Fear the Boom and Bust

There are few things more lame than an adult trying to act young and hip, or a "poser" trying to act like a "player". This rap video could be accused of such, and at first, I thought trying to make a rap video about economics deserved such ridicule, but I have since changed my mind. The reason is that the video communicates a tremendous amount of actual knowledge. It also portrays two of the biggest names in economics—John Maynard Keynes and Friedrich August Hayek. Both men had a lasting influence and led interesting lives. In many ways they are both beautiful men, and deserve our attention. Moreover, the rap video is really quite clever.

Fear the Boom and Bust: The Rap Video

Before viewing, I want you to appreciate this video's success in portraying the personalities of Friedrich August Hayek and John Maynard Keynes.

Fear the Boom and Bust: John Maynard Keynes

Keynes was one of the most influential people in the first half of the twentieth century, especially in his home country of England but also the U.S. He had an irrestible appeal to people. Everyone wanted to be within. All economists wanted to be him. There was something about his affable personality, love of pleasure, diligence of work, and genius that made people want to agree with him before they understood him. His book, The General Theory of Employment, Interest and Money, had a more profound and lasting effect on economics, since the time of Adam Smith, yet, we are still not sure what the book was trying to say. What the book actually says may not matter very much, for it was this book that gave Progressives their justification for a big government—a type of "big government" Keynes did not necessarily desire.

Keynes was more than just an economist. He was an outspoken opponent of the Treaty of Versailles, and his opposition was vindicated when the treaty's oppressive punishment of Germany after World War I set into play a number of political conflicts which led to the rise of Hitler's Third Reich and World War II. Speculation in markets earned him considerable wealth. Mornings would find him working from bed, reading and gathering information via telephone, and executing trades by phone (especially in currencies). He used part of his wealth to purchase the possessions of Sir Isaac Newton, and it wasn't until then we learned of Newton's mystical religious beliefs.

One of Keynes greatest appeals was his natural proclivity for conversation. People just loved to talk to him, about anything. The man loved to party, as the video suggests. I remember once reading he personallly subsidized champagne as his way of "spreading the joy", but I have lost the reference. One of the more interesting aspects of his personal life was the manner in which he managed his bisexuality: the first half of his life he had male lovers, and in the second half of his adult life he was married to a ballerina, to which he remained faithful. In his youth he even kept a sex journal: yuk!

Fear the Boom and Bust: Friedrich August Hayek

Hayek is the opposite of Keynes in many ways. While Keynes served in World War I as an economist in the finance ministery, Hayek was a fighting solder who returned to his home in Austria as part of a retreating and anarchic army. Watching the former Habsburg Empire decay amidst unbearable terms of surrender and hyperinflation, he would later be a avid supporter of "real" money, like gold, which cannot be arbitrarily increased by the government. Hayek eventually found himself studying the Austrian School of Economics, which advocates real, commodity money and government that does little more than ensure all are equal before the law, property is protected, people may freely engage in investment and commerce. Most modern Libertarianssubscribe to the Austrian School on economic issues.

As the video suggests, Hayek has a more tempered disposition and austere lifestyle. Few found him interesting, personally. He did not have an entourage like Keynes.


Hayek was hired by the London School of Economics (LSE) to act as a counter-balance to Keynes, who was a professor at Cambridge. Keynes' influence on other people was so strong the LSE thought they needed to go abroad to find someone who was willing to counter Keynes. The LSE needed an Austrian economist, so it is no surprise they traveled to Austria to find one.

The actual debate took place

The 1930's confronted economics with its greatest challenge: The Great Depression: a prolonged period of unemployment in which the economy's usual method of healing itself (by natural adjustments in market prices) did not seem to work. As economists fumbled around for some sort of cure for the poverty and unemployment, it is not surprising that the answer came from Keynes. This answer was embedded within his General Theory. When the General Theory book was published it was applauded and supported by almost all economists—except Hayek. In a book review Hayek slammed Keynes' theory—big time— starting a broad economic debate which eventually ended in Keynes' victory. However, it should be noted that Keynes was bound to win. He personality was just too irresistable for the validity of economic arguments to matter, and because no one really understood Keynes, the economics didn't matter.

