Lesson 3: Is Greece Keynes's Legacy?

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Congressman Barney Frank seems to have found the solution to all of America's woes. Some time ago, this most recognizable congressman took part in the following exchange.



(Original video found at http://www.youtube.com/watch?v=u1Mazjm_A5k)

Keynesianism... what is it? Students are told from elementary school through their collegiate studies that Keynesianism is what saved America from the ravages of The Great Depression of the 1930's, they are told that Lord Keynes discovered a guaranteed way to end recessions. We should not worry, our professors say, because, should a problem arise in the economy, our dear leaders will simply resort to Keynesian policies and all shall be well. What most of these teachers and professors fail to do, however, is to actually inform their students as to what Keynesianism is. This unfortunate situation certainly stems from the fact that most of those same professors in fact fail to understand Keynes's theories themselves. I dedicate this lesson to their enlightenment.

Keynes's approach to economics is based on a couple of major tenants, the first being that recessions are caused by a "general glut", and the second being that excess savings are harmful and slow an economy's recovery. In order to solve the looming crisis of the general glut, Keynes suggests that the excess savings amassed by the population be spent, via government intervention, in order to provide stimulation for an ailing economy. To understand why Keynes is misguided, to say the least, it is first necessary to understand what exactly is meant by the theories which drew him to his ultimately flawed conclusion.

A general glut is a concept that is simply bizarre. The idea driving the theory is that an increase in production will cause prices to fall, necessitating more production in order to make up for lost revenue because of the lower prices. The theory goes on to say that this process will continue ad infinitum. Strictly speaking, it is true that when supply increases for a given market the price for the good that market produces does go down, but, that is the point, this effect occurs in a given market. What the general glut theory suggests is that this effect can occur in all markets simultaneously. However, economic theory suggests that such an occurrence is impossible. What the general glut theory completely ignores is the central guiding principle underpinning all of modern economics, which is scarcity. If one producer buys all of a given resource, wood perhaps, to build houses, then at least in the short run a furniture maker would have no access to wood to pursue his work. Under such conditions, the market would see not only a large increase in the supply of houses forcing the price of housing down, but also a massive decrease in the supply of furniture which would cause the price of furniture to increase dramatically. Under the general glut theorem, both of these commodities as well as every other commodity in production would see their prices fall. However, because of competition over resources, as well as dynamic consumer markets which consistently seek out new goods whose prices are prime for bidding up, the general glut theorem is not so much a theorem as it is a myth.

Keynes is not correct, but, assuming that he were and that the general glut did exist, would his subsequent arguments then prevail? Keynes posits that private savings made in response to the onset of a recession only serve to further slow the economy and that those savings must be forcibly circulated so that investment might increase thereby alleviating the recession. I do not believe that Keynes had in mind actual seizure of the citizenry's assets, but I do believe he favored deficit government spending, which would eventually have to be paid for through higher taxes or a lower standard of living. This argument makes several assumptions which are obviously not tenable. First, as I previously mentioned, any deficit spending enacted today must be paid for tomorrow. So, even if the best case scenario is assumed and the economy is restored to its previous standards due to the introduction of stimulation, the following increase in taxes would certainly lead the people back into the recession from which they were just supposedly freed. But that is the best case scenario, the worst case scenario stems from Keynes's second flawed assumption with respect to government spending. Keynes implicitly assumes that government is efficient in the way it spends money, giving dollars to organizations that will help return the economy to growth. However, economic theories from the subset of economics known as "public choice" refute that assumption; additionally, observation of the U.S federal government's behavior over the past years makes the idea that government is efficient laughable.

Recently Senators McCain and Coburn released a document highlighting the 100 most wasteful stimulus projects. Here are a few.

• $554,763 for the Forest Service to replace windows in a closed visitor center at Mount St. Helens

• $762,372 to create “Dance Draw” interactive dance software

• $62 million for a tunnel to nowhere in Pittsburgh, PA that even Governor, Ed Rendell called “a tragic mistake”

• $1.9 million for international ant research

• $1.8 million for a road project that is threatening a pastor’s home

• $308 million for a joint clean energy venture with…BP

• $89,298 to replace a new sidewalk that leads to a ditch in Boynton, OK

• $3.8 million for a “streetscaping” project that has reduced traffic and caused a business to fire two employees

• $16 million to help Boeing to clean up an environmental mess it created in 2007

• $200,000 to help Siberian communities lobby Russian policy makers

• $39.7 million to upgrade the statehouse and political offices in Topeka, Kansas

• $760,000 to Georgia Tech to study improvised music

• $700,000 to study why monkeys respond negatively to inequity

• $193,956 to study voter perceptions of the economic stimulus

• $363,760 to help NIH promote the positive impacts of stimulus projects

• $456,663 to study the circulation of Neptune’s atmosphere

• $529,648 to study the effects of local populations on the environment…in the Himalayas

(http://coburn.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=20532b9f-f9ae-46d7-b2bf-0f01cd75d90d)

It must be recognized, even if the general glut theorem were to exist, the solutions to the supposed problem that Keynes offers are not worth the paper they're printed on. Keynesianism is, fundamentally, socialist non-sense. Lord Keynes did not end The Great Depression, the American people regained their prosperity in spite of him, not because of him. Keynesian policies go against the elemental liberties of the American people to keep the money they have earned by the sweat of their brow and to have a government which protects them from threats, not inflicts threats upon them. To Representative Frank, I would say only that I feel sorry for a man who is so enamoured with the idea of holding power over his fellow man and neighbor. If Mr. Frank is listening, I entreat him to understand...it is Keynesianism that is the disease, not the cure. America was built by free individuals exercising their right to self determination, not by Keynesian theoreticians deciding they know how to better use the resources earned and saved by the people. Keynesianism is a lie, Keynes is a liar, and as for Barney Frank, perhaps he should think about moving to Greece. After all, if Keynes was so insightful, Barney should be able to find a great job and lots of wealth for himself in Greece.........right? Wrong. Greece today is failing because they have followed Keynes, they are not floundering because they have deviated from him. The proof as they say is in the pudding, and it looks like Greece made a mess in the kitchen. I, The Economist's Apprentice, am proud today to proclaim the death of Keynesianism. Let it rest in peace and be forgotten.

Lesson 4 preview: The tools of the trade and a few applications too.