After the initial horror at the barbaric butchery on a leafy London street come questions about our attempts to prevent terrorism. Eleven years on from the attacks of September 11, we are still left grappling with some basic questions: What exactly is terrorism? And what can we do, if anything, to prevent it?

The British prime minister, David Cameron, his colleagues, and top officials and police have been careful not to jump to conclusions. They have avoided the rush to judgment that so many in the United States urged on the Obama administration in describing the motivation of the killers of ambassador Chris Stevens in Benghazi. It is not that they do not take the killers at their word; it is because they simply do not know.

Cameron was careful not to prejudge or speculate on the motives of the two suspected culprits, who made no attempt to escape and waited for the police to come and arrest them. “There are strong indications that it is a terrorist incident” was as far as he would go. It was even left to French President Francois Hollande – Cameron was in Paris ‑ to let slip that the British authorities knew the victim was a soldier.

The Metropolitan Police chief was even more cautious. “We understand concern about the motivation, and we will work tirelessly to uncover why this occurred and who was responsible,” he said. “I understand people want answers, but I must stress we are in the early stages of investigations.”

The British have a meticulous approach to preventing the prejudicing of evidence and juries that the American First Amendment does not allow. In the United States, we guess first and investigate later. Even by the morning after the attacks, Cameron remained reluctant to acknowledge that the jihadist language used by one of the killers in the immediate aftermath of the killing automatically made him a terrorist.

Instead, he went out of his way to distance Islam from the slaughter. “We will never give in to terror or terrorism in any of its forms,” he said. “This was not just an attack on Britain and on the British way of life, it was also a betrayal of Islam and of the Muslim communities who give so much to our country. There is nothing in Islam that justifies this truly dreadful act.”

This has put the official jostling to avoid jumping to conclusions in the immediate aftermath of the Benghazi killing of four Americans in a fresh light. There has been widespread scoffing that no one dare call the murder of Ambassador Christopher Stevens a terrorist act, though it had all the characteristics of terrorism. The suggestion has been made that the to-and-fro over how the attack should be described must have been politically motivated.

Sometimes it is important for law enforcement officials to stay mum rather than jump too quickly to conclusions, even if the motive is misconstrued. The CIA considered the ambassador’s premises in Benghazi a crime scene that might provide them with proof that would bring the killers to justice. Agents now have five suspects in their sights, under 24-hour surveillance, but are waiting until they have enough evidence to surely convict.

The CIA appears to have learned lessons from the roundup of al Qaeda suspects after September 11. There are already too many untried detainees held in Guantanamo – at least 45 of them genuine cold-blooded terrorists – without enough evidence against them for the CIA to ad five from Benghazi. Maintaining the rule of law is important for a civilized nation, but it comes at a price. Sometimes, justice is not served.

The failure to allow Gitmo detainees to be repatriated to face trial on American soil has caused, by the reckoning of a joint CIA, FBI and Pentagon task force, 86 innocent men to be held indefinitely by American forces. That is shameful, which is why President Barack Obama’s new initiative to provide justice to those at Gitmo is so welcome. Hypocrisy is the lifeblood of politics, which perhaps explains why the very constitutionalists who most conspicuously praise the principle of the rule of law are often the same as those who demand lynch law for suspected terrorists, even when they are known to be innocent.

The cases of the butchers of London and the Boston bombers raise an even more fundamental question: What exactly is terrorism? When Osama bin Laden was running al Qaeda training camps in Afghanistan and coordinating terrorist outrages around the world, the shape and modus operandi of terror networks was well established. In the 11 years since 9/11, however, the central management of al Qaeda’s operation has been defeated and the duty to continue the Islamist fight passed to individual jihadists.

But when is a murderer a terrorist and when is he simply an egotistical killer eager to grab the headlines? There is an iteration of Islamist terrorism that learned from the Allied invasion of Afghanistan and the defeat of al Qaeda in Iraq that they were no match for the Western military and its sophisticated technology. Islamist terrorism has largely devolved to individuals who work independently or in small cells and perpetrate well-planned or opportunistic horrors using everyday equipment bought in pharmacies and hardware stores.

How to deal with hydra-headed terror without impinging on our liberties is the greatest puzzle yet to be solved by contemporary law enforcement. Eternal vigilance is not particularly effective, even when accompanied by saturation eavesdropping by street cameras. But as the London outrage has shown, we may be in another phase.

Almost everyone now has a cell-phone camera, and brave souls are prepared to tackle armed terrorists. The heroine of the hour in London is a woman Cub Scout leader, Ingrid Loyau-Kennett, who, hearing the blood-drenched killer yammer, “You people will never be safe,” and threatening “war in London,” calmly replied, “You’re going to lose. It is only you versus many.”

Both the London and Boston killings appear to have been perpetrated by disenchanted young Muslim men. Despite one of the Boston bombers’ travel to Chechnya and their reported reliance upon an al Qaeda handbook to build the pressure cooker bomb that killed three and maimed 264, exiled Chechen separatist leaders fiercely denied connections with the pair and so far the FBI have failed to establish a direct link between the bombers and Islamist terrorist leaders. And until Scotland Yard establishes a connection between the London killers and a known terror network, they will be cagey about calling the two suspects terrorists.

The British have a long history of countering terrorism. From the start of the Troubles in Northern Ireland in the early 1970s, the Irish Republican Army waged wave after wave of terror attacks on soldiers and civilians, including an annual bombing campaign on Christmas shoppers. The IRA’s fighters were well disciplined and had a clear aim and an ideology. Because of the nature of their business, they attracted psychotics without any ideals or ideology only too happy to kill for fun.

That is why sorting real terrorists from the murderous insane must remain at the heart of counterterrorism. Wild talk about revenging the sins of Muslims in general may be good business for a tabloid cable news station catering to xenophobes, but it cannot be the standard of a democratic government and its instruments of law and order. Merely shouting “Allah is good!” as the London killers did, does not define a crime as an act of terrorism.

Alfred Hitchcock once said, “There is no terror in the bang, only in the anticipation of it.” He was wiser than he knew. As the British like to say, we are all going to have to “keep calm and carry on.”

Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.

PHOTO: A police forensics officer investigates a crime scene where one man was killed in Woolwich, southeast London May 22, 2013. REUTERS/Stefan Wermuth

Really? How about the Iran-Contra scandal in 1986 that besmirched the honesty of President Ronald Reagan, for whom Noonan used to write speeches? Perhaps she penned Reagan’s first denial, “We did not — repeat — did not trade weapons or anything else for hostages, nor will we,” or maybe his amnesiac mea culpa four months later, “I told the American people I did not trade arms for hostages. My heart and my best intentions still tell me that’s true, but the facts and the evidence tell me it is not.” Strange the tricks age plays on the memory. And I am not talking about Reagan.

If you were a precocious five-year-old at the time, you would have to be 32 to recall the Iran-Contra scandal, in which, with or without Reagan’s say-so, administration officials, in defiance of Congress’s clearly stated wishes, secretly sold weapons to America’s perennial enemy, the terrorist state of Iran, then passed the proceeds to Nicaraguan insurgents. Even if you were the smartest kid you would have to be over 41 to remember Watergate and, in President Gerald Ford’s words, the “long national nightmare” that led to Nixon’s resignation ahead of certain impeachment.

Unless investigations prove that President Barack Obama’s actions or inactions led to the death of Ambassador Chris Stevens in Benghazi, or that he directed the Justice Department to subpoena the phone records of 20 AP reporters or that he directed the IRS to investigate Tea Party groups, the current scandals are not Watergate, or even Iran-Contra.

