The Keynesian Fallacy

The Keynesian fallacy is not that Keynesians believe that governments can stimulate. Of course governments armed with fiat money can stimulate. Look at Argentina! Look at Zimbabwe! Look at the Wiemar Republic! The Keynesian fallacy is that Keynesians believe that turning labor into goods is easy, so excess demand will mop up excess labor, resulting in the expected level of production.

Some of the conditions required to turn labor into goods are security of property rights, the rule of law, and freedom of trade.

Well that sounds like mere piety. Everyone is in favor of those things (though not necessarily for foreigners or with foreigners). In practice, however, these things mean that a well run business succeeds, and a poorly run business fails. If the government deems it a crisis when a poorly run business, run by pals of the government, fails, and intervenes with regulation to keep the zombie business running, then you don’t have freedom of trade, security of property, etc, you have socialism without a central plan. And your economy is going to go to hell in a handbasket. Zombie businesses are not capitalism, but crony capitalism.

Turning labor into goods is hard, and people whose chief asset is their place on the revolving door between the regulators and the regulated are not going to do it. Stimulus may raise profits and employment, but you are not in fact going to get production. The economy is running on habit and inertia, on people doing what they used to do because that is what used to be done, and over time, this gets more and more detached from doing anything very useful.

Finding stimulus unstimulating, governments then lie about inflation and GDP, at first lying a little, and then, eventually, like Argentina, lying a lot.

Looks to me that living standards in the US have been declining since 1972. Food, fuel, education, and house that is safe to raise children, goes up, but supposedly this is offset by the fact that you now have an internet connection that can download more porn than anyone could watch, and your car now has electric windows. Every so often growth declines to a new new normal, and statistics are adjusted so that we pretend the old normal is still in effect. Median male income has, notoriously, been falling, as has male employment. Creative measures of inflation, wherein everything you have to buy goes up, but it is supposedly offset by everything you don’t much care about going down, is not the only distortion. Increased female employment transfers unmeasured household production (such as children and a nice house) to measured production, thus male income is arguably a better indicator than GDP per head. Increased female employment leads to a statistical mismeasure, since they were probably working harder and producing more value back in the days before they had office jobs. If female employment goes up while age of marriage goes up, there is not necessarily more production. If male employment goes down, there is really, no kidding, less production. Comparing the past with the present leads to a lot of apples and oranges problems, and the government increasingly chooses whichever approach that makes the present look good, and the past look bad.

13 Responses to “The Keynesian Fallacy”

  1. J says:

    Food, fuel, education, and house that is safe to raise children….

    You should take into account that food anno 1972 is qualitatively different from anno 2014. Peel a few potato, throw in cheap meat cuts, paprika and so and boil, and you have a 1972 gulash for 2 current dollars. Imported rice, with few regulatory expenses, is not more expensive.

    Fuel – energy got cheaper. We used to turn down lights when leaving the room. Fuel – had no car.

    Education – I see lots of students paying nothing. Most universities everywhere are free, specifically in Europe. What’s wrong to study in Switzerland?

    House – you mean a house safe from criminal minorities? Make aliyah and settle in Ariel. Nice climate.

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  4. Nigel says:

    A problem is over-reliance on foreign work to produce goods. The jobs that are left here are service jobs and managerial jobs. Much of the actual work is done elsewhere.

    Imagine how long a country would survive if everyone tied shoes for a living, or managed shoe-tiers. How long would people be able to feed themselves when their main skill is tying shoes or telling other people to tie shoes. Meanwhile, the people making the literal bread are overseas, wondering why people here are trying to trade shoe tying management for their computer components.

    Did we get this way by free trade or by government intervention? I would say that government intervention led to free trade moving production to less “intervened” countries, resulting in a local market failure that continues to operate as a kind of Ponzii scheme.

  5. Bob Wallace says:

    Wages stopped going up in January, 1973.

  6. Barnabas says:

    Hey Jim, I don’t see an email address for you on here. I’d like to send you an article but it is quite long and I don’t want to spam your comments. Can’t link since it’s behind a paywall.

  7. […] The Keynesian Fallacy « Jim’s Blog […]


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  9. VXXC says:

    Bernanke is General Jack Ripper, operating on orders from Dr. Paul Strangelove Krugman.

    That’s what the dollar pumping is, the Doomsday device, except since everyone knows about it, everyone plays along.

  10. Dr. Faust says:

    Incompetence or malfeasance, which snifter does Bernanke sip from?

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