Will Keynesians Please Answer?

There is not much to add to this post by Steven Horwitz. Obviously, the Keynesians will say that it is too simplistic; that economics is more complex, more “nuanced.” Well, no it isn’t! Only if you are selling snake oil do you have to avoid simplicity and straight-forward questions. Only if you are on the government payroll or aspiring to get there do you have to be afraid of questions like these. Or only if you are a technician, incapable of independent thought and brainwashed by a government-funded economics department should such questions upset you.

Bravo Professor Horwitz.

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Five Questions for a Keynesian

posted by Steven Horwitz, Guest Blogger at 10:28 AM on 12/24/09

Steven HorwitzIn the wake of last fall’s financial market chaos and the deepening of the recession, Keynesian economics, largely left for dead by the economics profession for the last 30 years, has made something of a comeback, at least among pundits and politicians, neither of whom have sterling reputations as sophisticated consumers of economics. But they are not the only group clinging to Keynesian fallacies in the current world of endless bailouts and stimulus packages. Many Keynesian fallacies have become part and parcel of the average American’s understanding of how to fight recessions. It seems that, like foxholes and belief in God, a good recession turns everyone into a believer in big government. You may have even talked to some of these people, perhaps at a Thanksgiving dinner or holiday party.

So before you go to your next get-together where such a conversation might take place, I offer you five questions you might ask such a person, just to get their critical thinking juices going and perhaps poke a few holes in their worldview.

1. Why did Keynes think savings was bad if when people save through financial intermediaries they give control over resources to the banking system, which in turn will lend that out to firms to create capital and new jobs?2. How does government spending create jobs and wealth if the resources that government spends must ultimately come from the private sector, through taxes or reduced borrowing due to government borrowing more (or inflation), and the private sector would have spent it either on consumption directly or on investment through savings anyway?

3. If one of the problems of the housing boom is that we put too many resources into housing and finance, how will a Keynesian government spending package know where that spending should have gone instead?

4. Keynes frequently wrote about the importance of the uncertainty of the future and the way that made things difficult for private investors and for the connection between savings and investment. Why doesn’t that same uncertainty prevent governments from knowing exactly how much and where they should be spending in a recession, especially because markets have prices and profits as signals to help entrepreneurs navigate that uncertainty while government bureaucrats do not have similar signals?

5. Given the enormous role that government interventions played in causing the current recession, from the expansionary policies of the Fed to GSEs like Fannie and Freddie, to misguided regulations in housing and banking, why should anyone believe that the same government actors will know how to solve it?

Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University. His opinions do not necessarily reflect the views of Nightly Business Report. To learn more about Steven Horwitz, read his bio.

2 Comments

  1. I am amazed at how the ‘experts’ blame Keynes for problems that did not exist when he was alive and was trying to deal with global problems that had the potential of destroying the free market system. Which of these can be blamed on Keynes? derivatives, SIV, mortgage fraud, collateralized debt, earmarks, endless wars and militarism of the USA, entitlement programs so generous they never made sense, the destruction of key US manufacturing industries by mismanagement and goofy tax policies. . Keynes realized that post World War I there was not only the enormous task of rebuilding much of Europe but economic and currency problems were threatening to make that impossible. Stability was essential and government was the key player of that. I often challenge the Keynes haters to explain why his concept of spending for peace was inferior to spending for war. Most believe the Depression ended by the necessity of spending for World War II. Somehow, weapons and further destruction of the means of production [Europe gets smashed again] is good but spending roads, bridges, dams, schools is bad. Few who bad mouth Keynes ever read what he wrote. He never argued for all deficits all the time. He never said Tax and Spend just to get elected. It is so convenient to blame someone else for your own stupidity..

    1. Elvis9,

      You are quite right to differentiate between Keynes and the Keynesians. It is difficult to claim that Keynes himself would or would not have approved of his “system” as it evolved. In one respect, I believe he would have been in general agreement. He was an elitist who believed in central management of the economy. His preface to the German edition of his General Theory makes that quite clear.

      On the other hand, Keynes never advocated unending deficits. He advocated surpluses as the norm in “good” times. That he could not or chose not to see what the political class would do with his system was shortsighted. Contemporary critics, Jacob Viner for one, clearly saw and warned of the deficit and inflation bias.

      Regardless of how one feels about Keynes as the person versus Keynesianism, the two should not be conflated. What Keynes said and what politicized Keynesianism says are not the same.

      Having said all of this, I am still dubious of any macroeconomic approach to the economy, be it Keynesianism or Monetarism. The basis for economics is behavior. Only individuals act. Aggregates do not. Was the paradigm shift known as Keynesian economics a wrong turn? Are the problems we now face merely a composite of wrong economic policy for multiple decades?

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