Keynesianism

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The basics of Keynes can be summed up as:
  • Keynes microeconomics was brilliant, his macroeconomics have never worked in the real world
  • Examples where it failed include: Japan, Venezuela, China, Russia, North Korea, U.S. in every administration since WWII
  • Keynes idea that government can borrow and spend to stimulate growth relies on the ignorance of the people to recognize that increased spending will cost them in taxes/inflation, that government will trim back as the economy gets better (which never happens), and assumes that jobs are highly mutable (they’re not any more).
  • Not all government spending is bad, it’s just usually worse than the alternatives: and the few successes are the broken window fallacy (looking at seen benefits, while ignoring larger unseen consequences)

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Dispersed Knowledge -
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There was an economics battle between Keynes and Hayek fought generations ago. But History proved Hayek the winner: things he predicted came true. Keynes scored a few microeconomic points, but history broke his macroeconomics models: the boom economy after WWI, stagflation in the 1970's, Japan's lost decades and the failure of Abenomics, China and Russia's growth after abandoning command economies, all proved Keynes wrong. And Hayek won the noble prize for explaining why: Dispersed Knowledge. If the leaders don't know more than everyone else combined, then the more decisions you make from the top, the less efficient those decisions will be, and planned economics will underperform ones where the decisions can be made closer to the problem.

Government spending - I'm not arguing government spending never produces anything good. It does. In theory, you can do things like invest billions in infrastructure, and that will benefit the economy in the long term. Hoover dam meant cheap power, and helped enable Vegas and L.A. So a few public works programs, do help, eventually. However, for each Hoover dam, there are a dozen Solyndra's, or government spending disasters. When you average them all in, you get far more weighing down your economy than helps it up, because: politics. So net net? Government spending fails more than it succeeds, and even when it succeeds, it generally succeeds by less than it would have if it was done/managed privately with profit motives -- but there are a few exceptions to the rule.

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IPencil -
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I listen regularly to the Freakanomics Podcast (Radio). And they did a two part series on writing. Starting with, “do we really need cursive anymore”, some light discussion on cursive, it was an interesting podcast, but just for curiosity. Mostly it was a setup for the next week’s one which was far more interesting. The second podcast was on i pencil: an economics treatise by Lawrence W. Reed, founder of fee.org (circa 1958), explaining the complexity of making something as simple as a pencil in the modern world. I’d heard parts of this, in other contexts, and I was very familiar with fee.org, which I’d read a lot of their stuff. But it piqued my curiosity, and read I pencil in it’s entirety. It’s definitely worth a listen or read.

Keynes - John Maynard Keynes was a microeconomist that got a few things right in the little picture, and got virtually everything wrong in the big picture. His macroeconomic theories have been long disproven. But since the collectivists prefers comforting lies to uncomfortable truths, they ignore Science and History and believe in unicorns and Keynesianism.

Keynes and the 2 day work week - Keynes said in 1930 that our grandkids would work 2 days a week and have a 5 day weekend. This is a typical flaw in thinking of the brightest minds on the left:
  • (a) that people don't value work/being productive or get rewards from it
  • (b) that people given more cash won't want to spend it on things and earn still more (some will trade more income for more free time: while many will not).

Keynesian failures -
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It would be great if Keynesianism worked, governments could manipulate economies, and our lives would be better. But history shows us the opposite: it has failed every time it has been tried. Examples: the new deal, the new new deal, after WWII (Keynesians predicted a depression cutting all those military jobs, instead we had huge growth), 1970's Stagflation broke their models completely, Japan's lost decades (Abenomics) all went the opposite of Keynes predictions. Every country that converted from centralized planning and communism to free'er economies (Russia, China, Vietnam, East Germany, etc), should have had a depression, instead of massive growth. The history of central planned economies like North Korea, Venezuela, Cuba, should have all outgrown places like South Korea, Brazil or Hong Kong: but the opposite happened. Heck, if it would have worked, then Obamanomics would have given us the highest labor participation rates in our history, instead of the lowest since the Great Depression. So what did we learn? Keynesians learned nothing because reality doesn't fit their desires. But the rest of us learned that Keynes was wrong.

New Keynesian - Keynes had micro and macro economic theories. While his micro economic theories/models were quite good and still work, his macro-theory (the model of models) is what most people who say they're Keynesians tend to be talking about. Those never worked. Hayek won the nobel prize in economics for showing why in the 1940's (Dispersed Knowledge). But Keynes' macro-economic theories broke completely in the 1970's with Stagflation: a concept which couldn't exist according to Keynes's original models.

Well, if you're proven wrong, but have a career being a specialist based on those wrong theories, what do you do? Rather than admitting their prophet was wrong, Keynesians just reworked the models (to allow an exception for stagflation) and called those new theories/models, "New Keynesianism". Their religion of Keynesianism was was too important to face contradicting reality, so they forked history. Thus pre-1970s and post 1980s Keynesianism is based on different models... but has the same flawed beliefs. We know that the new models have also never been accurate in any major prediction of trajectory in a recession or a recovery, so while they're not as glaringly wrong, the models still don't fit reality or actually work.

