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Dec 29, 2008

Keynes, Digger of Holes

Obama’s Keynesian Error
12/29/08 - ChicagoBoys by Shannon Love

No one should trust a theory that predicts greater prosperity from digging holes. Yet, this is the theory by Keynes that Obama is following, and many past presidents have followed, to forcibly change our society. We will supposedly create even more wealth in the future by wasting our current wealth today.

I know. I must be wrong. No one could believe such a thing. Certainly no President of a great country would listen to a dead crank who spouted such nonsense. But, there it is.

The promised future wealth has never appeared. What will our leaders say when, again, the wealth does not appear, after wasting the resources that we have today. "So sorry. We just had to try something."

[edited] Keynes famously said that the government could stimulate the economy by simply burying large amounts of money in the ground and then letting people dig it up again. The money spent to dig up the money would drive the economy again.

Keynes' economic theory says that the movement of money itself from person to person creates a good economy. Keynes thought recessions occurred when people saved too much and spent too little, causing the money to stop moving. Government could “prime the pump” of the economy by taking the saved "static" money and spending it.

Money communicates information not by moving, but by differences in prices. Keynes was like a naive individual who discovers that phones lines carry information with electricity. He then decides that pushing more electricity will send more information. In reality, all he would get is a squeal. Likewise, moving money through the economy does nothing if that movement does not transmit information about the real value of economic choices.

The New Old Big Thing in Economics
01/08/09 - Online.WSJ.com by Sudeep Reddy
Another story about Keynes:

During a 1934 dinner in the U.S., one economist carefully removed a towel from a stack to dry his hands. Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.
Keynes point was brilliant, if you forget that the restaurant owner had already paid to provide clean towels. Keynes didn't offer to pay for the mess. The owner had to pay to replace the towels. Keynes's ideas are wonderful, as long as you can find owners to take resources from. After that, no more clean towels, and no need for restaurant workers to keep them available.

It seems that Keynes liked to be destructive, then say he was really helping everyone out.

- -
"Keynesian Economics" in The Political Dictionary
Understand politics by knowing the meanings of things.

Econ 201: The Myth of the Economic Multiplier
You don't create $40 in wealth by paying $10 to mow your lawn.

The Deadweight Loss of Taxes
Collecting $1 in extra tax kills $2 in production.

A Short Argument Against Stimulus
It isn't so stimulating when you know that it must be paid back.

Let's Counterfeit Our Way to Wealth
If Obama and Keynes are correct, that there is a 1.5 wealth multiplier on spending, then $100 in spending produces $150 in wealth, and we should all benefit from counterfeiting. It is not my fault that the belief in a multiplier is so outrageous that it leads to this outrageous result.

1 comment :

Maggie said...

Obama is not following Keynsian economics. The model for Keynsian economics is Great Britain during the years of the Depression.

I do not think that Keynes would agree with Obamanomics because the prescription is inherently flawed. Keynes actually recognized that he had a theory and that in certain economic conditions the theory was flawed. Whilst he was not a Socialist or a Marxist, Keynes did state that his theory worked best in a communist country.

Keynes produced his theory during the Great Depression. He was evaluating the problems created by the harsh requirements for Germany to pay war debt. What he believed is that in times of HIGH unemployment there should be increased spending on public works. However, it is questionable that we do in fact have a period of high unemployment to the extent that we had during the Great Depression.

Yeah, my husband is one of the unlucky ones put out of work because of the bloat in an ex-government, quasi-public company that is undergoing difficulties in the airline industry. Their policies really suck.

Keynes's theories worked up until the period when we hit stagflation. After that, we needed something new, but the kind of analysis done by Keynes has not really been repeated by any other economist of note or worth. My own criticism of George Bush Jnr happens to be that he did not follow Keynes in a vital area and that has meant an increase in the debt burden - Keynes actually wrote that in a time of war taxes should be raised rather than have deficit spending. This was not done, thus the debt burden has increased.

Otherwise I agree with your comments, and I think that the stimulus is a real mistake - including in my own country Australia

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