Keynesian exuberance for the powers of stimulating demand or the ‘consumer’ has been in vogue since the 1930s. It is sheer nonsense which is taught in every school across the globe. Keynesian economics is little more than intellectual pablum used by those in power or by a technocratic and largely illiterate elite to increase their power; enhance government; print money and otherwise destroy normal economic relationships. Keynes’ theory, so believed by professors is in practice a disaster.
Keynes was a left wing wall flower and a member of the deranged Bloomsbury group of inter-World War British pacifists. He was an arrogant theorist who truly believed in the magical elixir of large government and in the technocratic dream of controlling billions of personal, business and economic decisions, to programmatically construct a perfect world order. Keynes gave intellect and jargon filled cover and rationale to politicians and demagogues who would cite his book, ‘The General Theory of Employment, Interest and Money’, to justify state interventionism.
According to this theory which has failed in practice every time it has been tried, governments can stimulate an economy through granting consumers, workers and businesses sums of borrowed money. This is termed a ’stimulus’. This debt or current deficit financing stimulus, is then paid back or retired, when the economy strengthened by consumer spending and business investment, produces a surplus of tax revenues. The stimulus is needed, so argued Keynes, to overcome business cycles, downturns and unexpected events which would decrease jobs, increase unemployment and impact state revenues. By macro and micro-managing economic and production processes, the state, so thought Keynes, would avoid cyclical variations and ensure that the lowest level of unemployment could be maintained. Government power was thus indispensable to full employment and income equality.
There are many problems with such a counter-rational plan to economic management. None of Keynes’ core assumptions make sense when they are analysed either separately or together. Business cycles have historically been caused by governments, and they are usually a response to government policies to increase the size of the state through trade barriers, higher taxation, more spending, more regulation and programs of fear and compliance. The Great Depression, the 70s Stagflation and the current financial crisis are all obvious examples of this fact. Government causing economic malaise would appear to mean that government programs are not the solutions required to either get out of an economic downturn, nor to prevent future derailments from taking place.
The main impact of Keynesian economic stimuli is to increase debt; raise future tax rates and distort the normal functionings of economic markets and personal and corporate decision making. Governments choose winners and confirm losers. The winners will include companies which get bailed out, those receiving welfare, unions and others having their jobs protected, those receiving redistributed incomes and those paid off for political support. The losers invariably include firms both domestic and international who want fair and free trade; higher income families; small businesses who are classified under high income categories; future generations who must pay off the debt; and consumers who pay a higher costs for all products and services.
Under Keynesian philosophy, government and technocrats assume the role of God. Given the poverty of God heads throughout history, this is probably not a noble supposition to support.
Brian Reidl from Heritage Institute wrong an excellent article recently on the fallacy that government spending, or what is termed Keynesian deficit spending, run by God-heads, is beneficial (see Reidl
http://www.frontpagemag.com/Articles/authors.aspx?GUID=220a4261-b3c8-4338-a5be-62bcc3f3b8d3). In this article he makes the following important points about demand-side management and the Keynesian fetish for economic control.
“Government cannot create new purchasing power out of thin air. If Congress funds new spending with taxes, it is simply redistributing existing income. If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If Congress borrows the money from foreigners, the balance of payments will adjust by equally reducing net exports, leaving GDP unchanged. Every dollar Congress spends must first come from somewhere else.
This does not mean that government spending has no economic impact at all. Government spending often alters the consumption of total demand, such as increasing consumption at the expense of investment.”
When stimulus packages are created the money has to come from someone via taxes, or be printed. Both are net negatives to the economy. Economic growth only results from producing more goods and services (not from redistributing existing income), and that requires productivity growth and growth in the labor supply as productivity not only increases wealth but also wages and wage opportunities.
Historically of course government spending has reduced productivity and long-term economic growth due to some obvious reasons. As government spends more it raises taxes which reduces profits, productivity and wage and job creation. As government incurs more debt through stimulus and demand side packages it reduces the incentive to produce and displaces money by removing the more productive private sector from the economic equation and replacing it with a far less effective state dollar, taxed or printed on government printing press. The inefficiency of government policy in health, housing, education, and general industry are obvious creating huge costs which must be borne by ordinary taxpayers – ineffective solutions at a higher price one can say.
And as Reidl sources and proves:
“Mountains of academic studies show how government expansions reduce economic growth:
1.Public Finance Review reported that “higher total government expenditure, no matter how financed, is associated with a lower growth rate of real per capita gross state product.”
2.The Quarterly Journal of Economics reported that “the ratio of real government consumption expenditure to real GDP had a negative association with growth and investment,” and “growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment.”
3.A Journal of Macroeconomics study discovered that “the coefficient of the additive terms of the government-size variable indicates that a 1% increase in government size decreases the rate of economic growth by 0.143%.”
