, when the government tanks and finally collapses, the industry of the profession is overwhelmed in just a few years.

When I watch a movie produced in 1930, I can still enjoy it if there is a good script. We all enjoy King Kong(1933). It is a better movie than the recent versions. Gable and Colbert still make us laugh in It Happened One Night (1934). Snow White (1938) still works. (Grumpy is my guy.)

The great breakthrough in movies came in one year, 1939. There has never been a year in the history of the movies like that 1939. One man directed two movies: Gone with the Wind and The Wizard of Oz. Can you name him? Probably not. But those two movies changed entertainment forever.

In that year, John Ford directed Stagecoach, which was the breakthrough role for John Wayne, Young Mr. Lincoln, which was the breakthrough role for Henry Fonda, and Drums Along the Mohawk, a confirming role for Henry Fonda. The next year, he produced Grapes of Wrath, starring Henry Fonda. Yet there was more change in 1939 than there had been through the entire 1930's. From 1939 on, movies are pretty much the same as they are today, except they were better in 1939.

We cannot connect emotionally with the silent film era. We laugh at Charlie Chaplin's sight gags, but other than Chaplin's movies, we don't watch silent movies. Yet we can easily connect with the earliest talking movies. That single technological change made possible what we know as the movies. And yet from 1903 until 1929, people were transformed by the movies. Somehow, silent movies were able to get inside the minds of masses of people. Hollywood did not see the potential for talking pictures.

Color pictures were a marginal improvement on black and white pictures. But would you really want to watchCasablanca if it were colorized? I don't think I would. What about Stagecoach? Maybe.

As it turned out, 3-D pictures were a setback. Only with modern cartoons and science fiction movies have 3-D movies reappeared. We still don't pay extra to see a 3-D movie unless there is a lot of action involved. A 2-D movie is fine for most storylines.

Sound was the big transformation. The coming of modern loudspeakers in the 1930's pulled us into the movies in a new way. Yet Hollywood did not see it coming. It was literally under their noses, or blaring in their ears, in 1927, but they still neither saw nor heard it.

I don't think this is abnormal. I think this is normal. George Orwell was right. It takes a great deal of effort to see what is under our noses.

CONCLUSION

Keynesians today are like the dinner guests on Babylon's last night. They are the silent film producers in 1928. They are Alta Vista's owners in 2001. They are headed for the ashcan of history.

The steady decline in the cost of information, especially communications, has undermined every establishment on the face of the earth -- North Korea excepted.

Here is how I view the future of Keynesianism. It is in the northern half of the map.

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Source: Keynesianism's Long March to the Dustbin of History - Gary North

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