That is not to say that the three events currently under scrutiny are not troubling. Four Americans were killed in the fog of war surrounding Benghazi, and if such pointless deaths are to be prevented in the future we need to know exactly what happened. Determining who won the talking-points battle between the CIA and State is not that investigation.

If the White House or any party of the Administration directed tax inspectors to target Tea Party groups for special examination because of their conservative/libertarian beliefs, that, too, would be a scandal. It doesn’t seem that way. When it comes to conspiracy or incompetence, I’ll bet on incompetence every time.

The IRS inspector general’s report said 298 political groups received special scrutiny. Of those, only 96 – about a third — were Tea Party groups. And the only group so far to have their eligibility for tax-free status rejected is the Maine chapter of Emerge America that trains Democratic women to run for office. The White House has asked the newly appointed IRS chief to investigate and bring to account those culpable. The sooner that investigation is completed, the sooner we can move on.

If the White House had anything to do with the irregular way in which phone records of 20 AP reporters were seized, we need to know. All administrations dislike leaks, and all say they will find out how they happened. In this case, however, citing that catch-all pretext “national security,” the Justice Department went in all guns blazing. Why the overkill? Why abandon the traditional legal means of gathering evidence? We need answers.

If the Republicans on the Hill were more concerned about finding the truth than sensational speculation and unfounded innuendo we would find out answers much quicker. But the GOP is involved in displacement activity. Since the mid-terms of 2010 they have mostly given up legislating, saying government is already too big and that their idleness will contribute to its demise. Now they think they have found the perfect excuse to switch from not passing laws to what they do best, grandstanding. The problem is, it is so evidently partisan, self-serving busywork that few middle-ground voters are paying attention.

The latest Pew poll shows that all except the most avid Fox News gawpers are largely unmoved by Benghazi and that since the recent congressional hearings the numbers taking notice have actually decreased. Those who think the administration has been dishonest are Republicans; those who think it honest are Democrats. I’m shocked. Benghazi continues to be a bore to most people and the further into the weeds congressmen wade, the less likely they are to change voters’ minds.

A CNN/ORC poll discovered a similar response to the IRS scandal. While 85 percent thought the subject important and 71 percent found the IRS agents’ behavior unacceptable, 61 percent thought Obama had been honest in his account of the matter and 55 percent said the IRS was acting on its own.

Although 54 percent said they did not think Republicans were overreacting, 42 percent thought they were. Even the 37 percent who believe, without evidence, that the White House ordered the IRS to target conservative/libertarian groups is 8 points less than the 45 percent who disapprove in general of the way the president is handling his job. Even the choir doesn’t seem to believe the preacher.

An overwhelming 87 percent of voters said the raid on the AP reporters’ phone records was an important issue and 52 percent said they thought the Justice Department’s action was unacceptable. That is not the whole story. The pollsters reminded respondents Justice was investigating who leaked anti-terrorism efforts, which is why, perhaps, a full 43 percent thought Justice’s blundering approach was acceptable.

One Republican who thinks his party is overreaching is the Washington Post’s tame conservative Charles Krauthammer, whose recent column opened with: “Note to GOP re Benghazi: Stop calling it Watergate, Iran-Contra, bigger than both, etc.” because “overhyping will only diminish the importance of the scandal if it doesn’t meet presidency-breaking standards,” and “focusing on the political effects simply plays into the hands of Democrats desperately claiming that this is nothing but partisan politics.” He then spoiled his argument by spending the next 700-odd words going round in Benghazi circles, but no matter.

I have suggested before that if Republicans are to be a governing party ready to take back the White House, rather than a protest movement destined for permanent opposition, they should concentrate on kitchen-table issues that mean something to the average American. Instead they hope against hope they have tapped a scandal that will topple the president. This is not Watergate, it is Whitewater, the festering accusation by opponents of Bill and Hillary Clinton that they had been up to mischief when investing in a housing development in Arkansas, back before he won the presidency twice. And well before Hillary looked a good bet to be the next president.

President Clinton considers one of his biggest mistakes was not whatever he got up to with Monica Lewinsky in the closet off the Oval Office but his appointment of a special prosecutor to clear his name in the Whitewater business who ended up snooping in the bedroom. That is why, whether it is the best course or not, Obama will not be appointing a special prosecutor to look into Benghazi, the IRS, or the Justice Department. Having seen his Democratic predecessor and the nation’s government frozen in inaction through a long-running and vindictive partisan investigation, the president is not going to sacrifice his second term in the same way.

So, is all the Republican bluff, faux indignation and dramatic calling of hearings merely to taint Hillary Clinton’s presidential chances in 2016? Maybe. Though it would be the first time many of them have stopped to think beyond the end of next week.

Nicholas Wapshott is the author of “Keynes Hayek: The Clash That Defined Modern Economics.” Read extracts here.

PHOTO: Members of the audience listen as Gregory Hicks, foreign service officer and former deputy chief of mission/charge d’affairs in Libya at the State Department, testifies before the House Oversight and Government Reform Committee hearing on “Benghazi: Exposing Failure and Recognizing Courage” on Capitol Hill in Washington May 8, 2013. REUTERS/Yuri Gripas

In the nearly five years since the worst financial crash since the Great Depression, the remedy for the world’s economic doldrums has swung from full-on Keynesianism to unforgiving austerity and back.

The initial Keynesian response halted the collapse in economic activity. But it was soon met by borrowers’ remorse in the shape of paying down debt and raising taxes without delay. In the last year, full-throttle austerity has fallen out of favor with those charged with monitoring the world economy.

Christine Lagarde, managing director of the International Monetary Fund, has been urging German Chancellor Angela Merkel, who has been imposing singeing public spending cuts on her neighbors, and George Osborne, Britain’s finance minister, who has been doing the same to the Brits, to ease up. The IMF is now urging fiscal measures beyond monetary easing “to nurture a sustainable recovery and restore the resilience of the global economy.”

Earlier this month, Lagarde criticized America’s automatic sequester cuts for being too deep, too soon. The United States, she said, “should consolidate less in the short term, but give … economic actors the certainty that there will be fiscal consolidation going forward.”

So much for the economics of austerity. That is only half the story, however. Austerity is a moral issue, too. It inflicts enormous misery upon hundreds of millions. To an American living under a relatively generous economic regime that is providing annual growth at 2.5 percent, the scale of unemployment in Europe is alarming.

We think 7.5 percent is too high. In Greece, it has reached 27 percent and youth unemployment (age 15 to 24) is at an appalling 64 percent. Much the same is happening in Spain, with 27.2 percent unemployed and youth unemployment hitting 57 percent. Italy’s 11 percent unemployed figure disguises the fact that more than that number have given up looking for jobs ‑ so the real jobless tally is more than 20 percent.

The social cost of austerity can be found in widespread political unrest, including mass public demonstrations that often spill into violence. Hard times are encouraging the adoption of simple-minded political solutions, and Europe has seen an upsurge in the electoral success of undemocratic and racist extreme parties that scapegoat minorities. Traditional parties take turns taking the blame, with voters turfing out incumbents of both right and left to punish them for complicity in inflicting such general misery.

The prospect of no work is diminishing and socially corrosive. Depression is rife. Cuts to health budgets have led to a sharp rise in HIV cases. New research from Stanford and Oxford Universities suggests austerity is deeply damaging to individuals and sharply increases the number of suicides.

