,Introduction
Over the past century or so, academics have presented mankind with spectacular scientific
advancements in just about all fields of study...except one.
Armed with a mastery of mathematics and physics, scientists sent a spacecraft hundreds of millions
of miles to parachute to the surface of one of Saturn's moons. But the practitioners of the "dismal"
science of economics can't point to a similar record of achievement.
If NASA engineers had evidenced the same level of forecasting skill as our top economists, the
Galileo mission would have had a very different outcome. Not only would the satellite have missed
its orbit of Saturn, but in all likelihood the rocket would have turned downward on lift-off, bored
though the Earth's crust, and exploded somewhere deep in the magma.
In 2007 when the world was staring into the teeth of the biggest economic catastrophe in three
generations, very few economists had any idea that there was any trouble lurking on the horizon.
Three years into the mess, economists now offer remedies that strike most people as frankly
ridiculous. We are told that we must go deeper into debt to fix our debt crisis, and that we must
spend in order to prosper. The reason their vision was so poor then, and their solutions so
counterintuitive now, is that few have any idea how their science actually works.
The disconnect results from the nearly universal acceptance of the theories of John Maynard
Keynes, a very smart early-twentieth century English academic who developed some very stupid
ideas about what makes economies grow. Essentially Keynes managed to pull off one the neatest
tricks imaginable: he made something simple seem to be hopelessly complex.
In Keynes's time, physicists were first grappling with the concept of quantum mechanics, which,
among other things, imagined a cosmos governed by two entirely different sets of physical laws:
one for very small particles, like protons and electrons, and another for everything else. Perhaps
sensing that the boring study of economics needed a fresh shot in the arm, Keynes proposed a
similar world view in which one set of economic laws came in to play at the micro level
(concerning the realm of individuals and families) and another set at the macro level (concerning
nations and governments).
Keynes's work came at the tail end of the most expansive economic period in the history of the
world. Economically speaking, the nineteenth an early-twentieth-century produced unprecedented
growth of productive capacity and living standards in the Western world. The epicenter of this
boom was the freewheeling capitalism of the United States, a country unique in its preference for
individual rights and limited government.
But the decentralizing elements inherent in free market capitalism threatened the rigid power
structures still in place throughout much of the world. In addition, capitalistic expansion did come
with some visible extremes of wealth and poverty, causing some social scientists and progressives
to seek what they believed was a more equitable alternative to free market capitalism. In his quest
to bring the guidance of modern science to the seemingly unfair marketplace, Keynes unwittingly
,gave cover to central authorities and social utopians who believed that economic activity needed
to be planned from above.
At the core of his view was the idea that governments could smooth out the volatility of free
markets by expanding the supply of money and running large budget deficits when times were
tough.
When they first burst onto the scene in the 1920s and 1930s, the disciples of Keynes (called
Keynesians), came into conflict with the "Austrian School" which followed the views of
economists such as Ludwig von Mises. The Austrians argued that recessions are necessary to
compensate for unwise decisions made during the booms that always precede the busts. Austrians
believe that the booms are created in the first place by the false signals sent to businesses when
governments "stimulate" economies with low interest rates.
So whereas the Keynesians look to mitigate the busts, Austrians look to prevent artificial booms.
In the economic showdown that followed, the Keynesians had a key advantage.
Because it offers the hope of pain-free solutions, Keynesianism was an instant hit with politicians.
By promising to increase employment and boost growth without raising taxes or cutting
government services, the policies advocated by Keynes were the economic equivalent of miracle
weight-loss programs that required no dieting or exercise. While irrational, such hopes are
nevertheless soothing, and are a definite attraction on the campaign trail.
Keynesianism permits governments to pretend that they have the power to raise living standards
with the whir of a printing press.
As a consequence of their pro-government bias, Keynesians were much more likely than Austrians
to receive the highest government economic appointments. Universities that produced finance
ministers and Treasury secretaries obviously acquired more prestige than universities that could
not. Inevitably economics departments began to favor professors who supported those ideas.
Austrians were increasingly relegated to the margins.
Similarly, large financial institutions, the other major employers of economists, have an equal
affinity for Keynesian dogma. Large banks and investment firms are more profitable in the
Keynesian environment of easy money and loose credit. The belief that government policy should
backstop investments also helps financial firms pry open the pocketbooks of skittish investors. As
a result, they are more likely to hire those economists who support such a worldview.
With such glaring advantages over their stuffy rivals, a self-fulfilling mutual admiration society
soon produced a corps of top economists inbred with a loyalty to Keynesian principles.
These analysts take it as gospel that Keynesian policies were responsible for ending the Great
Depression. Many have argued that without the stimuli provided by government (including
expenditures necessary to wage the Second World War), we would never have recovered from the
economic abyss. Absent from this analysis is the fact that the Depression was the longest and most
, severe downturn in modern history and the first that was ever dealt with using the full range of
Keynesian policy tools. Whether these interventions were the cause or the cure of the Depression
is apparently a debate that no serious "economist" ever thought was worth having.