4.Public Choice reported that “a one percent increase in government spending as a percent of GDP (from, say, 30 to 31%) would raise the unemployment rate by approximately .36 of one percent (from, say, 8 to 8.36 percent).”
It is obvious that Keynesian economics and demand management are tools for fools. Wealth, a better society, a cleaner world, a higher level of development is not coerced by government. It only occurs when free people operating in free markets are allowed to interact and determine the price and supply of various goods and services. Government involvement ensures the opposite and is a theory mired in cultish theological absurdity.
C. Read
http://www.articlesbase.com/news-and-society-articles/keynesian-economics-is-a-failure-681943.html
7 Responses to “Keynesian Economics is a Failure”
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What are the main reasons that Supply-Side Economics has been so successful and Keynesian Economics a failure?
Examples of Supply-Side: Harding, Cleveland, Kennedy, Reagan, Clinton with GOP congress, George W. Bush first term
Examples of Keynesian: Hoover, FDR, Johnson, Nixon, Ford, Carter
Keynsian economics is the basis for modern supplys-side economics.
It’s not a failure.
As time passes, we learn more, that’s all. With Reagan and Bush, we now have proof that cutting taxes opens the floodgates on our economy. You have to be an idiot if you try any other way.
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You are over-simplifying to the point of irrelevancy. You have said nothing here.
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Keynesian economics, at it’s worst, is the meddling of government in market affairs. It is the troubling act of government thinking that they know best, when often they haven’t a clue.
All growth of any sustained value has been realized during supply side cycles. Everyone runs to Keynes ideas when we have a downturn in the market. It’s really a sight to see. Like a bunch of toddlers running for their mommies.
Market predictions are much sharper today due to the increased computing power available. Recent studies have shown that FDR’s meddling only prolonged the Great Depression. And I wonder what the USA would be like had Hoover not burdened us with the IRS?
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Get someone to help you with the book you are reading, big words can be confusing.
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I believe Keynesian econmics are a faliure ( and that may be too hard of a word, tough would be better) due the the inablity to adjust for peoples confidence level or financial mindset. If you tamper too much, it could Unnerve investors causing a spiral effect. Look at the 700b egg we just laid, Hard to tell if its helped much. Think you just have to be light handed with them. Reagan did nothing after the 87 crash and we were fully recovered in a year and a half. fdr screwed around alot and we hit a depression for the better part of a decade.
But remember even Reagan and clinton used some Keynesian economic tools.
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Really depends on the context you are using.
Keynesian economics evolved at a time with different economic structure and demographics. American population was young by today’s standards in the 1930’s through to the 1970’s. The main industry was manufacturing. Economies of scale overwhemingly worked in America’s favour. Government involvement and services were relatively limited before this era. The root of Keynesian economics was to prevent the down-turns in the natural cycle of Capitalist economies. That was… basically increase government spending and lower prime interest rates when the economy is bad… and lay off when the economy is good. This would kick-start the economy back into the cycle again.
America still, in a way, practices this.
Keyenesian economies worked very well in Europe post WW2. Massive infrastructure and welfare state economics maintained a middle class of workers who consumed and produced the majority of the goods.
After the 1980’s the economy re-structured. The main industry since then (and is growing) is the tertiary and quaternary industries… basically service and IT industries to a large degree. The demographic is also older.. much older in fact… if it weren’t for immigration the US population would actually decline due to a rising death rate and lowering birth rate. This means the demand for government services began to supercede income generation. It was easy to fund things when the population was young and working. Not so easy when economic re-structuring has seen the real wage fall, and the demand for public service funding rise.
The result…. cut spending. Privatize more, engage more in public-private partnerships in infrastructure and services. So you really have the supply side economics at work…. essentially it’s more of a trust in the market place.
But is it really more successful? I suppose in a way.. since NAFTA and the re-structuring the economy the standard of living has increased in America (although lately the real wage is falling, technological and innovational creations have offset this decline to a degree). However.. many argue this is simply a victory for corporations who are now able to operate multi-nationally… primarily in the manufacturing sector where they can now freely re-locate to take advantage of poor environmental law enforcement and cheap labour offered by the developing world. Some have argued this is (as well as the rise of low-skill service sector employment outnumbering high skilled), has caused the Middle Class to dwindle. The Middle Class… as history is shown (look up post WW2 Europe)… is quite an essential element to a stable democratic structure.
Keyenesian economic practices in the 1930s up to the 1970s are no doubt out-dated. Governments simply cannot afford them int he new era. However… to a degree they do help retain the bouyancy of the Middle Class.
So… that’s a tough question really. I think it deserves alot more study by geographers, economists, sociologists, and government officials.
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