While mainstream politicians revel in their impotence, religious leaders are speaking out with unprecedented vigor. It takes a lot before senior churchmen dare to intervene in politics, for fear they will offend half their followers. But the extent of the despair being endured has changed the equation.

The Roman Catholic primate of Spain, Braulio Rodriguez, archbishop of Toledo, predicts that austerity will lead to despotism. “We have to change direction,” he said this week, “otherwise this is going to bring down whole political systems. We have to give people some hope or this is going to foment conflict and mutual hatred.”

Archbishop Ieronymos, head of the Greek Orthodox Church, has written to the Greek premier to warn against administering “larger doses of a medicine that is proving deadly.” “Greeks’ unprecedented patience is running out,” he said, “fear is giving way to rage, and the danger of a social explosion cannot be ignored.”

In London, where the ruling coalition’s austerity program has led the nation twice back into recession, the leader of the Anglican church, the archbishop of Canterbury, argues that “what we are in at the moment is not a recession but essentially some kind of depression. It therefore takes something very, very major to get us out of it, in the same way as it took something very major to get us into it.”

When spiritual leaders warn that austerity may lead to the end of democracy, it’s time for political leaders to take notice.

There is little sign that Europe’s political leaders, in particular Germany’s unwavering Merkel, grasp the seriousness of their dilemma. Yet austerity is undermining the very cause they claim to be rescuing by their tough love: closer European unity. Nor is it rescuing the euro, the troubled single European currency designed to bind European nations in an ever-closer embrace.

The latest economic data shows the 27-nation European Union to be in recession for the sixth consecutive quarter. The euro bloc of 17 nations has also been in recession for six quarters. Far from bolstering the value of the euro, austerity policies are causing it to slide against the dollar. Yet the EU insists there is no alternative: Austerity is the only cure, even if it kills the patient.

Germany, with Europe’s strongest economy, has almost alone among EU nations benefited from the acceptance of the euro, which, particularly in its weak state, keeps the prices of exports unnaturally cheap. But German prosperity comes at an enormous cost. Anti-German sentiment in Europe is rife ‑ particularly among the Mediterranean nations, which are reviving memories of atrocities committed during German occupation in World War Two.

Seventy years after German troops massacred 498 men in cold blood in the Greek village of Kalavryta, in reprisal at the killing of German soldiers by Greek partisans, the Greek government is citing such incidents to prove Germany owes $213 billion in unpaid World War Two reparations. A quarter of a million Greeks died during German occupation, most from starvation. Germany agreed to reparations when the war ended in 1945, but stopped payments within a year.

In 1970, the Germans settled for a once-and-for-all payment of $70 million. The sum the Greeks are now demanding would go a long way to solving the country’s debt problem. The angry response from Merkel’s government to the new Greek demands aggravates the newly opened wounds between the two countries and revives the sense, now commonly expressed by non-German Europeans, that the financial crisis has let Germany own by stealth what the Nazis failed to win by conquest.

Europe’s economic turmoil is dragging the world economy down. It is against this destructive display of unnecessary and counterproductive masochism that many here continue to demand that the U.S. sequester be allowed to continue slashing at public spending. On top of this, Tea Party insurgents in the Republican Party prevent the vacillating party leadership from leading.

Few doubt that the level of national debt is unsustainable and must eventually be paid down, but timing is everything. A glance across the Atlantic offers a chilling insight into what would happen here if the fiscal hawks get their way and start imposing European-style austerity.

It won’t be pretty.

Nicholas Wapshott is the author of “Keynes Hayek: The Clash That Defined Modern Economics.”Read extracts here.

PHOTO (Insert A): International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during the conference with top financial officials at the Economy ministry in Paris November 30, 2012. REUTERS/Charles Platiau

PHOTO (Insert B): Irena, 50, a Polish homeless worker, lies on a park bench in central Athens January 15, 2012. REUTERS/Yannis Behrakis

 PHOTO (Insert C): German Chancellor Angela Merkel (L) meets with IMF chief Christine Lagarde before a European Union debt crisis summit in Brussels October 26, 2011. REUTERS/Pool/Bundesregierung

It makes you wonder what Friedrich Hayek would have to say about such aberrant research. Hayek has become the patron saint of conservative intellectuals – and with good reason. He went head to head with John Maynard Keynes in 1931 in an effort to stop Keynesianism in its tracks. Hayek failed, but his attempt gave him mythical status among thinkers who deplore big government and central management of the economy.

Hayek became a conservative hero a second time with publication of his Road to Serfdom  (1944) that suggested the larger the state sector, the more there was a tendency to tyranny. Many of today’s Hayekians harden up Hayek’s carefully expressed thoughts to declare that all government is potentially despotic, while also ignoring his arguments in favor of governments providing a generous safety net for the less advantaged, including a home for every citizen and universal health care – perhaps because Americans were first introduced to Serfdom in a much truncated Reader’s Digest edition. They would do well to re-read the original.

The rest of Hayek’s vast oeuvre doesn’t get much notice, even from those who boast of their devotion to the master. But it is not a stretch to say that the very notion of conservative think tanks grew out of his plea for an ideology that would inspire and unite the right as effectively as socialist theory continues to inspire the left.

In the aftermath of World War Two, when Western governments adopted Keynesianism wholesale and Social Democrats with big spending agendas won landslide elections, Hayek assembled a ragbag of nonconservatives and maverick thinkers to a summit in an off-season ski resort on Mont Pelerin, Switzerland. He set them a task: Come up with an ideology to inspire conservatives and arm them with cogent arguments to counter socialists and Keynesians. He warned them the effort could take 25 years.

The group met annually, argued sharply with each other, and eventually outlived the fashion for Keynes and socialism. Mont Perelin’s achievement is that conservatives, once mostly traditional and opportunistic, are now armed – some would say cursed – with a compelling ideology of their own. By the time of Ronald Reagan and Margaret Thatcher, both Hayek devotees, a worldwide conservative revolution was challenging the onward rush of socialism and, with various degrees of success, slowing its progress.

Hayek, however, was not satisfied. A born contrarian and pessimist, he hotly denied responsibility for Reaganomics or Thatcherism. He distrusted all politicians for the compromises they must make, which is why he tried to deter protégés like Milton Friedman from joining the Nixon administration.

Perhaps the most enduring legacy Hayek left, along with an immense body of work,  is the clutch of conservative think tanks that fuel conservative political debate, among them the Hoover Institution, the Cato Institute, the Manhattan Institute, the Ludwig von Mises Institute and the Heritage Foundation.

So what would Hayek make of the Richwine affair? One thing right off: Hayek disliked national borders because they inhibited the free movement of labor. He was also color-blind. So the racial prejudice that underpins much opposition to immigration reform he would find abhorrent. He would also find Richwine’s sloppy and partial immigration paper an affront to scientific integrity.

Hayek had tough things to say about traditional seats of learning that apply equally today to the lavishly appointed think tanks he inspired. His views were so out of the mainstream that for most of his life he was treated as a pariah – even by Chicago University’s conservative economics professors who did not think his economics up to snuff.

Instead, Hayek had to accept a specially established chair in the social studies department funded by a businessman who had adored Serfdom. As a truly original and free thinker, Hayek was wary of businessmen who spend shareholders’ dividends on employing tame academics to research pet projects.