Numbers Covered by Obamacare -
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Those claiming 20 million more people are insured because of Obamacare (ACA) either don’t know what they’re talking about, or are bald-faced liars. We're around 29 million people short of the campaign promise for universal coverage. And it's well below the 20 million new people covered that the fools and frauds like to claim. The facts: about 2.8M were covered because of Obamacare, and another 4-6M because of medicaid expansion, at a cost of about $20K per new person covered.

The Broken Window Fallacy -
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The Broken Window Fallacy is a fundamental concept of economics (and logic) about seen advantages versus unseen costs. Henry Hazlitt summed up the art of economics as not merely looking at the immediate consequences but the longer effects of any act or policy, and tracing those consequences not merely for one group but for all groups

Tragedy of the commons -
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We often get dire warnings about Malthusian Catastrophes, Ehrlich's population bombs and how individuals can't be trusted to manage shared interests. We need government to protect us from ourselves. History shows the opposite: individuals form small governments for common interests better than big governments, unless big government stops them.

Treasury View -
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The general definition is "government spending crowds out private investment". It is widely accepted as at least partly true.

The Keynesian version is that in recessions/depressions everything has to be perfectly efficient and instantaneous. Since it isn't, they see any lags, overreactions and inefficiencies as opportunities for government to step in and spend (stimulate) to where "things should have been", to smooth out the downturns.

Nice theory. FDR tried it in the great depression (believing in his "brain trust"), and the results were extending the depression by a decade, and we have many more examples of the failures of planners to be more effective than the free market. So while it's a great theory, it has never actually worked in the real world. Keynes was a brilliant micro-economist, with delusions of being a macroeconomist, but his religion of collectivism (authoritarianism) got in the way of understanding human nature (how people and thus economies would react) or the nature of governments.

Trickle Down Economics -
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There's a name for Trickle Down Economics... it's called economics. Even Keynesianism is the idea that if government spends, it trickles down. No rational economist will argue against the idea that cutting everyone's taxes leaves them more money to spend, and they will spend some of it. Increases in earnings will either be actively invested, saved (passively invested), or spent. And if they do any of those, that money is passed through into the economy: in other words, it trickles out (and down). Period. End.

Now there can be intelligent debates on what helps the economy more: spending, cutting, and whether cutting at the top or the bottom helps more. But liars (polemics, fools and the media), will perverts that debate on what helps more, into some fraud that cutting taxes at the top doesn't work at all.

Why can't Keynesianism work? -
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Keynesianism is the idea that during recessions/depressions markets can react to fear and over-correct. Government can make up for the fearful private sector over-cutting (and being less than efficient), by spending up to where levels should have been, and smoothing the reset. However, for Keynesianism to work you need 4 things to happen: (1) an information vacuum (2) you have to cut spending/programs as the economy gets better (3) you need to be replacing like jobs (4) you have to have near equal efficiency between government and private sector. Since none of those things happens in the real world, the Keynesian promises have never, ever, been realized.

Conclusion

I believe that after another 60 years of examples, pounding home why he was wrong, Keynes would have eventually realized that while his micro-theories were valid, but his macro-theories never worked in practice (and broke in the 1970's). Keynes was a reasonable man that admitted Hayek was brilliant. So it is likely he would have revised his views, and would no longer be a Keynesian (at least not as Keynesians today think of it).

Or in other words:

  • in theory, theory and practice are the same thing
  • in practice, they are not
  • Keynes created theories.
  • Hayek observed the real world, and human nature, and said that Keynes (and others models) couldn't work, unless you could model human behavior. Which you can't very well.

What is left of Keynes theories has become a mockery of what Keynes had ever believed or advocated: that spending results in magic multipliers (for each dollar you spend, you get many in return), and does so by ignoring that the dollar comes out of the economy (and that this has any de-stimulating effects by people/companies smart enough to see through the charade), or that companies have become more mobile than employees (they can offshore, and job training makes make-work job programs and stimulus way too specialized to have broad economic returns).

Thus simplest argument against Keynesianism is if Keynesianism worked, we wouldn't have recessions in the first place. Governments could manipulate money and spending to just make them disappear -- and of course, while governments can be credited with causing many recessions (or depressions), they can't be credited with stopping any of them.

So Keynes and Hayek would have eventually grown to have more similar views over time. And it probably would have looked more Hayekian than Keynesian.

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📚 References

More

BrokenWindows.jpg
The Broken Window Fallacy is a fundamental concept of economics (and logic) about seen advantages versus unseen costs. Henry Hazlitt summed up the art of economics as not merely looking at the immediate consequences but the longer effects of any act or policy, and tracing those consequences not merely for one group but for all groups
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There’s a bunch of meme’s and soundbites going around where politicians love to point out the disappearing middle class (income inequality), and how we need them to fix it. There’s only a few problems with that:
  1. It’s a lie that plays to people’s ignorance and greed
  2. History always looks better from a distance (and if you don’t look too closely)
  3. It’s prestidigitation to distract you while they pick your pockets
This article details why this is a fraud, and how they give ammo to the frauds and flimflam the gullible.

Written 2012.09.01 Edited 2014.12.22