With Keynesians in firm control of economics departments, financial ministries, and investment
banks, it's as if we have entrusted astrologers instead of astronomers to calculate orbital velocities
of celestial bodies. (Yes, the satellite crashed into an asteroid, but it is an unexpected encounter
that could lead to enticing possibilities!)
The tragi-comic aspect of the situation is that no matter how often these economists completely
flub their missions, no matter how many rockets explode on the launchpad, no one of consequence
ever questions their models.
Most ordinary people have come to justifiably feel that economists don't know what they are
talking about. But most assume that they are clueless because the field itself is so vast, murky, and
illogical that true predictive power is beyond even the best and most educated minds.
But what if I told you that the economic duality proposed by the Keynesians doesn't exist? What
if economics is much simpler than that? What if what is good for the goose is good for the gander?
What if it were equally impossible for a family, or a nation, to spend its way to prosperity?
Many people who are familiar with my accurate forecasting of the economic crash of 2008 like to
credit my intelligence as the source of my vision. I can assure you that I am no smarter than most
of the economists who couldn't see an asset bubble if it spent a month in their living room. What I
do have is a solid and fundamental understanding of the basic principles of economics.
I have that advantage because as a child my father provided me with the basic tool kit I needed to
cut through the economic clutter. The tools came to me in the form of stories, allegories, and
thought experiments. One of those stories serves as the basis for this book.
Irwin Schiff has become a figure of some renown and is most associated with the national
movement to resist the federal income tax. For more than 35 years he has challenged, often
obsessively, the methods of the Internal Revenue Service while maintaining that the income tax is
enforced in violation of the Constitution's three taxing clauses, the 16th Amendment, and the
revenue laws themselves. He has written many books on the subject and has openly challenged the
federal government in court. For these activities, he continues to pay a heavy personal price. At 82
he remains incarcerated in federal prison.
But before he turned his attention to taxes, Irwin Schiff made a name for himself as an economist.
He was born in 1928 in New Haven, Connecticut, the eighth child of a lower-middle-class
immigrant family. His father was a union man, and his entire extended family enthusiastically
supported Roosevelt's New Deal. When he entered the University of Connecticut in 1946 to study
economics, nothing in his background or temperament would have led anyone to believe that he
would reject the dominant orthodoxy, and to instead embrace the economic views espoused by the
out-of-fashion Austrians...but he did.
Over the past century or so, academics have presented mankind with spectacular scientific
advancements in just about all fields of study...except one.
Armed with a mastery of mathematics and physics, scientists sent a spacecraft hundreds of millions
of miles to parachute to the surface of one of Saturn's moons. But the practitioners of the "dismal"
science of economics can't point to a similar record of achievement.
If NASA engineers had evidenced the same level of forecasting skill as our top economists, the
Galileo mission would have had a very different outcome. Not only would the satellite have missed
its orbit of Saturn, but in all likelihood the rocket would have turned downward on lift-off, bored
though the Earth's crust, and exploded somewhere deep in the magma.
In 2007 when the world was staring into the teeth of the biggest economic catastrophe in three
generations, very few economists had any idea that there was any trouble lurking on the horizon.
Three years into the mess, economists now offer remedies that strike most people as frankly
ridiculous. We are told that we must go deeper into debt to fix our debt crisis, and that we must
spend in order to prosper. The reason their vision was so poor then, and their solutions so
counterintuitive now, is that few have any idea how their science actually works.
The disconnect results from the nearly universal acceptance of the theories of John Maynard
Keynes, a very smart early-twentieth century English academic who developed some very stupid
ideas about what makes economies grow. Essentially Keynes managed to pull off one the neatest
tricks imaginable: he made something simple seem to be hopelessly complex.
In Keynes's time, physicists were first grappling with the concept of quantum mechanics, which,
among other things, imagined a cosmos governed by two entirely different sets of physical laws:
one for very small particles, like protons and electrons, and another for everything else. Perhaps
sensing that the boring study of economics needed a fresh shot in the arm, Keynes proposed a
similar world view in which one set of economic laws came in to play at the micro level
(concerning the realm of individuals and families) and another set at the macro level (concerning
nations and governments).
Keynes's work came at the tail end of the most expansive economic period in the history of the
world. Economically speaking, the nineteenth an early-twentieth-century produced unprecedented
growth of productive capacity and living standards in the Western world. The epicenter of this
boom was the freewheeling capitalism of the United States, a country unique in its preference for
individual rights and limited government.
But the decentralizing elements inherent in free market capitalism threatened the rigid power
structures still in place throughout much of the world. In addition, capitalistic expansion did come
with some visible extremes of wealth and poverty, causing some social scientists and progressives
to seek what they believed was a more equitable alternative to free market capitalism. In his quest
to bring the guidance of modern science to the seemingly unfair marketplace, Keynes unwittingly
,gave cover to central authorities and social utopians who believed that economic activity needed
to be planned from above.