It was from personal knowledge, then, that he wrote, in The Constitution of Liberty (1960), about “the need for protecting institutions of learning against the cruder kind of interference by political or economic interests.” He advocated “watchfulness, especially in the social sciences, where the pressure is often exercised in the name of highly idealistic and widely approved aims.” He went on, “The danger lies … in the increased control which the growing financial needs of research give to those who hold the purse strings.”

He distrusted reactionary conservatism and wrote an essay, “Why I Am Not a Conservative,” spelling out why. There was little point, he believed, in merely attempting to restore a previous age, however idyllic.

“The belief in integral freedom,” Hayek wrote, “is based on an essentially forward-looking attitude and not on any nostalgic longing for the past or a romantic admiration for what has been.” He went further. “I doubt whether there can be such a thing as a conservative political philosophy. Conservatism may often be a useful practical maxim, but it does not give us any guiding principles which can influence long-range developments.”

Reading Hayek can be uncomfortable for those who are under the impression he would agree with them.

So what of the myriad, well-paid fellows attached to conservative institutions? Hayek deplored intellectuals who became involved in party political battles, as so many think-tank fellows do today.

“The task of the political philosopher,” he wrote, “can only be to influence public opinion, not to organize people for action.” But he did not have in mind encouraging grass-roots causes like the Tea Party. An unashamed elitist and individualist, Hayek was suspicious of all mass movements.

“The higher the education and intelligence of individuals,” he wrote in Serfdom, “the more their views and tastes are differentiated.” The corollary is that “to find a high degree of uniformity and similarity of outlook, we have to descend to the regions of lower moral and intellectual standards where the more primitive and ‘common’ instincts and tastes prevail. It is, as it were, the lowest common denominator which unites the largest number of people.”

He deplored those, perhaps like the talk radio and Fox News audience, “prepared to accept a ready-made system of values if it is only drummed into their ears sufficiently loudly and frequently.” Instead, hope of achieving a better society “must rest on persuading and gaining the support of those who by disposition are ‘progressives.’”

Hayek believed academics could achieve their best work in an ivory tower. Most of the think tanks he spawned, however, cluster around Capitol Hill — the better to play politics.

Reinhart and Rogoff may be given a pass. They should have checked their figures more carefully and have apologized. It is the governments imposing terrible unnecessary hardships on their people, using Reinhart and Rogoff as a pretext, who are to blame for perpetuating the error.

Richwine, however, is different. If Heritage were ignorant of his racist Harvard thesis before it hired him, they are now being punished for their lack of diligence. When an institution loses the trust of the very people it sets out to please, they deserve to lose donors and be ignored in the future.

There is a hard lesson there for similar institutions dedicated not so much to discovering the truth as to pandering to a political clique. If they had read Hayek a little more closely, or with a more open mind, they might have saved themselves a great deal of embarrassment.

Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.

 PHOTO (Insert): Former Senator Jim DeMint, who is now head of the Heritage Foundation.REUTERS/Jonathan Ernst

arvard Professor and Economist Kenneth Rogoff speaks during the Sohn Investment Conference in New York, May 16, 2012. The Sohn Conference Foundation is dedicated to the treatment and cure of pediatric cancer and other childhood diseases. REUTERS/Eduardo Munoz

This week’s House committee resumed the fight, with GOP members eager to show the Obama administration at fault. Because Hillary Clinton has already emerged as the 2016 Democratic frontrunner, determining what exactly happened in Benghazi that day has become the first scuffle in the next presidential election.

In the weeks running up to President Barack Obama’s reelection, conservative commentators thought that in the Benghazi deaths they had found an explosive issue that would shock the nation. Despite their best efforts, which elicited an admission of responsibility from the secretary of state, the Benghazi campaign did not move the pollsters’ needle. The campaign to implicate the president andClinton was long on innuendo and short on facts. There was no smoking gun. As a result, voters did not grasp what they were being urged to be indignant about.

Despite this indifference, Republicans are pressing on. The former presidential hopeful and Fox News host Mike Huckabee has high hopes Benghazi will lead to impeachment. “I believe that before it’s all over, this president will not fill out his full term,” he said. “This is not minor. It wasn’t minor when Richard Nixon lied to the American people and worked with those in his administration to cover up what really happened in Watergate.”

But even after the House revisited Benghazi and took evidence from three State Department whistleblowers, the most alarming front-page headline Rupert Murdoch’s Wall Street Journal could come up with was: “Diplomat Airs Attack Details.” And its low-key editorial, “The Benghazi Awakening,” was a quiet plea for more information, not a cry for impeachment. Even the most eager conspiracy theorists may be excused for stifling a yawn. Once again, Republicans have raced off in their own direction, leaving the rest of us wondering what all the fuss is about.

The Benghazi boondoggle has wider implications. The eternal rule of politics is that elections are won and lost in the center ground. It is in the middle that the undecided and uncommitted are to be found. Those who only think about politics every four years are open to persuasion in a way devoted partisans are not. So why, when week after week it has failed to gain traction with Benghazi, is the GOP still cracking the whip at this long-dead nag?

Benghazi is not the only subject that excites the GOP but leaves voters cold. A party set on achieving government looks at what is concerning moderates and formulates policies to meet their needs. Exit polls show 56 percent of “moderates” voted for Obama, which ensured his reelection. This does not mean the GOP must kowtow to focus groups and pollsters, but it does mean being open enough to hear what voters are saying, not putting on headphones and ploughing on regardless with pet obsessions.

Gun control is a case in point. Soon after 20 children were shot dead in Newtown, Connecticut, 90 percent of voters wanted universal background checks and 60 percent tighter restrictions on guns. Nearly five months later, the anger and despair has abated, but still half the electorate want Congress to pass a new gun control law. An indication of how guns have become a key issue for many is the way the gun control campaign group around Gabby Gifford, the gun-owning “blue dog” Democrat House member shot in the head in 2011, has in such a short time attracted 366,000 members and raised $11 million.

A party eager for power would take note of the strength of public passions around the shooting of schoolchildren and work to find a compromise that would preserve gun rights while keeping weapons out of the hands of criminals and crazies. Yet Republicans know better. In the name of the Second Amendment, accompanied by Democrats from rural, gun-toting states, they resist approving even the most temperate measure in the Senate and will not even allow the House to vote. They let their case be made by divisive, implausible figures like the NRA’s tone-deaf Wayne LaPierre. To middle-ground voters, on this issue Republicans appear unreasonable and closed-minded.

Immigration reform follows a similar path. Armed with exit polls showing Hispanics voting 71 percent for Obama and 27 percent for Romney, a party intent on winning the White House would overwhelmingly back immigration reform. As Ronald Reagan put it, “Latinos are Republican. They just don’t know it yet.” But Republicans cannot even agree what addressing the nation’s 11 million undocumented workers would cost if, as is certain, the vast majority were allowed to stay. Looking at the abuse heaped upon those, like Marco Rubio, who lead GOP efforts at reform, middle-ground Hispanics would rightly conclude that the party does not yet deserve their affection.

Some in the GOP leadership recognize that they are seen as unbending and out of touch. Having tried to blame the press for “shoving us in the corner,” House Majority Leader Eric Cantor concedes his party’s leadership is to blame. “We also want to speak to the people who, frankly, have begun to turn us off because they don’t feel we have an agenda that speaks to them,” he said. “What are we doing for that assistant manager of a fast-food restaurant?” Little wonder that a majority of Republican voters disapprove of the party’s leaders, and fewer than one in five independents rate them.

