Advertisements

Keynesian Economics: A Misleading Policy

Keynesian economics, though often touted as successful, has a number of key pitfalls

Advertisements

By Jack Parkos | United States

Imagine a kid doing chores for his parents. One day there isn’t a lot for him to do, so the parents make a huge mess for him to clean up. Does this make sense? Of course not. But, this logic is similar to the Keynesian school of economics. Keynesianism has taken over both American parties and severely hurts the economy.

What is Keynesian Economics?

During The Great Depression, economist John Maynard Keynes developed a new school of economic thought. He hoped that his Keynesian economics would bring an end to the decade’s stagnant economy. Keynes’s theory focuses on demand-side economics. Keynesian economics asserts that a mixed-market economy will be the most successful in the long run.

Governments employ this by increasing both spending and the money supply. Keynesians would argue that the government should spend on programs such as infrastructure in order to boost the economy.

The Critical Flaw: Increased Spending

Despite such common adherence, Keynesian economics has a number of key problems. The first of which deals with spending increases. The money for this spending must come from somewhere, and it usually lands on the taxpayers. Otherwise, US debt levels just increase even more.

The wealthy, who play a key role in economic growth, often see the worst of tax hikes. The government taxes those who provide jobs and products, then uses for the money on a bridge, for example. The idea here is that government created jobs and a product. However, they only did so by robbing the same opportunity from a private company, which is more likely to use the money more efficiently to provide a greater number of jobs and better services. Allowing all classes of wealth to have more disposable income will simply lead to more economic growth.

Keynesian Economics and Government Monopolies

Keynes often criticized the free market, claiming it created monopolies. But government is also capable of doing this. In fact, the creation of monopolies is a huge fault of Keynes’s theory. A government, with its reckless spending, can easily create monopolies and ruin private businesses, which only spend more if profits increase.

On the other hand, the government has a tax farm of millions of citizens. Thus, it can take money from any one of them, or simply print more of it. For example, Keynesian economics would have the government spend more on infrastructure. But what happens to the companies that the state does not fund? They will likely lose business, even though they may be the best ones for the job.

On the other hand, government services are usually subpar and inefficient. There are just some things government can’t provide that the market can. Government is not meant to produce, it is meant to protect rights. A business owner, to keep customers, has to make an effective product or service. This forces him or her to improve the quality of service.

State services simply do not work the same way. Don’t like the service? Too bad. They don’t need to rely on supply and demand. Rather, they can tax people or drive further into debt and provide a subpar service. We have established that under Keynes’s model, there will be more state services. This will be an atrocity! Instead, the state should seek to lower taxes and lower spending in order to improve the economy.

The Danger of Increased Money Supply

The last and possibly the most dangerous part of Keynes’s model, increasing the supply of money. Simply printing out more money will not help the economy but will do the opposite, it will cause inflation which hurts the economy. This has happened a lot in history.

Hyperinflation in the Weimar Republic

The most infamous example of this is 1920’s Germany.  The problem started when Germany abandoned its gold standard during World War 1. After the war, the Treaty of Versailles forced Germany to pay reparations that they simply could not afford. The government then printed out more marks to pay off these reparations, but this caused hyperinflation. Money became worthless to the point where Germans used it for kindling. Children would use paper money to make toys to play with. If someone went to the store with money to buy two loaves of bread, they would only be able to afford one by the time they arrived. In fact, by late 1923, 1 US Dollar was worth a staggering 4.2 trillion German marks. The German Mark was worthless.

(Image Source.)

Of course, hyperinflation will not occur every single time money is printed. But history repeats itself with many other examples of hyperinflation. Zimbabwe also tried this and, like Germany, saw hyperinflation in its economy. Keynesian economics would suggest printing more money for the economy during times of recession. However, history shows this does not work.

The Keynesian School of economics suggests increasing spending, debt, and taxes. It also replaces market services with the government and calls for the risky activity of printing money. Most of the last century’s policies have been Keynesian. Without a doubt, they have raised taxes and sent the country further into debt. Hope, however, is not lost. By looking towards more free-market schools of economics, the American people and state may create a freer and stronger economy.


To support 71 Republic, please donate to our Patreon, which you can find here.

Featured Image Source.

Advertisements
  1. Edward Raphagavado June 14, 2018 at 2:21 pm

    This has a lot of problems. Though I despise the London School, this article just does not even come close to arguing against-or even understanding-what Keynes believed.

    First is your awful section on the spending-taxing beliefs Keynes espoused. First of all, he did not always believe in increased spending. He only believed in it during economic crashes. The rest of the time, he believed in less government spending so the economy would grow less and therefore wouldn’t have as a big crash. Then, you say something about increased taxing to pay for this that so misunderstands Keynes and the London School that it convinces me you have not even read a bit of what they say. You say that the money “must come from somewhere” and that therefore he believed in tax increases to pay for this. That is not true. He believed during recessions and depressions you should actually decrease taxes to stimulate the economy. He was completely fine with running a deficit during depression, in fact he thought it was necessary and good. Only during economic booms would he say that tax hikes are good. This is because he agrees with you that this hurts the economy and he says the less the economy grows during booms, the less it will crash afterwards. It’s all very complicated and nonsensical and I can’t explain it very well. If you want to learn more, read The General Theory of Employment, Interest, and Money by Keynes himself.

    Next: your stuff on monopolies. You talk about how the government can drive companies out of business by spending a lot(?). I don’t even know how you got to this conclusion. So, first of all, the reason companies go out of business a lot of the time, is because the alternatives are better. So, the only way a government service would drive a company out of business is if it was better than that business. In which case, your last two paragraphs, and basically the reason this is supposedly bad, do not make sense. The government cannot be both worse than private industry and drive private industry to bankruptcy. That is unless, of course, there are vast regulations on non-government industry in a particular area. Keynes did not advocate for increased regulations on non-private industry. On top of that, I fail to see how this would be an atrocity. Keynes did not particularly care about productivity. He cared about employment and economic growth. Neither of these things are even slightly touched upon in this section.

    And then, you talk about hyper-inflation. The only thing that I appreciated in this section is that you actually showed you are in favor of parts of Keynesian economics by using empirics. One of Keynes’ major gripes with Neoclassical economics, and one of his most major innovations was changing economics from an A Priori field to an A Posteriori one. So, by making this argument against Keynes, you accidentally argued in for at least some parts of Keynesianism. The actual argument has no value. Keynes never said anything even slightly in favor of the major inflation you are talking about. He even said vast amounts of inflation was the easiest way to endanger a society. The closest thing he ever said was that he preferred inflation to deflation. That would be like if someone said they preferred a Communist society to a Fascist one and you took that to mean they were a Communist.

    Your final paragraph is right about debt and incorrect about the other two. He believed in increased spending during recessions and decreased spending during economic booms. And vice versa for taxes. My recommendation for you is to actually read Keynes before you critique him. Then, maybe you will actually argue against Keynes instead of this weird strawman you have made for yourself.

    Reply

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Advertisements
%d bloggers like this: