Hey there. If you’re reading this, it’s either you’re one of the four people,
me included, who read this blog regularly, OR someone you know has linked you here
to save you from your pathetic status as a Keynesian (I keed, I keed).
Let’s get started.
0:01
KEYNESIANISM IN A NUTSHELL
The Keynesian blames economic crises on a ‘lack of
aggregate demand.’ During a depression, many people and much equipment are rendered
useless because no one is there to patronize their goods and services.
This demand gap is to be filled by increasing government spending,
or lowering interest rates to make spending more affordable. And by boosting demand
to meet supply, money flows around once more, raising employment and
productivity.
Who’s to argue with this? Who could possibly oppose spreading the
wealth and giving people back their jobs?
0:46
THE REALITY
It’s such a pleasant scenario, that I’m hesitant to ask:
With the stimulation of demand, what happens to prices?
(Prices go up).
What do high prices indicate of supply?
(That supply is falling)
Why would supply fall in spite of more money/’wealth’ in the
system?
1:34
INCREASING PAPER DOES NOT INCREASE RESOURCES
Because the entry of new monetary notes into the system does
nothing to increase resources.
More cash means merely redistributing resources, as desired by
policymakers, who do not recognize, or care about, the unsustainability of
their efforts as indicated by the demand-price-supply dynamic enumerated above.
2:01
OVERTIME: FOR THOSE FURTHER ENSNARED
But, it might be argued, supply is only a problem when there is
full employment. In a crisis, what a waste to not use these additional
plants/people, when they’re just lying there!
The implication of this ‘full employment’ argument is that prices
could not possibly rise for anything, unless people and existing equipment are
employed to the point that price/wage increases will not boost employment
levels.
2:33
MEASURING PRICES
Prices don’t rise just to spoil the
party or make you Keynesians look stupid, but are indications that
supply is really not sufficient for whatever endeavors are stimulated. And the
more that consumption is encouraged, less investible resources remain by
which to sustain an economy. This explains the net loss, and not a mere return
to previous conditions, come depression time.
But, you say, the consumer price index doesn’t show the price
increases I’m claiming. The c.p.i. is rather stable at 2-ish%, or nothing
beyond 5%.
2:58
PRICE INCREASES AND MONETARY EXPANSION
But price increases remain only a symptom of the
monetary manipulation going on. If sometimes prices don't rise, this indicates an
increase in supply of goods offsetting the monetary expansion.
But don’t rejoice about such an increase in output
either. These are goods the sustained purchase of which is doubtful when credit
tightens, when price signals are corrected to reveal poor demand for these
stimulated sectors (e.g. construction materials).
3:24
C.P.I. DOESN’T COVER ALL PRICES
Leaving aside as well that there is no such entity as
a ‘general price level’ in an economy, the c.p.i. necessarily neglects some
consumer products in favor of others. The c.p.i. also ignores other upward
price distortions, in real estate, stocks, bonds, etc.
Besides, price increases do not go up immediately
after the lowering of interest rates, or according to anyone’s time frame. It
may take years for the newly printed money to move from bonds to ‘real’ capital
and consumer goods, but this delay does not make the consequences of monetary
expansion any less adverse.
Recognizing that prices are merely symptomatic,
wouldn't focus be better placed on the source of price changes, that is,
monetary policy?
3:59
NON-AGGREGATE DEMAND
During crises, there is a drop in demand
indeed, that is, demand for existing goods in certain sectors, the production of which was spurred by the
impression of profitability as signaled by below-market interest rates (e.g.
housing).
Without manipulating interest rates, such production of otherwise-unprofitable goods would
have not been undertaken, in favor of goods more in line with consumption
levels and preferences.
5:20
MOLDING FACTS TO THEORY
The trouble with Keynesianism actually begins with
methodology, or rather, the lack of it. Hence, the quickness to point to the
c.p.i. in defense of credit expansion, or interpreting unused ghost neighborhoods
as a cluster of private-sector errors in calculating demand for goods. As an aside,
why then isn’t ‘excessive aggregate demand’ (i.e. undersupply) just as common an entrepreneurial blunder?
Bad methodology allows
for malleability in the face of contrary theory, even if such theory withstands
logical tests and empirical interpretations. It is thus not too surprising to hear that this present crisis is a perfect Keynesian model. But could we expect anything more reasonable from a model premised on the notion that spending makes for prosperity?
5:52
CAPITAL
And so ends my attempt at getting into the head of a Keynesian.
As an additional note, it is a great aid to go beyond
categorizing goods by either-consumption-or-production. One should also
consider a producers’ good; from what products it is derived; and the products
of which it is a component. Hence the saying, capital is heterogeneous, which
you probably never read in your macroeconomics textbook.
To understand my very specific choice of terms in the
brief exposition above, read further on capital and interest ― the latter’s
level of which is as much a signal of scarcity as the price of any good ― and
their crucial relation to the business cycle.
If you think I missed some points in my refutation,
e.g. Paul Krugman’s baby-sitting coupon fantasy ― which simply assumes an unchanging
level of utility derived from the rest of the non-coupon world, and assumes that the
health of a single sector matters to an economy ― let me know.
***
Suggested books/selections:
Time and money: The macroeconomics of capital structure
by Roger Garrison.
Austrian business cycle theory in the language (and
diagrams) of Keynesians and monetarists. Ask to be furnished a copy.
Within this masterpiece on money is a Keynes-specific chapter (Ch. 7).
Each contributor
discusses a particular Keynesian topic, e.g. Phillips Curve, the multiplier,
paradox of thrift.
A compilation of essays by various economists before, during and after Keynes,
disputing in principle his refutation of Say’s Law. E-mail me for a selection
of relevant quotations.
A section-by-section critique of Keynes’ ‘General
theory.’ Not that it matters to you, but this is the first ‘Austrian’ book I
read.