To become so detached from the wishes of ordinary middle-ground voters is particularly strange for a party that favors business and champions the free market. There are companies who successfully nurture a narrow niche and turn a decent profit. Fox News comes to mind. But those who do best from market forces are those who take note of the appetites of all their potential customers and design their goods accordingly.

Those who ignore what the public wants and introduce unpopular products, like Ford and the Edsel, Coca-Cola and New Coke, and most recently Microsoft and Windows 8, must make amends quickly or be forever tainted. Right now the Republicans leadership is peddling unpopular policies to a loyal minority. To win in 2016, pandering to a niche is not enough; it needs to please more than half of America. Any business leader will tell them the same. If the GOP were a company, it would be going bust.

Nicholas Wapshott is the author of “Keynes Hayek: The Clash That Defined Modern Economics.” Read extracts here.

PHOTO: (L-R) Acting Deputy Assistant Secretary of State for Counterterrorism Mark Thompson, Gregory Hicks, foreign service officer and former deputy chief of mission/charge d’affairs in Libya at the State Department, and Eric Nordstrom, diplomatic security officer and former regional security officer in Libya at the State Department, are sworn in before the House Oversight and Government Reform Committee hearing on “Benghazi: Exposing Failure and Recognizing Courage” on Capitol Hill in Washington May 8, 2013. REUTERS/Yuri Gripas

After a barrage of complaints, Ferguson – an economic adviser to John McCain, a conservative Newsweek/Beast blogger (typical headline, “Hit the Road, Barack”) and, between book tours and big-fee speaking engagements, sometime history professor at Harvard – was obliged to issue an abject apology. “It is simply false to suggest, as I did, that [Keynes’s] approach to economic policy was inspired by any aspect of his personal life,” he bleated. “My colleagues, students, and friends – straight and gay – have every right to be disappointed in me, as I am in myself. To them, and to everyone who heard my remarks at the conference or has read them since, I deeply and unreservedly apologize.” Brenda Lee could not have sung it better.

Ferguson’s retraction appeared to be more to save his skin than to confess his many errors. While Harvard may tolerate an historian who regularly misrepresents macroeconomics, to smear the greatest economist of the twentieth century for being gay and without issue may well jeopardize his valuable tenure. (Ferguson can afford to lose both gigs: his jobs portfolio also includes: a chair at the Harvard Business School; membership of the faculty of Harvard’s Minda de Gunzburg Center for European Studies; a chair at Oxford University; a fellowship at the Hoover Institution at Stanford; a post with the British Conservatives advising on history syllabuses in schools; and an “advisory fellowship” at the Barsanti Military History Center at North Texas University.)

Ferguson’s “apology” is hard to credit because he has suggested before that Keynes’s economic advice to a succession of British prime ministers over 30 years was inspired not so much by the brilliance of his mind but by his homosexuality. Ferguson wrote that Keynes’s private opposition to World War One – despite his distaste for the slaughter, Keynes loyally worked for the British Treasury throughout, negotiated American loans that funded the Allied war effort, and advised against the disastrous Treaty of Versailles – was because “the war itself made Keynes deeply unhappy. Even his sex life went into decline, perhaps because the boys he liked to pick up in London all joined up.” The problem with flip history is that eventually those who hold the purse strings catch up with the backlog of nonsense. Cheap shots can turn out to be expensive.

So, what’s the truth? For the first half of his life, Keynes was exclusively homosexual. Notwithstanding the illegality of all gay acts in the UK at the time, he was promiscuous. He used to keep a book in which he listed boys he had had and boys he would like to have. He did not disguise his tendencies and the political leaders he mixed with knew he was gay.

As the member of the Bloomsbury group whose sound investment advice allowed his friends the freedom to write and paint, he was an aesthete who felt no shame about his love of men. Then he met, fell in love with, and four years later married Lydia Lopokova, a ballerina from the Sergei Diaghilev’s Ballets Russes. They tried to have children. Lydia miscarried. When the tactless alluded to their lack of progeny, the gallant Keynes – ennobled in 1942 as Baron Keynes – would say, “I am the Barren Keynes.”

What has any of this to do with Keynes’s genius that transformed economics forever? Nothing. Unless you are looking for shabby ways to discredit him and diminish his towering achievement. Ferguson is not the first to cast aspersions on Keynes’s economics by a sly, sniggering reference to his unashamed bisexuality. Kenyes’s nemesis Friedrich Hayek, who has become a saint among conservatives for his effort, albeit failed, to derail Keynes as he was formulating the revolutionary General Theory, used to allude to the “immorality” that underpinned Keynes’s life and therefore his views on economics.

Unlike Ferguson, Hayek was too smart and perhaps too well mannered to spell out exactly what it was about Keynes’s personal ethics that helped liberate economics from the earth-bound logic of microeconomics. Perhaps Hayek was inhibited by his own morality. Despite his fastidious approach to life and his (lapsed) Catholicism, Hayek abandoned his wife and two children on the day after Christmas to start a new life with an old flame.

After taking a hastily arranged job in Arkansas to obtain a speedy no-contest divorce, he exiled himself to the United States – a country he never took to – to dodge his liabilities. Hayek was a cad. Yet I have never heard a Keynesian use Hayek’s lack of personal ethics as an excuse to damn his thinking.

In answer to a question about Keynes’s remark that “in the long run we are all dead,” Ferguson wrenched the quote out of context. He made out that Keynes had little concern for long-term debt because he was gay and childless, so did not care what happened in the long run. In fact, as any Harvard Economics 101 student might have told him, Keynes was alluding to the elusive “equilibrium” of full employment and high growth promised “in the long run” by those who put their faith in the untrammeled market but that never came about, however long the run.

As Keynes argued, even if the equilibrium were to arrive “in the long run,” it would be far too late for the millions of families in the 1920s and 1930s broken by long term joblessness. Taunting free market advocates with their own expression, he insisted it was necessary to find a quicker solution because “in the long run we are all dead.” To deliberately misquote Keynes is to willfully distract from the truth and topicality of his observation.

Hayekians allude to a paradise lost, a pre-Keynesian Eden where “natural” economic forces come to rest in the best of all possible worlds: full employment, high growth, and high profits. Yet Ferguson, an economic historian, not an economist, must know that in the Hayekian idyll before Keynes’s General Theory, “natural forces” resulted in violent swings in the business cycle and a series of catastrophic booms and busts. Businesses went under by the thousand, banks sank by the score, taking with them the life savings of thrifty families, and tens of millions were thrown out of work.

It was in disgust at the sordid consequences of the free market, and an urge to save sinking capitalism from a socialist revolution, that Keynes applied his brilliant mind to making economics work for the good of the people, their children and their grandchildren. As Ferguson surely knows, Keynes did not advocate long-term large-scale public borrowing; on the contrary, he said borrowing should be paid back as soon as the recovering business cycle began its upswing.

More productive than trying to link Keynes’s sexual behavior 100 years ago to today’s concern about the scale of government borrowing, Ferguson and his kind might do better to explore the psychology that inspires those who viscerally support Keynesian remedies as compared to those, like them, who attach their faith to long-gone certainties. Keynes wrote that those who believe a bad economy can be cured by austerity are inspired by subconscious sadomasochism. By contrast, he was an unapologetic hedonist who, when asked whether he had any regrets, said yes, he had not drunk enough champagne.

Nicholas Wapshott is the author of  “Keynes Hayek: The Clash That Defined Modern Economics.” Read extracts here.

