The question of interest shouldn’t be “what would Keynes do” but rather “why even listen to someone so pompous and nihilistic to begin with?
While Keynesianism appears to have a benevolent, humanistic intent it is greatly disappointing that so many of its advocates do not also recognize its destructive aspects.
In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy.
What’s Wrong with Keynes
Lengthy and worthwhile read on the mythical Keynesian ‘multiplier’, why ‘stimulus’ didn’t - and doesn’t - work, and the key relationship between consumer confidence and the economy.
HT @abnormalreturns for the link
Amplify’d from cafehayek.com
For many people, economists and non-economists, nothing could be more intuitive than the idea that giving people money stimulates the economy. I think they have two fundamental ideas in mind, two ideas that are somewhat related. The first is the multiplier. If the government gives A one dollar to spend, A spends it on something B produces, encouraging B to hire more workers. But it doesn’t end there. Now B has money now who spends it on C and so on. Because people save part of what they spend, A’s spending is less than a dollar, say .9. Then B spends .81 cents (.9 x .9) and so on. If you do the math (and if everyone spends 90% of what they earn) then this infinite series leads to a total amount of spending equal to $10.
This metaphor of the car that needs a jump start or the ship that needs a push because it’s hit a patch of water that’s windless, has a certain compelling feel to it. But it really has no intellectual content. It’s an ex-post story to make you feel good about spending money. There’s no there there. So when a Keynesian is confronted with the fact that about $800 billion dollars of spending was promised in February of 2009 (and more than half of it has been spent) but unemployment has barely budged, well that just proves how bad the economy was in February of 2009.
The whole circular flow idea that underpins the Keynesian story is bizarre. It’s a veil that disguises what’s really going on–the trades and exchanges I’m able to make as a worker and consumer. The car analogy is flawed. What keeps the economy going is our mutual creativity and cooperation, not our spending. The spending is just a result of our underlying productivity and desires to consume out of what we produce. Part of the circular flow story is correct–there are a set of forces that keep the whole thing going on its own–but those forces are my skills and productivity and your skills and productivity and how they all fit together–what Arnold Kling has been calling PSST, patterns of sustainable specialization and trade. I would remove the word “sustainable” and stick with PST. The word “sustainable” suggests a transience or fragility that may or may not be important. Suffice it to say for now that in good times, the patterns of specialization and trade are changing constantly, as demand for products changes, as new entrants to the labor force bring different skills to the market, as tastes change and so on.
So the fundamental stimulus question is this: does government borrowing a lot of money and spending it on tax rebates and grants to the states and some infrastructure (not much) and some other things, does that make people less confident or more confident about the future. Who knows? There’s no easy way to measure confidence, especially among the people who are relevant, those who are considering hiring new workers. But it is plausible that running up much bigger deficits reduces confidence and increases anxiety. It is plausible that the whole Keynesian circular flow story breaks down or at least works less effectively when people are anxious about the future.
See this Amp at http://bit.ly/gWWvX0