Thus began a period of decline for Hayek, where he continued to conduct spectacular but unrecognized research. Then came the 1960's and 70's, when many economists lost faith in their ability to keep unemployment low by ramping up government spending during recessions, and saw that Keynes' arguments were not being used to keep unemployment low but to keep government spending high at all times. When economists searched around for a new prophet they found decades of Hayek's work they had neglected. They compensated for this neglect in 1974 by awarding Hayek the nobel prize in economics.

Hayek's popularity has lately surged among Libertarians and members of the Tea Party. His book The Road To Serfdom, which echoed Jefferson's famous statement, "A government big enough to give you everything you want is big enough to take everything you have," was championed, and even appeared on The Glenn Beck Show during its most watched period, after which it quickly became a best-seller in 2010, longer after its initial publication in 1944.

The Lyrics {comments by me in purple}

We’ve been going back and forth for a century {from Great Depression to the Great Recession}
[Keynes] I want to steer markets, {by increasing and decreasing government spending}
[Hayek] I want them set free {let prices and time cure recessions}
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates. {government's printing of money}
[Keynes] No… it’s the animal spirits {irrational speculation}


When Hayek blames "low interest rates", he means that the "booms and busts" caused by recessions are ultimately due to the printing of money by governments, and although the idea is not new it is especially relevant today. Before the Great Recession, the Federal Reserve printed tons of money in response to the Dot-com Bubble. This newly created money first found its way into the financial sector, and was soon after invested in the housing market. Many of the new houses that were built during the Housing Bubble would not have only been built with newly created money. That is, people never wanted these houses—at least, not at the cost at which they were built. Although the money may have been free the resources used to build the houses could have been used to produce something else, something people value more. Once this mistake was realized, layoffs in the contruction sector and the decrease in house prices began the financial crisis, and ultimately, the Great Recession. By printing money, the government tricks us into buying things we do not want, at prices we do not wish to pay. Once we discover the trick the economy must alter its course, and like a man who must move his family across the country after losing his job, the cost of this adjustment can be severe.

Keynes has a different take. Irrational speculation causes price bubbles, but the source of this irrationality is not clear, so he terms it "animal spirits". Once the economy realizes it has behaved irrationally, it corrects itself, but this adjustment can be difficult. Before the Great Depression there was a price bubble in stock prices. Before the Great Recession the bubble occurred in the housing market. In both cases a recession followed. 

Both Keynes and Hayek agreed that the unemployment following the popping of a bubble represents the labor force seeking an alternative place of employment, and that takes time. They disagreed on the cause though. Hayek believed government was the cause and Keynes blamed speculators in the financial sector. This blame game has continued to the present, where Libertarians blame the government (including the Federal Reserve) for the crisis while Progressive blame investors. Who is correct? No one knows, and there is nothing to prevent you from belieiving both have a scent of truth.}

[Keynes Sings:]
John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
{if wages fell employers would hire more people, but there is a stigma against lowering wages}
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
{enact a fiscal stimulus where the government spends more money by either raising taxes or borrowing the money}
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…


Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health
{The "Multiplier"? If the government pays me a dollar, I spend that dollar at Jim's gas station, and Jim spends that dollar at Abigail's grocery store, and Abigail spends the dollar at...}

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit {government printing money}
The Fed sets rates low, are you starting to get it?
{new money is "given" to financial sector, so they have more to lend and they lower interest rates}
That new money is confused for real loanable funds
{new money is invested in housing, but not because people's real needs for housing rises}
But it’s just inflation that’s driving the ones {the printed money tricked people into believing that houses would be valued higher}

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few
{the printed money seemed free, but the real resources (labor, wood) used to build houses are not free because they could have been used for something else}

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
{the printed money tricked us into believing we needed more houses}
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
{investment decisions should be given serious thought}
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
{all government spending must be taken out of the economy through taxes or borrowing before it can be injected into the economy, and it is erroneous to think the government knows  better than people how money should be spent}
The boom was a binge that’s a matter of fact
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits


(1) Papola, John and Russ Roberts. 2010. Fear the Boom and Bust. EconStories.TV.

(2) Wapshott, Nicholas. October 17, 2011. "Wapshott on Keynes and Hayek." EconTalk.org. Podcast interview by Russ Roberts. Library of Economics and Statistics.

(3) Nasar, Sylvia. 2011. Grand Pursuit. Simon & Schuster: NY, NY.

(4) Ransom, Greg. January 25, 2010. "The Hayek vs. Keynes Rap." Taking Hayek Seriously. Blog available at http://hayekcenter.org.