PHOTO: Niall Ferguson, a British historian, addresses the financial collapse of 2008 at the Newseum in Washington, October 1, 2009. REUTERS/Jonathan Ernst

A young girl holds a picture of Bobby Sands in a republican march to mark the 20th anniversary of the IRA hunger strike at the Maze prison in Northern Ireland May 27. REUTERS/Archive

Barely a week after Margaret Thatcher’s funeral in London, her ghost is stalking the corridors of power. At his press conference on Tuesday in Washington, President Barack Obama was asked about Guantánamo Bay prisoners refusing to eat. In doing so, the veteran CBS reporter Bill Plante, who asked the question, exposed a running sore in the Obama administration. He also invited direct comparison between Obama and Lady Thatcher – who faced a similar dilemma in 1981.

As a candidate in 2008, Obama, a distinguished Harvard-educated legal scholar known in the Senate for his common sense and humanity, promised to quickly close the prison for 166 terrorist suspects in the U.S. naval base at Guantánamo Bay, Cuba. The existence of a U.S. detention center that ignores the basic legal right of habeas corpus and the failure to bring prisoners to trial after so many years “erode our moral claims that we are acting on behalf of broader universal principles,” he said. He went on to repeat his pledge, yet five years on, Gitmo is still open for business.

The president’s embarrassment can be blamed, in part, on his naïveté. For a while after his inauguration in 2009 he appeared to be under the impression he had been elected the most powerful man on earth. It has taken four painful years for him to realize that the division of government guaranteed by the Constitution prevents him from doing not only what he wishes but what a majority of Americans have mandated.

Under the guise of saving money, Congress has stymied the president’s plan to try those believed guilty of terrorist offenses on U.S. soil and to release the 86 innocents who have been held without trial for years. Despite their insistence that they believe in America’s system of justice, it appears that many congressmen have little faith in it.

About a month ago the Gitmo detainees started taking matters into their own hands. Using passive resistance methods championed by Mahatma Gandhi, they decided en masse to stop eating.

This is not the first hunger strike at Gitmo, but it is the largest and most concerted. Of the 166 Gitmo inmates, 100 are refusing food. These include many of the 86 detainees who, according to a task force of CIA, FBI and Pentagon officials, are not terrorist risks and should be let free without charges, as well as some of the 46 the task force said were dangerous and should be detained indefinitely.

This time, the prisoners insist, they are going to get a result. America must decide whether to try them, free them or allow them to die.

Obama’s dilemma is that he is responsible for holding the prisoners, yet he dearly wants to bring to a swift end one of the most troubling episodes in the history of U.S. justice. But a quick fix is not in his gift. Unless he can find a solution, he is condemned to spend the next few weeks watching 100 prisoners trying to starve themselves to death. When he told the White House press corps, “I don’t want these individuals to die,” he meant every word, for the majority of them are blameless and would die under American supervision in barely legal captivity.

What has Thatcher to do with Obama’s predicament? In 1981 she faced a similar problem with imprisoned Irish republican terrorists, many of them tried and convicted of acts of vicious terrorism and mass murder. Looking for an issue with which to embarrass the British government, the killers went on a hunger strike over whether they should be termed “political” prisoners or common criminals.

Using the intransigence that was her stock-in-trade, Thatcher refused to compromise. After six grueling months, the fasting was called off. By then, 10 IRA terrorists had starved to death. Thatcher appeared to have won her point. It seemed the rule of law had been restored and the terrorists roundly defeated.

Obama has little to learn from Thatcher’s obstinacy. There may be terrorists among those now on hunger strike at Gitmo, but about half are already deemed free to leave – if only the administration could find a country to take them. The hunger strikers are not bringing pressure to bear on Congress, which is capable, if it wished, of quickly resolving many issues involved. Instead, the president, pinned between his own base, the obstructive members of Congress and 100 men willing to commit suicide, is feeling the heat.

He must know, however, that Thatcher’s example, painted at the time as another display of the Iron Lady’s indomitable resolution, was politically ruinous. The Irish deaths dragged on for months, with weeping mothers making last-minute interventions to prevent their sons from killing themselves. Each death was met with violent demonstrations by thousands on the streets of Northern Ireland.

Some now suggest that, rather than bolster British rule, the Irish hunger strikers helped advance the republican cause.

The process of trying to save those who are determined to starve themselves to death is not pretty. Nor is the emaciated state of those in their final days of life. Keeping someone from death by force-feeding them is disgusting and barely ethical. The strikers know, as did the Irish terrorists, that it is by attracting publicity, however horrifying, that they may find a solution to their woes.

By trying to kill themselves in the full glare of the press, they are humanizing a problem that many in Washington had hoped would be quietly forgotten. The worse the physical condition of those refusing food, the more pressure will be put on the administration to end the misery.

When the first death is followed by a second, then a third and a fourth, you would have to be a Thatcher to defy the public’s anguished reaction to such needless, pointless death.

The asymmetric warfare used by terrorist organizations like al Qaeda has brought to the fore suicide as a weapon of maximum impact. The September 11 hijackers, armed with promises about the carnal delights of the life hereafter, were prepared to kill themselves. The Irish terrorists, whose murderous attacks on civilians were cowardly, found some sense of valor in taking their own lives in a British jail. Little wonder, then, that suicide has become the weapon of choice for last-ditch terrorists. It makes soft targets indefensible and normal life difficult ‑ and instant martyrs out of those who volunteer to die.

By preventing justice from being done at Gitmo, members of Congress are undermining the American values of democracy and decency they affect to admire and that terrorists so despise. Denying prisoners a trial draws attention to the torturous techniques employed by allied forces to obtain “intelligence” during George W. Bush’s “war on terror,” fans the embers of resentment against us and subverts America’s reputation for fairness and justice.

Obama’s problem is trying to separate in the public mind the 86 wholly innocent detainees slated for release, who simply demand justice, and the handful of terrorists who would rather commit suicide than spend their lives in a maximum security prison in the United States.

By advocating on behalf of the Gitmo detainees, the president runs the risk of being painted as soft on terrorism. But by failing to address the Gitmo issue, he shows the full extent of his impotence. Elected twice on a clear program of reform, he is being held hostage by a Congress that thinks a majority in the House and a third of senators is enough to ignore the public will and bring government to a standstill.

The Gitmo prisoners are the latest victims caught in the cross fire of a broken system of government. One thing is certain: Thatcher would not have put up with it for a second.

Nicholas Wapshott is the author of “Thatcher” (1983) and “Ronald Reagan and Margaret Thatcher: A Political Marriage” (2007). His most recent book is “Keynes Hayek: The Clash That Defined Modern Economics.” Read extracts here.

PHOTO (Insert A): Activists, standing in front of the White House in Washington, demand President Barack Obama close down the U.S. prison in Guantanamo Bay, April 11, 2013. REUTERS/Larry Downing

PHOTO (Insert B):British Prime Minister Margaret Thatcher answering questions at a news conference in London, June 8, 1987. REUTERS/Roy Letkey

PHOTO (Insert C): Irish flag waves in front of a picture of Irish Republican activist, Bobby Sands, who died after a 66-day hunger strike in the Maze 20 years ago, May 4, 1081. Ten prisoners starved themselves to death on hunger strike over policital status. Picture taken May 3, 2001. REUTERS/Archives

Remember the sequester? When seven weeks ago the deadline to find a federal budget compromise came and went, there was much handwringing in Washington. In the event that no agreement was found there were to be cuts to public spending so severe and painful that no one would dare fail to agree. To deter Republicans from holding out, half the immediate spending savings of $85.4 billion was to be found from the defense budget, and, to ensure Democrats would work to find a deal, half from annually funded federal programs. Despite these encouragements to fiscal discipline, the March 1 deadline came and went.

