Darkness Descends

The ultimate test of Keynesian orthodoxy

Introduction: Jim Walker – Author & Director, Asianomics Group

Dr. Jim Walker is the Founder and Director of Asianomics Group, a highly respected independent economic research and advisory firm specializing in Asia. With a career spanning over three decades, Dr. Walker is renowned for his contrarian insights, incisive macroeconomic analysis, and deep understanding of Asian markets.

Before establishing Asianomics in 2007, he served as Chief Economist at CLSA Asia-Pacific Markets, where his unconventional, often provocative views earned him both a loyal following and widespread recognition. Under his leadership, Asianomics has provided institutional investors with forward-looking economic perspectives, grounded in Austrian economics and focused on structural realities often ignored by mainstream models.

Dr. Walker holds a PhD in Economics from the University of Strathclyde in Glasgow. As a frequent speaker, commentator, and published author, he continues to challenge prevailing economic dogmas and advocate for frameworks that better capture the complexities of capital, labor, and growth in Asia and beyond.

Darkness Descends

One word of warning right at the outset: ChatGPT, Grok and Deepseek won’t help you this time. Artificial Intelligence is dominated by the prevailing and accepted academic wisdom. That means, in economic terms, the world is flat.

Perhaps putting it more appropriately, it means that the assumptions behind Donald Trump’s tariff policies are dominated by the Keynesian economics mainstream and its wholesale reliance on macroeconomic aggregates. It is simplified theory designed for mathematicians by mathematicians but it bears no resemblance to reality.

One of the main reasons that macroeconomic models never forecast recessions accurately is their reliance on the concept of rational expectations. In that theory, representative agents (who, you are supposed to believe, reflect the real world) react immediately to all price signals while, at the same time, having anticipated those price signals perfectly in advance. Why the price signals changed in the first place in this perfect information world is rarely asked but the answer is, well you know, some exogenous shock. Donald Trump, and his advisers, have just provided that exogenous shock but fear not! Given the mainstream’s views, this macroeconomic change will be instantaneously absorbed and production patterns will immediately shift to reflect the new reality.

That’s the theory. Underlying that theory are the simplifying assumptions that capital and labour are homogeneous and immediately malleable to a new order. For example, manufacturing industry will seamlessly relocate to the United States from China and Vietnam because – as Krugman has argued in the past but now seems intent to distance himself from – large trading partners are characterised by similarities not by heterogeneous comparative advantages.

On a more theoretical level, we are now entering the last battle between competing philosophies of economics. The Keynesian macroeconomic aggregate view of the world (e.g., that China trades with the US, not the individual companies, businesses and consumers operating in the two countries) versus the Austrian world where microeconomic decisions dominate. Where the world is characterised by capital structures that are difficult, if not impossible, to move in the short and even medium runs (maybe anywhere from one year to five-ten years). A world where human capital skills are inherently heterogeneous based on social and industrial capital deployments over the previous decades. In other words, burger flippers and financial analysts are not easily transferable into automobile production lines or steelworks.

Keynes or Hayek? The fiat money system in a global economy short on trade barriers has allowed the fiction of Keynesian macro aggregates to dominate the models and the corridors of academia for decades. The real world has now been reintroduced with the stroke of a pen. Scott Bessent and his advisers are not intellectually equipped to handle the paradigm shift. And you should not believe a single word from any analyst that gives you point estimates on what the Trump tariffs mean for trade flows, economic growth, inflation or unemployment.

Unfortunately, the Hayekian analysis, with capital theory at the heart of the economic system, was never fully developed post-World War Two because the old world, where capital structure and the intertemporal nature of the economic system were accepted as reality, gave way to mathematical models that assumed away all the non-linearities and multiple outcomes. Austrians can tell you what is about to happen (massive disruption and hardship) but we can’t tell you where we are going – that will be determined by the new plans and investment decisions of millions of entrepreneurs worldwide over years, not months and quarters.

Economic darkness has just descended. Uncertainty has been multiplied manifold. Investment will contract severely and the world is headed for recession. There will be winners and losers but the current global capital structure, intricately woven as it has been over decades of stability, has just been shattered.

For once, we hope that the Austrian critique is wide of the mark and that the Keynesians and their lakes of infinitely substitutable capital and infinitely available money are economic reality. That said, we wouldn’t put a penny of our savings, what will be left of them, on that outcome. Buy Gold.