John Maynard Keynes was wrong

John Maynard Keynes was wrong again

For historical record here is a document. It was put into PDF by the Cato institute. I hope students of the history of economics will look back on this as confirmation that Keynesian economics is wrong. I recommend you download that file and review it. It is very short and to the point.

Many Economists, stop short of saying the economists John Maynard Keynes was wrong about his general theory of disequilibrium. When it comes to the realm of pure theory it is something hard to prove or disprove on a macro economic level because there are so many exogenous and endogenous variables that go into large scale economics. It is not like calculating the price elasticity of the price of wheat. Simply put, macro economists have a hard time to prove, why aggregate demand gets stuck at disequilibrium.

I disagree. John Maynard Keynes was wrong. If you just your own powers of observation, it is clear he was wrong.  Keynes was well intentioned but, like Karl Marx, Keynesian economics is fuzzy logic. His economic theory threw back the progress of civilization and the defenders of that paradigm. If governments did not listen to Keynesian professors, we would all have been better off, wealthier and live with more freedom.

Keynesian theory in a nutshell

Keynes believed that aggregate demand (Consumption + Investment + Government expenditures), settled below full employment. This long-term could be a life time for some as ‘in the long-run we are all dead’. Therefore there was need for action. For him inadequate demand (C+I+G) was the cause of chronic unemployment. If demand was increased the economy would move back to a state of full employment. Demand could come from Consumption or Investment. However, when this did not occur, government needs to prime the pump by spending. It is a nice economic fairy-tale but unfortunately reckless and it is beyond me how so many academics and politicians built careers on this idea.

A few reasons why the Economist John Maynard Keynes got it wrong

  • The damage continues: Freedom in the market, balanced government budgets and a gold standard where nullified by Keynes. I personally like freedom, responsible governments and money that can be trusted. Keynes’ economics hurts us today.
  • Milton Friedman proved the basic ideas of Keynesian economics were wrong and not empirical. Friedman argued the basic ideas of Keynesian economics was based on a model of economics that was distant from testable reality. For example, the Phillips curve model (developed after Keynes) was not based on anything empirical, rather just showed a relationship. However, the Phillips curve was not fixed or stable, and certainly not an policy tool. In fact, Government intervention as recommended by Keynes will cause stagflation. Stagflation is inflation combined with unemployment. This was the result of Keynesian policies and reckless expansionary Federal Reserve policies and fiat money. The result will be long-term disequilibrium in the employment market with inflation, unless the market rescues us. Think about the 1970s.
  • Keynes was wrong on a philosophical level. This is because the study of economics and the role of government is not only about sustaining consumption driven booms. Protecting the American consumer is not the highest goal of government. The US constitution never mentioned anything about this. However, it does talk a lot about liberty.
  • Keynes misunderstood the role of the market. He was well versed in classical economics, but blinded by his own ideas. For example, when the economy is artificially inflated with a credit boom, the bubble needs to deflate. If it is not allowed to adjust, the cycle is prolonged. Markets perform the important role of helping people economically.
  • Keynes was naive because Government is an inefficient way of allocating resources. Government stimulus falls under the influence of special-interest politics. It was a justification for government spending and all things most thinking people do not like about politicians.
  • Keynesian economics is forced redistribution of income. Is it the role of the government for to redistribute income on a large scale?
  • The primary cause of a business cycle is disequilibrium in the financial markets which spreads to the real sector. Think of the speculation of the 1920s or the credit boom before 2007. To correct this the financial markets need to adjust including letting large inefficient dinosaurs fall and smaller more efficient and competitive lenders take their place. Hiring bureaucrats or throwing money at a favored industry is wrong and our children will have to pay for this.
  • Keynesian economics believes in central planning. For me, living in a post communist country this is unthinkable. You might argue central planning is a strong word for government intervention, but ultimately what else is it. Someone else knows how to spend your hard earned money than you.

The Austrian school of economics, Lucas, the Chicago school, Monetarist and many others noted and respected economist have clearly warned against following the failed economic policies of Keynes, yet they have been resurrected by for political reasons.

Use your own powers of observation. Think about the current state of political economy in the world. The crisis has lasted from 2007 to 2011 and beyond. Keynesian economics does not work. When we pull out of the crisis it will be in spite of the New Deal II not because of it. John Maynard Keynes was wrong.