For weeks the word “sequestration” was used so often that commentators and their readers grew sick of it. The headlines moved on. But quietly, without making much news, implementation is well under way and proving just as dire and destructive as advertised. It is hard to fully comprehend the impact of death by a thousand cuts and where they fall. This week the sequester broke surface when it began affecting air travel, causing long delays at airports, which is to be expected when you send 1,500 air traffic controllers home without pay. One in 10 controllers will stay at home on unpaid leave every day until October. With the vacation season looming, crowded airports full of frustrated passengers will become commonplace.

Many cuts have an impact less obvious than gumming up airports. Carnegie Mellon University in Pittsburgh, which relies upon federal sources for 86 percent of its research, is losing $7 million between now and September, while the University of Pittsburgh will lose $26 million, mostly from health research. All other research universities tell a similar story. This fiscal year the National Institutes of Health, the largest federal funding agency for many schools, like the University of Minnesota, is spending $1.5 billion less on research.

Postponing medical research sounds victimless, but it is not if you are among those helped when a new drug comes onstream. It is impossible to list those who will miss new treatments by a year or so but will continue suffering, or even die, as a consequence of the delay. More easy to picture are the thousands of cancer patients being turned away from hospitals because of the cuts. For a cancer center on Long Island, that means not administering the most expensive drugs and telling one-third of its 16,000 patients on Medicare it will no longer treat them.

Air traffic controllers are not the only federal employees being told to take the week off. Staff at the Smithsonian in Washington, which has lost $40 million of its federal grant, and at the National Zoo have followed suit. Managers at the oo stress that the animals will be unaffected, as well as the number of exhibitions, but staff vacancies will not be filled. One rare cut to raise a laugh was that IRS workers are also having to take unpaid leave. Funny, that is, until you realize that one of the reasons for the furlough and the public spending deficit is that not enough Americans paid the taxes they owe.

More troubling for the maintenance of civilized values are the cuts to the police looking after our national parks, which means partial closures and less safe parks, and the truncation of justice entailed in the $350 million removed from the federal court budget, which means fewer public defenders, the state-funded lawyers who help those who cannot afford to be represented. At least 2 million unemployed will be paid 11 percent less in benefits for the rest of this fiscal year.

The trimming of defense spending has already made the world a more dangerous place. There have been many specific decisions taken to reach the $450 billion reduction on defense spending over the next nine years. Routine training of forces has been cancelled, the USS Harry Truman, an aircraft carrier due to station itself in the Gulf, remains in port in Norfolk, Virginia, combat aircraft will not be maintained, and so on. Defense Department workers are being put on a furlough: Civilians can expect to lose one day’s work (and one day’s pay) a week for 14 weeks. As Oklahoma Senator James Inhofe  sees it, “These shortsighted cuts to defense capabilities will not protect our national interests. … A weakened U.S. military will only embolden our adversaries and threaten the safety of our citizens both at home and abroad.”

So far, the sequester appears to have pleased no one, except perhaps those fiscal hawks who agree to anything so long as the federal government is shrunk. The cuts are blind, irrational, hastily arranged, uncaring, arbitrary and dangerous. They are to good economic management what chain-saw sculpture is to Michelangelo’s David. Few doubt that federal expenditure is too high, but even if one is persuaded that cuts need to be made right now – which, as we remain stuck in a stagnant economy, flies in the face of macroeconomic reason – the sequester is the wrong way to make cuts and is already cutting the wrong things.

Although the federal government is reluctant to put a GDP figure on the cost of Hurricane Sandy, it and anticipation of the sequester drove American growth in the final quarter of 2012 into the red for the first time in 14 months. Even with Sandy, growth dropped by just 0.1 percent. The Congressional Budget Office estimates that the sequester alone will cost 0.6 percent in GDP this year. The cuts are not merely the enemy of good economic management but an automatic depressant upon the nation’s economic health.

There seems little sign that a “grand bargain” in Congress to settle the balance between revenue and spending is on its way. Instead weak lawmakers, true to form, are hoping to avoid having to take a decision by busily trying to exempt their pet projects and favorite causes from the sequester. The list of those lobbying to be taken off the hit list includes the homeland security department, drug and pharmaceutical companies, and medical equipment suppliers. But money saved on exemptions must be made up by cuts to other federal programs, only increasing the agony.

It is a mark of how dysfunctional Congress has become that even the failed bipartisan negotiations over gun control count as an optimistic sign that other matters, such as defanging the sequester, could be fixed through negotiation and compromise. Until that happens, we must impotently watch as essential government services slow down and seize up, and as Americans, particularly those at the bottom of the heap, cry out in pain. It will be something to think about as we line up for hours at the airport to catch our delayed planes.

***

Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W.W. Norton. Read extracts here.

PHOTO: U.S. House Armed Services Committee Chairman Rep. Buck McKeon (R-CA) left coins he used to illustrate his point about how sequestration cuts affects defense funding, as well as his notes, on the podium following a news conference at the U.S. Capitol in Washington, March 1, 2013. REUTERS/Jonathan Ernst

There  is room, however, for a small celebration: that the Cassandras have been caught short. Their simple remedy of faith in the abiding value of gold as a hedge against an otherwise treacherous, inflated market has been shown to be flawed.

There have always been those who have advocated cashing out and putting everything into gold against the day the stock market crashed, though the number of investors who genuinely found refuge in gold when the market crumbled in 2008 is probably fewer than goldbugs would like to admit. The flight to gold over the past dozen years has attracted a new form of ardent absolutist who suspects the Federal Reserve and the Treasury do not know what they are doing and who believes quantitative easing to be an evil process that invites inflation. These ideologically driven gold stashers are closely related to, indeed are often the same people, as those who advocate the return of the dollar to the gold standard. Such nervous creatures can only be reassured by the ancient lure of gold as a rock-solid reserve. For the past 12 years the rising gold price has appeared to confirm their lack of confidence in Keynesian manipulations of the economy. Since August, however, when gold started to lose its value, something has gone badly wrong.

It really doesn’t matter why gold has lost its glister, whether it is because troubled banks like the Bank of Cyprus are contemplating selling off all their gold to satisfy their country’s creditors while flooding the market in gold, or because of a general readjustment in all commodity prices, gold included. Gold’s fall shows that it is no different from other, more mundane commodities and that its special quality, an unimpeachable promise of retaining its value through the most turbulent of markets, is a myth. The market in gold is tossed by the same concoction of rumor, whimsy and conflicting signals as any other market. The difference is that the practical uses of gold — except as jewelry and in some industrial applications — are strictly limited. One of the few qualities to commend it is that it is easily shaped into ingots for hoarding.

Gold became a commodity that operated as a currency because it is in strictly limited supply. Its scarcity is its principal allure and enhances its value. But its lack of practical value also reduces its versatility as a traded commodity. Why should anyone, other than a hoarder, need gold? John Maynard Keynes saw little merit in the ritual of digging up gold in South Africa and shipping it for perpetual safekeeping in Fort Knox. He observed that such obscure transactions provided a small amount of employment but did not otherwise help an economy grow. Gold’s scarcity continues to commend it as a safe haven in an uncertain market. But for how much longer? The market has been heading upward for so long, it has come as a surprise to some goldbugs that the price of their favorite refuge can go down. Their faith in gold as an absolute bedrock, expressed to disbelievers with an arrogant air of conviction and complacency, is under challenge.

