Monday, September 7, 2009

Economics - Keynesianism

With all of the economic news of the past year or so dating back to the 2008 downturn, there seemed to be a huge deal of focus on this debate of what caused the downturn and what should be done to put us on the right path.

Having taken both Microeconomics and Macroeconomics in college, I had a pretty basic knowledge of the theory behind many elements of economics. Clearly, Macro-econ teaching is heavily tied to the theory of John Meynard Keynes. Basically, his theory relates to the fact that gov't should step in and stimulate spending when the private sector contracts or shrinks to keep employment sustained which will lead the economy to recovery. In a nutshell, if we drop money from a helicopter into the economy, it will get the economy going again.

I argue that Keynes theories are flawed in several ways:

1) All of the money needs to come from somewhere and it can't just magically be grown on the infinite money tree. Before sending money INTO the economy and to workers, corporations, etc... it first has to take money FROM the economy. Gov't doesn't boost nation income, it only redistributes it. The notion of "aggregate demand" make assumptions that our gov't can and should be some sort of "central planner". In free market made up of individuals making their own decisions on how to be productive, build wealth, spend money, and make their own decisions ... how can a central planning board possibly know better than the market what ample demand should be at an "aggregate" level? The answer is that the gov't cannot know better than the market. Does my neighbor do a better job telling me how to spend my household money than I do?

2) When gov't continues to spend money on a given spending item, subsidy, or public works program, the receiver of that money becomes addicted to it and continually relies on it in perpituity. Take cash for clunkers for example. The central planning keynesians putting the progam together estimated the "aggregate demand" for the progam would last 3 months with $1B of resources alotted for it. The "aggregate demand" projection was undoubtedly wrong and it only lasted one week. Now, instead of looking at the mistaken allocation of funding and mis-diagnosed reading of demand, the gov't called the program a "success" and allocated an additional $2B to last to the original end date in Oct/Nov. The extention only lasted 2 additional weeks. This program while it stimulated demand did not make the receivers of the program any wealthier or more productive other than having received a federally subsidized rebate for the their shiny lawn mower with 4 windows.

Bottom line, we cannot expect the central planners in Washington to know how to allocate resources or know what type of "aggregate demand" is needed. That is for the market to decide. The Keynesian model is flawed in so many ways, but mostly because it relies on government intervention to facilitate a planned economy. Let free markets ring!

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