Have you heard of the technological singularity? Don’t be ashamed if you haven’t; it’s sort of a geeky concept. The people most likely to have heard of it are computer scientists and science fiction fans (and if you’re both, then you’ve definitely heard of it).
Basically the concept is about artificial intelligence and the “endpoint” of technology, if you like: Once humans have been able to create a machine with super-human intelligence, then we’ve reached the technological singularity. What happens after that is uncertain – scenarios range from utopia to dystopia; from a world where robots can solve all our problems that our simple human brains have been unable to solve, to a world where robots take over and enslave us (see; “Matrix”, “I, Robot” for artistic depictions of this scenario).
Are we ever going to reach the technological singularity? Scientists, as well as philosophers, argue about this, and we may never know for certain. Those who argue for it do so by using extrapolation: If technology keeps improving at the rate it has been improving for the past 30-40 years or so, how can we NOT reach the singularity?
Those who argue against it claim (among other things) that there is some “natural” limit on how far technology can go.
Whatever the case, this post is not about technology. I’m an economist and I’m not particularly interested in whether or not machines will take over the world and use us as batteries. However, the Keynesian singularity interests me a lot.
Never heard of it? That’s because I just made it up; I figured we needed a term to describe the long-run consequences of keynesianism. What is the Keynesian singularity and how does one get there? This is what I’m now going to describe, step by step:
1) It all starts when a recession hits. The government at the time decides that inaction is too costly – economically and/or politically – and looks into the Keynesian playbook for solutions. The answer is obvious: The recession is caused by a fall in aggregate (total) demand, because consumers and businesses just won’t spend money anymore. So, the government has to step in in their place and do the spending they refuse to do. In order to do this, an increase in government debt is necessary – unless the government has savings, but that’s almost never the case.
2) The growing government debt drives up interest rates, slowing down the recovery. The money the government injects is spent inefficiently of course, but none the less (provided the government debt was reasonably low in the first place) a recovery does take place.
3) A boom follows the recession, just like sunshine follows rain. In keeping with the Keynesian formula, the government now attempts to not only balance the budget, but also save up for the next rainy day. So far so good – remember I’m not trying to question anyone’s intentions, only the results. However, they run into resistance from groups who have benefitted from the “temporary” increases. In the end, government debt ends up falling with 5 % – after having risen 20 % during the recession. The government congratulates itself on passing balanced budgets, and even non-keynesian economists are happy about the progress – they naively see this as “small steps in the right direction” and tell themselves that “baby steps count”.
4) This may go on for several business cycles: Government debt goes up during recessions, down during booms – but italways increase more during recessions than it falls during booms. Depending on how high the government debt was initially, this could take several decades. However, you will sooner or later (even if the name of your country starts with a U) run into a situation where banks and other investors starts to get a little uneasy about your ability to pay back your loans. And so, one faithful day when the government comes and asks for yet another loan during yet another recession, the bank will turn them down.
5) This is when things get interesting: The state finds itself unable to borrow at reasonable interest rates, and now, government officials have to inform the public about the situation and the need for austerity. Or; they may claim that this shows how flawed deregulated banking is: That’s right, if the government can’t borrow money at the rate it wants, that’s clearly because something is wrong in the free market. After all, when already overleveraged americans couldn’t borrow money back in 2008, wasn’t this blamed on deregulation? Hence, at this point, a witch hunt against bankers will begin. They are an easy target; no-one really liked them in the first place.
6) The first step in regulating the banking sector will be the introduction of price ceilings – meaning banks will no longer be allowed to charge as much interest as they like. These are not a new thing, the state will remind us, after all we already have price ceilings in the credit market that protects us from loan sharks (anti-usury laws). Now that the banks are clearly practicing usury towards the government, surely it makes sense to have price ceilings in place to stop them? And just to make sure banks do in fact buy government bonds; let’s make that mandatory, sort of like an extra tax. I mean, most of us pay taxes to the government without ever getting any interest, so forcing banks to pay a “tax” in the form of buying bonds, for which they will receive (a very low but still) interest, that can’t possibly be wrong, right? Or so the government will argue. As a conservative, I know the answer and I trust most readers know it as well, so let’s just move on:
7) The funny thing about price ceilings is that while they are supposed to help consumers, they usually only leave consumers with fewer suppliers to choose from and products that have lower quality. What happens first is that banks will have to lower the interest rate on savings (as they now get less from the interest rate on loans – too much of their loanable funds go to the government which pays almost nothing). This will be seen as yet another attack on the middle class on behalf of the banks – the government has always borrowed money, and the banks used to be able to offer decent interest rates before, so why not now? Clearly, this is a conspiracy.
8) Then, banks will fail, en masse. We all know that when one bank fails, everyone else is dragged down. One bank will fail – even offering almost nothing on savings will not be enough to keep the bank profitable with the government bonds (that they are now forced to buy) offering to almost no interest rate at the same time as inflation keeps going up. And the government doesn’t really mind this…
9) The government at this point nationalizes the banks. After all, we need credit, and since the private sector is unable to provide it, the government has to.
10) With the government in control of credit supply, those who oppose the government’s policies suddenly find that they can’t get loans. Business owners who have criticized the government find the interest rates on the loans they already have (most businesses have loans, after all) go up – fixed-rate loans have been a thing of the past for a long time at this point; inflation made sure banks couldn’t offer them. Of course, those who most strongly oppose the government’s policy are entrepreneurs, so with the government in control of who gets and who doesn’t get credit, their strongest critics are efficitively silenced. Those loyal to the increasingly totalitarian regime will get cheap credit, while the dissenters will find themselves unable to even get a credit card.
