Brains Not Included

Cracked Up, Whacked Out and Completely Out of Control

Keynesian Kooks – Why Keynesian Theory Doesn’t Work

KeynesianWhose Theory is This?

Keynesian Theory was developed by John Maynard Keynes, a man who would eventually have the royal title of Duke bestowed upon him in England.  Born in 1883, he came to prominence as an economist and philosopher around the time of The Great Depression. 

 His theories were adopted by the government in England in the late 1930’s and were eventually adopted by the Americans towards the end of World War II.  Essentially he believed that government could and should control capital in order to abate the swings in unemployment that can be typical in capitalist economic systems.

His theory basically states that high rates of savings by the population should be discouraged because those rates of savings hamper growth.  He also believed that supply drove demand not the other way around.

One of his largest critics was Milton Friedman who believed there were some basic flaws in Keynes theory.  One of the things that bothered Friedman the most was that much of Keynes economic themes were based on his feelings or his philosophy and had very little to do with actual mathimatical formulaic proof.

Friedman actually disproved Keynes theory that supply created demand and proved mathematically the opposite was in fact true.

What is the Keynesian Theory of Economics?

Simply put, Keynesian theory states that government can place capital more efficiently than the private sector.  When government controls capital and directs its placement through taxation and heavy regulation or through deficit spending, then swings in economic cycles are flattened and full employment is brought into equilibrium for long periods of time.

It further hypothesizes that high savings rates are unsafe and destabilize the economy and that only low savings rates and high rates of spending by the population can sustain growth and fuel stable economic cycles. 

Therefore, when the public is saving in large numbers, the government must encourage spending through regulation and if government cannot encourage spending then it should tax heavily in order to put the saved money to work in the economy.

Why Keynesian Theory is Still a Theory

Keynesian Theory is still a theory because it’s never been proven to work.  While America embraced Keynesian Theory in the lat 70’s under Nixon and Carter, the British were quickly squeezing the vestiges of this failed theory out of their government.

Theories remain theories until they are proven at which time they receive the title of Rule or Law.  We don’t call it a law because the theory’s concepts have failed time and again.  If it worked we would call it a Keynesian’s Law or the Keynesian Rule.

Milton FriedmanCommon Sense Shows Us the Way

Think about the two basic tenants of Keynesian Theory.  1.)  That saving is bad and; 2. )  That capital in the hands of a few (the government) is better than the profit motive of capital in the hands of many.

Instinctively we know that having savings is good.  ‘Save for a rainy day’… ‘Neither a beggar or a borrower be’…  ‘Waste not, want not’…  All of these wise old sayings are telling us something.  SAVE FOR A RAINY DAY!  Saving is a good thing.

Next lets take a look at human nature.  How good would a person have to be if you put millions, billions or even trillions of dollars in their hands and said, this doesn’t belong to you but you have complete control over it? 

Now the rules say this person can’t use their emotions in deciding what to do with the money and they can’t let their personal opinions play on their decisions, but…  How does this person or these few people in control that kind of money keep their own human nature in check? 

They don’t, just look at the Marxist utopia that should have bloomed from the Bolshevik revolution.  Instead of Utopia we got the USSR.  Socialism and Communism are the end result of basic Keynesian Theory.

Friedman Got It Right

Milton Friedman used mathematics to prove his economic theories and to disprove Keynesian Theory.  While Keynesian approached economics from the viewpoint of philosophy first and mathematics second, Friedman comes at from the other side.

While the Keynesian experiment was all the rage in Europe and was being put into practice in the U.S.A., Friedman was being decried by his piers for his opposition to this ‘enlightened’ economic theory. 

But, armed with the mathematical facts and penchant for philosophy himself, Friedman was able to write one of the greatest books of all times.  Capitalism and Freedom is a must read for anyone that wants to understand why Capitalism works and how it creates freedom.

We can try Keynes ideas one more time, but doesn’t make more since to turn to the logical rules that are proven and documented for us by Friedman?  Capitalism may give us some ups and downs in our economy, but it is still the worlds last best chance for strong free societies where people have an opportunity to live free from tyranny and where people are free to live their lives as they see fit!

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2 Responses

  1. Steve says:

    No, Keynes is a demand-side guy, which means he believed demand will create supply, whereas Reagen is supply-side, which means supply creates its own demand. I think you got this point wrong.

    • mdg123 says:

      Steve,
      Keynes was a demand-side guy meaning that demand could be created through the regimented appropriation of the capital. He believed that the ‘market’ uses capital in an inefficient manner and that government regulation could force the market to distribute capital more efficiently theirby accomplishing two things. 1.) focusing capital on the production of items that the consumer demanding and 2.) driving consumer demand by limiting the availability of certain product.

      Keynesian Theory was deployed in the 70’s under the Johnson, Nixon and Carter administrations and brought our country to it’s economic knees. The problem with his theory was that governments can’t control human nature and when they try to ‘control’ people they loose the ability to create and innovation. The lack of creativity and innovation leads to stagnation.

      On the other side of the coin suppy-side economics is driven by the notion that the government can give incentives to the private sector to create and innovate through the reduction of regulation and taxation. Allowing the private sector to keep it’s money and to innovate in a productive way creates demand for products that did not previously exist. This innovation … ala; IPhone, better computers w/faster processors, hybrid cars, Gortex for clothing creates a supply of products that in turn drive consumer activity (demand).

      In a way Supply-Side economics is a conservatives version of Keynesian. Government is still has a hand in directing private capital to be used efficiently, it just does it in a way that is not controlling and allows for innovation. Call it supply-side or trickle-down economics it doesn’t matter, what it refers to is the suppy of capital and the distribution of that capital. Supply-side economics says that demand drives supply and that less regulation and more capital in the hands of the private sector will allow for creativity, innovation and elevated productivity.

      In the end, both theories really deal with the control of capital inputs. One says that capital is more efficiently directed by governments while the other believes that capital is more efficiently deployed by the private sector.

      My research:
      http://www.friesian.com/sayslaw.htm
      http://en.wikipedia.org/wiki/Supply-side_economics
      http://www.econlib.org/library/Enc/SupplySideEconomics.html
      http://theeprovocateur.blogspot.com/2008/12/demand-side-vs-supply-side-economics.html

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