Where Keynes Went Wrong
John Maynard Keynes has been one of the
most influential figures in economics. He advocated government
deficit spending to stimulate demand in order to drive economic
growth. His theories had a vast influence on 20th century
economics, and they have been credited with saving capitalism.
Right now we are seeing the negative
results of the policies that he has advocated.
Keynes' most famous statement was, “In
the long run we are all dead.” Aye; but we have our children to
think about. And the people who do not do that are scoundrels who
leave the world in a worse shape than they have found it.
Deficit spending has proven to be a
disaster. We see that with Argentina; we see that with Greece.
Deficit sucks the investment out of the productive sectors of the
economy, leaving less money available for investment in business
development. The result is a sluggish economy and, in case of default
on the debt, a huge economic crisis.
Keynes's second most famous statement
has been the argument that economy – and in particular the stock
market – are governed not by “rational self-interest,” as is
the premise of classical economics, but by “animal spirits.”
Animal spirits is a judgmental term; but there is a truth to what
Keynes said on this matter. Most economic decisions are not made
based on “rational self-interest.” They are based on
psychological factors. And it is important that this argument be
made.
Why are most economic decisions based
on psychological factors? Because, time and time again, we see
superior marketing dominating the marketplace with inferior products.
With VHS vs. Beta, Microsoft vs. Borland, and fast food chains vs.
mom-and-pop shops, inferior product has dominated the marketplace by
virtue of superior marketing. Marketing is based on psychology; and
the inferior products that rise to dominance do so through a superior
use of psychology.
Keynes himself was a master in playing
the stock market; and his insights on what it is based on still hold
truth. But his advice for deficit spending was a disaster. Deficit
spending is justified in addressing emergencies such as the Second
World War and the 2008 recession. But as a way of life it is a key to
ruin; and we have the example of Argentina and Greece to show that.
In recent history, it was the Clinton
administration that did anything effective about the deficit. The
economy boomed vastly under Clinton, allowing me as a person in his
early 20s to earn $80,000 a year. I have not earned anything close to
that in the following decade. Clinton achieved both economic growth
and fiscal sanity. The administration that followed destroyed both.
Keynes got some things right, but many
things very wrong. Deficit spending is a burden that people place on
their children. As a parent I have nothing but hatred for people who
do that. My daughter deserves to live in a better world than I have.
And it is my duty as a father to make sure she does.
posted by Ilya Shambat at 1:04 AM
1 Comments:
Keynes advocated that the government spend more than it took in for taxes during recessions, and then collect enough to make up for it during booms. In theory this would help to even things out.
Of course the US Congress was happy to spend more when they had an excuse, but not to raise taxes during good times to slow things down.
The deficit doesn't mean what it would seem to. The government prints money. It could print as much as it wants. It's supposed to try to keep about the right amount of money that people want to circulate, so that prices stay reasonably predictable. Since we don't trust politicians to do that, we wound up with the Federal Reserve that does a complicated money-shuffle to try to adjust the money supply. When Congress agrees to too big a deficit, so that banks etc don't want to buy government bonds at a reasonable price, the Fed steps in and buys them. Then it arranges to take enough money out of circulation from other sources that we don't get too much inflation. It's turned complicated and mysterious because we don't trust the elected government to do the right thing.
You made $80,000/year because of the dot.com boom. A lot of businessmen believed they had to sell over the internet. They didn't have a plan for how to make money that way, but they believed they would lose everything unless they did it. So they invested whatever it took to do that. You had skills they needed and there was a shortage of people with those skills, so you made money. About the time those businessmen realized that they did not have a plan, that the money they spent was not going to pay off, they quit doing it. The bubble had burst. The jobs were gone.
It was not because Clinton didn't have a deficit. Clinton didn't have a deficit because of the money businesses were spending, money that did not and could not bring them profits. It wasn't Clinton doing something right, it was just the bubble.
It could be argued that we don't have to do things this way. As it is, the economy is built on debt. Every dollar that's circulated is a dollar that somebody borrowed from a bank. Those dollars have to be paid back with interest, but people can borrow enough money to do that. IT's kind of a crazy system when you think about it.
WE could design a system that did not depend on banks to decide how much money to lend. We could do it without debt. We could almost certainly design something that worked better.
But powerful people want us to do it this way. Bankers, for example. No politician can get elected who goes against the banks. It's political suicide to do that. So we're stuck with the system we have.
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