8 Replies to “John Maynard Keynes was wrong”

  1. Simon Pringle says:

    Keynes maybe wrong but the Austrians aren’t right either. Adam Smith would not only not recognize the modern version of free markets, but, ruefully despair at how his homeland has suffered under the onslaught of free markets, indeed, the invisible hand has been replaced by the invisible boot.

    George Orwell had an equally stark quote incorporating a boot, and, he knew both poverty and the forces of real power.

    If you want to understand economics first leave your ivory tower and walk the bare earth, barefoot like Socrates.

    1. Mark Biernat says:

      Very poetic but what is you point? Economics is me doing business with you. That is economics, it is not some abstract theory in the aggregate. When I make something, sell something or perform a service a buyer will compensate me on his subjective interpretation of the value of those goods or services. If my price is too high he will look elsewhere or forgo the utility offered to him.

      Let the markets work. Most variations of that including a huge middleman called the government, the king or the feudal master or involved in the redistribution of productive endeavors are disincentives and slow the growth of wealth and happiness for all.

      I mean if you want to hire me for doing programming, just do it. Why have a third person called the government bureaucrat engineer the process in the control room of Washington like the Wizard of OZ.

      1. Plasticmoney888 says:

        “Why have a third person called the government bureaucrat engineer the process in the control room of Washington like the Wizard of OZ.”

        Because they benefit from your labor. They justify there income by pretending it benefits us with constant virtuous sounding propaganda and if you don’t like it there nothing like the use of force. Government is a tool that protect three groups.

        A) The so call public servants, Numerous Overpaid Noncompetitive Bureaucrats and all there privileged and benefits.

        B) Crony Capitalism that hate competition and lobby all year long to get more Protection, Favorable Regulations and Subsidies.

        C) The welfare state that maintains a large percentage of the population in a generational and permanent state dependency.

        It’s to big and as become a corruption magnet.
        The real economy as manage despite of them not because of them but it’s getting more difficult as the monster grows.

        People forgot that the Government as no right it’s the people that have right and there only role should be to work for us in protecting our liberties.

      2. Debasish Das says:

        Economics is not all about micro it is also useful to study macro dynamics. Thanx

  2. Plasticmoney888 says:

    Thanks good post and info mark.
    John Maynard Keynes at one time was broke and was subsidized by his father. That may be how he got is big spending theory. Ha ha ha …
    The only difference was that his father gave him real money but when Government spend money from haven it does not stimulate demand it dilutes the buying power of almost every one.

  3. Stacy Anne says:

    Aren’t governments meant to be there to well… govern? Government spending is just as easy to start as to stop. Cutting spending can be done and is widely supported in our government. Sometimes we don’t have time to just wait for the economy to recover, that was the point of Keynes’ theory anyway, to get out of a recession.

  4. Debasish Das says:

    His was a very simplified analysis of the complex world & his policies at best works like a sugarpill. though if it has been taking for a long time it will prove to be disastrous. It works like an illusion for the stateman, to curb a malaise with ill diagonstic & drugs, result in a fueling of inflation & euphoric bubble, boom without growth with jobs. Hopes lie on rebound or rebouncing of private economy market through investments, launching new products through innovations, farsightedness, scientific & technological breakthrough & pulling up & pushing through of markets’ optimisim by the private economy market investors, business entreprenuers.

  5. Seer Clearly says:

    Keynes was very analytic and could prove his ideas. Unfortunately, the authors of this article and the following comments rely in “well I believe it so it’s true” arguments that don’t stand up well to Keynes’ analytics. Sorry, Keynes was not wrong because you think Neo-liberal/Free Market/Trickle Down/Corporatist economics should work. Whether you believe Keynes or not, every application of Free Market/Trickle Down in the world has failed miserably, creating greater stratification of wealth and lowering GDP. What it has not failed at is producing billionaires, so my theory is that these neo-con magical economic theories are actually a secret plot by billionaires to wrest control over the economy. The implied aim of economics is to improve the economic welfare of everyone. These magical theories, however, don’t do that. I’m thinking that’s intentional. However, a more learned analysis of why people cling to discredited economic ideas is given at prospect.org/article/why-economists-cling-discredited-ideas

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