Keynesian economic theory is the social-science version of a perpetual motion machine. It assumes that you can increase your prosperity by taking money out of your left pocket and putting it in your right pocket. Not surprisingly, nations that adopt this approach do not succeed. Deficit spending did not work for Hoover and Roosevelt is the 1930s. It did not work for Japan in the 1990s. And it hasn’t worked for Bush or Obama.
The Keynesians invariably respond by arguing that these failures simply show that politicians didn’t spend enough money. I don’t know whether to be amused or horrified, but some Keynesians even say that a war would be the best way of boosting economic growth. Here’s a blurb from a story in National Journal.
America’s economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today. Nobelist Paul Krugman, a New York Times columnist, and Harvard’s Martin Feldstein, the former chairman of President Reagan’s Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. …Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact “exogenous” shock like a major war — something similar to what Krugman called the “coordinated fiscal expansion known as World War II” — would be enough to break the cycle. …Both reiterated their previously argued views that the Obama administration’s stimulus was far too small to fill the output gap.
Two additional comments. First, if Martin Feldstein’s views on this issue represent what it means to be a conservative, then I’m especially glad I’m a libertarian. Second, Alan Reynolds has a good piece eviscerating Keynesianism, including a section dealing with Krugman’s World-War-II-was-good-for-the-economy assertion.
International Liberty 
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[…] his unwavering support for Keynesian economics. I’ve addressed that issue here, here, here, here, and here, so I don’t feel any great need to rehash all those arguments. I’ll just ask […]
[…] his unwavering support for Keynesian economics. I’ve addressed that issue here, here, here, here, and here, so I don’t feel any great need to rehash all those arguments. I’ll just ask […]
Heh. That title just gave me a rather amusing mental image of adolescents in tie-dye spitting on Hank Paulson as he walked down a gangway from the Treasury Building.
Boy the conspiracy nuts are gonna love this one next time it hits the fan – hell, maybe I’d be willing to entertain the idea myself. Either way they’ll have a lot to talk about with these guys, since they seem to be into the correlation/causation fallacy too.
God needs a whole new Circle of Hell to send people like Krugman. I don’t recall any area from Dante’s Inferno that takes, “indirectly urging mass death and destruction by intellectual ineptitude”, into account. But if God is listening, might I recommend an inner ring where the souls of the Keynesian damned continuously attempt to put out the pit of fire they’re standing in with an endless supply of kerosene.
Okay, okay, don’t call the FBI. Obviously I was only joking.
… if I wasn’t it would have been napalm.
“Keynesian economic theory is the social-science version of a perpetual motion machine.”
LOL. I recently wrote a blog post titled “Stimulus spending: the new perpetual motion machine.”
Spending, err, I mean “investing” a trillion Dollars in a stimulus program didn’t help the economy. Obviously, they should have spent a quadrillion Dollars or maybe even a quintillion!
Of course when Mr Mitchell says “It assumes that you can increase your prosperity by taking money out of your left pocket and putting it in your right pocket” Mr Mitchell is near right because the main reason of the “stimulus” failure is that in say, 99.9% of the items spent on, the damage done by government spending will be greater than the “stimulus” done. (I just make up that 99.9% figure)
What is shocking to me is how Mr Mitchell says something equivalent to “government cannot stimulate”.
In a Latin American country government stimulated the economy by building a badly needed road. For decades very little important roads were built, bureaucracy consumed in salaries monies which supposedly should be invested in (badly needed) new roads. But, when the 2008 crisis came, government built that much needed road.
If private sector could build such roads then that road would have been built zillions of years ago, because it was so much needed. But because government simply spent money on other things then when the road was built it was very beneficial. By not builiding essential stuff governments can be very productive by actually builiding stuff that should have been built zillion years ago.
That was a real stimulus for the economy. That is my point. I do not think Keynes style nonsensical spending would, on aggregate, stimulate the economy
In my opinion government can increase prosperity, if it could not then we should be arguing that government spending should be zero and we are not arguing for that.
