Many believe that John Maynard Keynes was a communist or a socialist. However, this simply isn’t so. While Keynes did believe that government interference in the economy was necessary, he did not believe that the government should own the means of production. Instead, what Keynes believed was that there were certain times that the government would need to enter the market in order to keep balance in the free market. Nevertheless, this would cause an oxymoron, as the very intervention of the government would negate the true nature of the “free market.” This was a hybrid style of politics and economics, similar to how the Nordic model is neither free market nor socialist.
One of the main points that Keynes perpetuated was that the government would need to intercept a recession in order to curb it from being as disastrous as it could be. Keynes believed that the prescription for a failing economy was to spend money that you don’t have. It wasn’t that you needed to spend money on one thing or anything specific, but just spend money: consume, consume, consume!
This is because Keynes had one simple principle backwards. He thought that Say’s Law was false. Say’s law is the idea that supply creates demand. This law is true and false. The simple fact that I create a product doesn’t mean that there will be a demand for it. On the other side of the coin, just because I am hungry does not mean that someone will create the food I want. There is a balance here, but for the most part, Say’s Law is correct. Once a product or service is created, then the population can demand it. There is very little demand for items that do not exist, because people are not always aware of the items they want; take for example, the launch of the iPhone.
Another issue that Keynes had was he considered savings during an economic downturn bad because it held resources that needed to be distributed to the masses. Unfortunately, this leaves out a very important point. There needs to be savings so that we can have investment. The creation of new products and services that people want will entice the very thing that Keynes advocates for: consumption. Keynes is just looking at this puzzle from the wrong angle. He is seeing the end as the beginning.
The Austrian school of economics developed a model to describe the simple and natural ebb and flow of an economy. They called it the Austrian Business Cycle Theory. The basic theory lines out that the relation of loanable funds, money saved by investors, must be in equilibrium with capital demanded by business and entrepreneurs. When this is out of kilter we see a boom or a bust. Typically we see an economic boom and we begin to overextend ourselves. This is when a recession, or a bust, comes into play. This is simply the market trying to make corrections. When there is little to no investment because the surplus of savings has been depleted then the interest rate must go up. This is basic supply and demand. However, in this scenario Keynes would say that it is time that the government enters the equation.
Instead of just letting the real price of money be what it needs to, decided by the actors in the market, Keynes believes that interest rates, which are being set by the central bank, should be held down in order to encourage people to spend. Unfortunately, all that does is misallocate the resources to projects that never should have been funded in the first place. Now that money is eaten when someon could have used it to actually stimulate the economy.
Next, Keynes would like to see the government spend money. Unfortunately, the government has no money and a recession is not a time to tax people; instead, Keynes is trying to create a sense of prosperity in an economic downturn through the use of government stimulus and infrastructure. How do they get this money if they aren’t taxing people? Well, they can print more, which basic supply and demand says that if there is more of a commodity available then the price drops, and that means that the value of the dollar decreases. The other method that they use is to barrow money. The federal government issues bonds in order to fund pet projects. These methods have led us to the more than $20 trillion in debt.
This is also what prolongs the recessions that we have seen throughout the years. Over the course of 110 years we saw five significant recessions, yet during the 80 year duration since the New Deal we have seen 12 recessions, and signs are pointing to another one. Now, it’s not that each recession has gotten worse, but recessions over time have gradually gotten worse. This is because tampering with the recessions causes us to never have a full recovery, which is also why we have seen more frequent recessions. The economy is still trying to recover from the Great Depression and the New Deal.
Keynes actually believes that the strongest and healthiest economies have a combination of government intervention and private sector. This is very similar to how the Nordic countries see their system: an intersection of public and private (you can read more about my take on the Nordic Model here). This would not place Keynes under the umbrella of a socialist or a communist.
Keynesian beliefs are the symptom of statism. The idea that the market cannot handle the hiccups and, therefore, we must try to craft it to what we like. Neither Democrats nor Republicans are immune from utilizing Keynes’s backwards approaches to the economy. Unfortunately, there is always a reaction to an action, similar to a rubber band effect and it is not the politicians that feel it so much as we do.
Read more from Rocky at Think Liberty here.