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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Bingo! There is a Plan

McCain is getting hammered by the press, by the Dems and by the conservatives.  His egregious mistake?  He mentioned that he would take $300 Billion and buy up all the bad loans and then reset those loans to make them affordable for the homeowners.

Now everybody is hammering him for his plan.  Let me just say this, AT LEAST HE HAS A PLAN!.  He’s not playing the Paulson/Bernanke game and just shooting in the dark.  He’s looked at the problem and said; ‘hey, if the real problem is bad mortgages clogging the system, then let’s get them out of the system.’

BINGO!  If that is the problem, then remove the problem.  What Paulson and Bernanke have done is said they’ve identified the cancer, they see the tumor and it’s in the gut.  BUT, we have to go through the foot, up the leg, through the groin and then maybe we can get to the problem area. 

McCain says, hey I see the tumor, let’s go in there and pluck it out!

I for one do not relish the thought of sitting around over the next three years while the current plan slowly weeds these bad mortgages out of the system.  Furthermore, can someone telll me where the authority was given to Paulson to invest our $700 Billion into bank stocks? ….both good and bad companies…..

So now the Fed is in the business of being a stock holder in America’s banks?  What, are we turning into United Socialist State of AmeriKa?

Look, I’m in the mortgage business so I see this stuff every day.  I’ve seen the bad players and I’ve fought against the predatory lenders.  I’ve watched our stock market and bond markets slowly detach themselves from one another and now they are completely working as opposing forces instead of working in unison.

There is a huge problem out there and at lease McCain has a fix.  It may be unpalatable to those of us who play by the rules and pay our bills on time, but what is the alternative?  The alternative is what we are dealing with right now ….or worse!  Let’s just swallow this one last BAD bite and be done with it.

The more I think about it, the more I’m beginning to think McCain is on to something.

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