11) Restrictions on free speech are put in place. Not just indirectly (by not allowing government critics to access credit), but directly as well: After all, recessions are caused by “animal spirits” – basically, when someone delivers bad news, people will act in a way that makes the bad news true – even if they weren’t in the first place. This kind of irrational panic has been behind several bank runs historically. Now, since the recession (the one that forced the government to nationalize banks) will have gotten really bad by this point, there is only one thing to do to ensure things don’t get worse: Ban media, and everyone else, from reporting bad news and making pessimistic predictions about the economy. This, according to Keynesian theory, will immediately improve the economy (no, Keynes did not support this – it’s just something that follows).
12) Inflation at this stage is skyhigh, and price ceilings on regular goods are introduced to “protect” consumers from greedy businessmen. Step by step more and more businesses fail as the government prints more and more money and businesses are unable to compensate by raising prices (many don’t get this, but inflation is caused by an expansion of the amount of money in circulation – it’s not caused by higher prices; the higher prices that follow are merely a symptom). A business that fails has its assets taken over by the government; that way, as more businesses fail, more and more of the private sector becomes nationalized (the official excuse is that unless the government takes over these businesses, many cities would soon find themselves completely without grocery shops and other necessities). This goes on until you reach a state when there are no private businesses left, and all the means of production have been transferred to government hands. This state is known as socialism.
What happens next?
This question is very hard to answer, just like “what will happen once we reach the technological singularity?” – no-one really knows. Looking at the Soviet Union and other socialist countries might give you an idea about what happens once you reach the Keynesian singularity. But sure the Soviet Union was dissolved eventually, right? So a state that ends up at the Keynesian singularity will have to abandon socialism sooner or later too, right? Not so fast.
While it’s possible that the “singularity state” won’t last forever, we should not assume that just because the Soviet Union collapsed, every socialist regime must collapse. The Soviet Union only collapsed once the government introduced glasnost: Policies which led to more transparency and openness. In other words: Democratic reforms ruined the Soviet Union. Not communism, central plannings or mass executions (all of which existed in Soviet): Democracy! To simplify, it basically worked like this: Once people had a chance to see what the rest of the world looked like (because under glasnost, censoring became less common), they decided communism sucked and demanded capitalism instead.
The leaders in the Soviet Union didn’t understand how democracy and free speech was going to derail their way of government. Trust me, the next communist dictatorship will not make that mistake. There is a reason why there hasn’t been any “glasnost” in North Korea: Even communists learn from each others mistakes.
I understand many of you who read this will be sceptical; surely the citizens wouldn’t let this happen? And even if they did, surely our politicians wouldn’t want this to happen?
On the first point; how good have the citizenry been so far at preventing tyranny? Most communist dictators had popular support at the time they took power. Even Hitler was democratically elected.
On the second point, what you need to understand is that I’m not saying anyone (least of all Keynes himself who definitely had the best intentions) wants this to happen; it’s just something that is going to happen anyway unless we abandon Keynesian policies. We have to understand that the kind of people who choose to run for office are usually the type of people who believe they can fix things. That may not sound so bad, but it is: Because when a politician thinks he can fix a problem; that implies he doesn’t think the market can fix said problem. And most of the time, he’s wrong. Politicians by nature always look for solutions that involve them somehow; they can’t stand sitting on the sidelines and just doing nothing (which most of the time is what they should do). This is also what makes Keynesianism so attractive to them; they get to intervene and “save the economy”, rather than just sit on the sidelines and wait for the market to fix things.
What about the assumption that the government won’t decrease government debt as much during booms as they increase it during recessions? That assumption is empirically sound; virtually no government consistently follows the Keynesian “formula”. As a matter of fact, in the text above where I assumed government debt would go up by 20 % during recessions and go down by 5 % during booms, I was being quite generous; US government debt has never decreased by 5 % during any boom since the 1920′s. The US is not unique: France for example hasn’t balanced the budget since the 1970′s (despite having experienced numerous booms). It’s just a common fact that during a boom, very few people see the point in cutting back on goverment spending to save up for a rainy day. It’s sad, but it’s the way it is.
Some may object to the idea that politicians would be able to force banks to lend out money to the government at government-set interest rates. The point however is that even if politicians didn’t do this, banks would fail sooner or later due to hyperinflation caused by the goverment printing money to finance its deficit (if they can’t borrow from the market, printing money is really the only option). The end result, in other words, is the same.
Finally some may ask why we haven’t reached the singularity yet, given that Keynesianism has been around for almost 80 years. There are two answers to this: First, it takes a long time for any country to reach the singularity, assuming it starts with a reasonably low amount of debt. But most importantly, we have to remember that the US took a break from Keynesian, left-winged policies in the 1980′s under Ronald Reagan. Had Reagan not been elected, the trend in the 1970′s (which can be summarized as “More government will fix everything”) may very well have continued and the US might reached the singularity by now. Think about the 1970′s with its price ceilings, seatbelt laws, high inflation and marginal tax rates in the 90′s and you’ll realize how close to socialism the US really was.
I’m going to finish up now. Thanks for reading,