At the core of his view was the idea that governments could smooth out the volatility of free
markets by expanding the supply of money and running large budget deficits when times were
tough.
When they first burst onto the scene in the 1920s and 1930s, the disciples of Keynes (called
Keynesians), came into conflict with the "Austrian School" which followed the views of
economists such as Ludwig von Mises. The Austrians argued that recessions are necessary to
compensate for unwise decisions made during the booms that always precede the busts. Austrians
believe that the booms are created in the first place by the false signals sent to businesses when
governments "stimulate" economies with low interest rates.
So whereas the Keynesians look to mitigate the busts, Austrians look to prevent artificial booms.
In the economic showdown that followed, the Keynesians had a key advantage.
Because it offers the hope of pain-free solutions, Keynesianism was an instant hit with politicians.
By promising to increase employment and boost growth without raising taxes or cutting
government services, the policies advocated by Keynes were the economic equivalent of miracle
weight-loss programs that required no dieting or exercise. While irrational, such hopes are
nevertheless soothing, and are a definite attraction on the campaign trail.
Keynesianism permits governments to pretend that they have the power to raise living standards
with the whir of a printing press.
As a consequence of their pro-government bias, Keynesians were much more likely than Austrians
to receive the highest government economic appointments. Universities that produced finance
ministers and Treasury secretaries obviously acquired more prestige than universities that could
not. Inevitably economics departments began to favor professors who supported those ideas.
Austrians were increasingly relegated to the margins.
Similarly, large financial institutions, the other major employers of economists, have an equal
affinity for Keynesian dogma. Large banks and investment firms are more profitable in the
Keynesian environment of easy money and loose credit. The belief that government policy should
backstop investments also helps financial firms pry open the pocketbooks of skittish investors. As
a result, they are more likely to hire those economists who support such a worldview.
With such glaring advantages over their stuffy rivals, a self-fulfilling mutual admiration society
soon produced a corps of top economists inbred with a loyalty to Keynesian principles.
These analysts take it as gospel that Keynesian policies were responsible for ending the Great
Depression. Many have argued that without the stimuli provided by government (including
expenditures necessary to wage the Second World War), we would never have recovered from the
economic abyss. Absent from this analysis is the fact that the Depression was the longest and most
, severe downturn in modern history and the first that was ever dealt with using the full range of
Keynesian policy tools. Whether these interventions were the cause or the cure of the Depression
is apparently a debate that no serious "economist" ever thought was worth having.
With Keynesians in firm control of economics departments, financial ministries, and investment
banks, it's as if we have entrusted astrologers instead of astronomers to calculate orbital velocities
of celestial bodies. (Yes, the satellite crashed into an asteroid, but it is an unexpected encounter
that could lead to enticing possibilities!)
The tragi-comic aspect of the situation is that no matter how often these economists completely
flub their missions, no matter how many rockets explode on the launchpad, no one of consequence
ever questions their models.
Most ordinary people have come to justifiably feel that economists don't know what they are
talking about. But most assume that they are clueless because the field itself is so vast, murky, and
illogical that true predictive power is beyond even the best and most educated minds.
But what if I told you that the economic duality proposed by the Keynesians doesn't exist? What
if economics is much simpler than that? What if what is good for the goose is good for the gander?
What if it were equally impossible for a family, or a nation, to spend its way to prosperity?
Many people who are familiar with my accurate forecasting of the economic crash of 2008 like to
credit my intelligence as the source of my vision. I can assure you that I am no smarter than most
of the economists who couldn't see an asset bubble if it spent a month in their living room. What I
do have is a solid and fundamental understanding of the basic principles of economics.
I have that advantage because as a child my father provided me with the basic tool kit I needed to
cut through the economic clutter. The tools came to me in the form of stories, allegories, and
thought experiments. One of those stories serves as the basis for this book.
Irwin Schiff has become a figure of some renown and is most associated with the national
movement to resist the federal income tax. For more than 35 years he has challenged, often
obsessively, the methods of the Internal Revenue Service while maintaining that the income tax is
enforced in violation of the Constitution's three taxing clauses, the 16th Amendment, and the
revenue laws themselves. He has written many books on the subject and has openly challenged the
federal government in court. For these activities, he continues to pay a heavy personal price. At 82
he remains incarcerated in federal prison.
But before he turned his attention to taxes, Irwin Schiff made a name for himself as an economist.
He was born in 1928 in New Haven, Connecticut, the eighth child of a lower-middle-class
immigrant family. His father was a union man, and his entire extended family enthusiastically
supported Roosevelt's New Deal. When he entered the University of Connecticut in 1946 to study
economics, nothing in his background or temperament would have led anyone to believe that he
would reject the dominant orthodoxy, and to instead embrace the economic views espoused by the
out-of-fashion Austrians...but he did.