Government can pay the salary of someone like Louis Pasteur, a scientist that made very important discoveries being a government employee, and in doing so it helps growth. But for every Pasteur there are perhaps tens thousands little productive government jobs.
I think what matters is what kind of investment and spending the government does, exactly as it happens in private enterprise: There has been so many sound businesses that have been bankrupted by stupid investments. Of course pork barrel spending like Obama’s “stimulus” will increase growth only in bureaucrat regions and will ruin tons of other activities, but that is a reason for the “stimulus” failure that is different from the “taking money from one pocket to another” reason.
Not only governments do zillions of pork barrel spending, but many public spending is downright extremely damaging, like spending on taxing and regulating businesses forcing millions of businesses to hide in the informal sector because those businesses simply are not productive enough to pay for the exorbitant taxes and regulations imposed by the political class. The Third Word exists, in my opinion, mainly because of unaffordable exorbitant high taxes and regulations that force hundred millions enterprises to be informal and to be persecuted by governments instead of being protected.
I think Keynes central logical error (he has tons of them) is that he postulates that there is a FIXED relationship between consumption and output. He reasons like this: 1% of my income is spent on burgers. There is a FIXED ratio between the amount spent on burgers and my income. Therefore if I multiply by 1,000 the amount I spend on burgers then, thanks to that FIXED ratio, my income will be too multiplied by 1000!. Of course Keynes do not uses burgers and is not so downright clear as I am here because if he did so it would be obvious how ridiculous Keynes assertions are: Keynes not only is confuse but he uses investment and consumption which sounds more reasonnable but what he says is as nonsensical as what I just said about burgers. That kind of FIXED ratio never exists; of course things have ratios but not fixed as he dogmatically asserts, I may spend 1% on burgers this month and 1.5% next month, but there is NO magical FIXED ratio between burgers and income
From that nonsense, which is simply postulated, not proven, he builds a huge building of nonsense. We cannot even clearly split production between investment and consumption but Keynes theory is so utter absurd that, if we could bring the “propensity to consume” 1, the “keynesian multiplier” would be infinity (!!!)
I think government spending in the USA should be lower than 10% of GDP, during the 19th century US total government spending was lower than 10% of GDP and the USA became THE WORLD SUPERPOWER. Even tough some statistical work built on GDP (keynesian?) figures show a higher -for growth- optimal government spending, I think the utter prowess of the 19th centuty USA is enough proof that the the optimal for growth government spending is lower than 10% of GDP. I know statistics that show a higher growth in the USA in the 19th century.
When I see GDP figures that say that GDP per capita in Norway is 90 times what it is in Nicaragua or Vietnam I laugh. That is ridiculous. Those figures do not make much sense and anyone can, with google earth, make a “virtual” trip to Nicaragua or Vietnam and see that that 90 ratio is nonsense.
The PPP adjusted GDP figures (figures adjusted for purchasing power) , that show the 1960s ultra poor Singapore today with much higher output than the 1960s super rich Sweden, are figures that make much more sense.
When England was ruled by Adam Smith’s science it was the world’s superpower. Today, ruled by John Maynard Keynes pesudoscience, England, as a superpower, is joke (you should look use the size of the english economy in PPP adjusted figures)
The industrialised world is simply repeating England path , it is becoming every day a lesser part of the world economy thanks to John Maynard Keynes pseudo science, “stimulus” will bring them even more stagnation .
This is my very first post. I hope it will get published. IMy future posts will be much shorter.
Short interview with David Stockman you might enjoy:
http://www.thefiscaltimes.com/Issues/Budget-Impact/2010/10/06/David-Stockman-US-Is-in-Race-to-the-Fiscal-Bottom.aspx
I’ve said it before and I’ll say it again; If Keynesianism requires a world war to work, we should pay a bunch of people to dig a ditch and bury Keynesianism in it.