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.