Central to the goldbugs’ belief system is that whatever governments do to boost an economy leads to inflation. Since Milton Friedman 30 years ago persuaded policymakers that the amount of money in circulation is the sole reason for inflation, so goldbugs have watched in alarm as the Fed has printed billions of dollars. In the past five years, however, despite an $800 billion stimulus and waves of quantitative easing, there has been no inflation. The role of gold as a surefire hedge against inflation is therefore redundant. The post-Great Recession readjustment is mostly being conducted not through inflation but currency fluctuations, with the dollar, the yen, the euro and the renminbi jostling to find a sweet spot that will leave their economies stable and prosperous.

Much of the allure of gold is a hankering after a time of certainty when currencies were backed by ample gold reserves. But this El Dorado is a fantasy. Michael R. Bordo, professor of economics at Rutgers, who has made a study of the comparative strengths and weaknesses of the three most recent currency regimes ‑ the gold standard, the system of fixed currencies established by Keynes at Bretton Woods and the modern regime of floating currencies ‑ concludes that Bretton Woods performed “by far the best on virtually all criteria.” The gold standard is not going to be revived, and those who continue to hoard gold will be deprived of their day of reckoning. They might just as well invest in bitcoins, another speculative commodity with limited supply that promises a false refuge from market uncertainty. But the price of bitcoins, too, wobbles around.

In his recent gloomy economic tour d’horizon, Ronald Reagan’s former budget director, David A. Stockman, was so despondent about the way the economy is being manipulated that he urged everyone to sell everything and put their assets into cash. “When the latest bubble pops, there will be nothing to stop the collapse,” he wrote. “If this sounds like advice to get out of the markets and hide out in cash, it is.” But then what? In the event of a widespread market crash, as Stockman predicts, hiding out in cash or gold will provide a false and temporary feeling of safety. Even if the cash is converted into gold as a hedge, it is the real market in goods and services where fortunes will be made and lost, even in a collapsed market. Hiding out in gold is like taking to a nuclear fallout shelter. Someday, you have to come out and face the world as it is.

Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W.W. Norton. Read extracts here.

PHOTO: One gram gold bars are pictured side-by-side at the Zlatarna Celje in Celje, April 17, 2013. REUTERS/Srdjan Zivulovic

It is no secret that Hagel relishes the chance to slim the armed forces to a more affordable size. It is what commended him to President Barack Obama. He has already commissioned a wholesale “strategic choice and management review” of the Defense Department, which has been told to think the unthinkable in terms of cutting spending. This week, before defending his vision before the House Armed Services Committee, he offered a glimpse into what he has in mind: a slimming of the desk-bound middle management whose pay and perks cost more than the value of their contribution to the nation’s defense; a clearheaded look at the generous health and retirement benefits the nation’s military and veterans enjoy; the abandonment of expensive advanced weapons that may not be necessary; and an unsentimental assessment of the need for all of our domestic military bases.

Hagel invited “change that involves not just tweaking or chipping away at existing structures and practices but, where necessary, fashioning new ones” because “left unchecked, spiraling costs to sustain existing structures and institutions, provide benefits to personnel and develop replacements for aging weapons platforms will eventually crowd out spending on procurement, operations and readiness.” The American military is too large, Hagel argued. “How many people do we have,” he asked, “both military and civilian? How many do we need? What do these people do? And how do we compensate them for their work, service and loyalty with pay, benefits and healthcare?”

Until recently, such a radical approach to military spending would have been greeted with a chorus of disapproval, not just from those whose constituencies include the military bases that provide a vote bank for those who argue for the maintenance of high defense spending, but also from the united Republican leadership. Until George W. Bush left the White House, protecting the strength of the military was a top priority for the GOP. Maintaining high spending on the military, come what may, was a key policy difference with the Democrats to be played up at every turn. Since Eisenhower, all Republican presidents have spent like drunken sailors on the military to counter fiscal conservatives in their ranks who demanded that the federal government be put on a diet. Lavish spending on our forces was used as a counterweight to fiscal conservatism: backdoor Keynesianism to pump money into a flagging economy.

Now all that has changed. Fiscal hawks from the Tea Party rule the roost, and it is hard to find a military hawk prepared to come out in the open and argue his case. The fiscal hawks are behind allowing the sequester to take effect. For defense, this means $47 billion in largely arbitrary cuts by September to forces’ pay, to reducing flying hours for air patrols, to canceling the deployment of the aircraft carrier USS Harry S. Truman to the Persian Gulf, to cutting army and marine training, and other hastily arranged improvised savings that will hamper our ability to respond to events like the craziness emanating from Pyongyang. The fiscal hawks find these hasty, careless, risky, reckless cuts to the military acceptable simply because the sequester shrinks the deficit and shrivels the size of government. In a battle between fiscal rectitude and patriotic military preparedness in today’s GOP, balancing the books wins every time.

In the meantime, the same congressmen resist adopting Hagel’s carefully planned defense budget. Hagel, a former Republican senator from Nebraska and, more importantly perhaps in this context, a distinguished Vietnam veteran who served on the front line as a lowly sergeant, plans to cut tens of thousands of jobs in the military’s middle management. “Today, the operational forces of the military — measured in battalions, ships and aircraft wings — have shrunk dramatically since the Cold War era. Yet the three- and-four-star command and support structures sitting atop these smaller fighting forces have stayed intact, with minor exceptions, and in some cases they are actually increasing in size and rank,” he said. Cutting the numbers of military fat cats “leads to more agile and effective organizations and more empowered junior leaders.” It is time, Hagel said, to “to pare back the world’s largest back office.”

Hagel also proposes closing redundant military bases at home. And he wants to cut the benefits provided to current and former members of the armed forces. In an argument that should appeal to fiscal conservatives ‑ for it is the same argument they make for cutting benefits to civilians ‑ Hagel warns that “we’re not going to be able to sustain the current personnel costs and retirement benefits. There will be no money in the budget for anything else.” If the cuts are not made, the Pentagon would become ossified, “an agency administering benefit programs, capable of buying only limited quantities of irrelevant and overpriced equipment.”

The absolutism of fiscal conservatives should work in Hagel’s favor. In a rare confluence of forces, both sides of the political divide are prepared to consider bringing defense spending into line with the change in the nature of our potential opponents. The age of the big battalions and massed tanks has long gone. We now face dangers that are best met by stealth fighters and bombers, cyber-warriors, special forces making incisive interventions, cruise missiles and drones operated from thousands of miles away.

If Hagel gets his way, we should end up with a leaner and meaner military that is within our budget. But it means some frank talking to those who prop up outdated military structures and who maintain a deleterious system that keeps large communities of families dependent on the Pentagon for their livelihoods, their housing, their education and training. Weaning so many thousands off the Pentagon’s largesse will take courageous congressmen making hard-nosed decisions. But the temptation to dodge the bullet and continue with a bloated military may be too hard to resist, even for those who claim to put fiscal rectitude before all else.

Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W. W. Norton. Read extracts here.

PHOTO: U.S. Defense Secretary Chuck Hagel speaks during a briefing on the Defense Department’s FY2014 budget at the Pentagon in Washington April 10, 2013. REUTERS/Kevin Lamarque