I'm hoping some of the economic theory experts can help me out in my understanding of Keynesian Economic Theory. I've always been a huge advocate for the free market, even before I was aware of Austrian theory. It just always seemed to make sense to me, and given our current economic "turmoil," reading Rothbards "Economic Depressions: Their*Cause*and*Cure" seemed to make perfect sense. Which begs the question:
Why do so many intellectuals buy into the Keynesian theory of expanding government and the money supply to "effectively" manage economic growth?
I read Rothbard's "Spotlight on Keynesian Economics," but it really didn't answer my questions, I think it's just a little to abstract. I did a little internet searching and came across this article:
A REVIEW OF KEYNESIAN THEORY
This article seems to present pretty persuasive evidence in support of Keynesian theory. My question is, how do we as advocates of the free market explain the following items:
During the 70s, monetarism reached the peak of its popularity among conservative economists. Today, however, Friedman stands virtually alone among top economists in his belief that it contains any merit. Monetarism was tried in Great Britain during the 80s and it proved to be a disaster. For almost seven years, the Bank of England tried its best to make it work. According to monetarist theory, the British economy should have enjoyed low inflation and high stability. But in fact, it went berserk. The economy sank into a deep recession, while the lead economic indicators zigged and zagged. Although inflation came down, this was at the price of rising unemployment, which soared from 5.4 to 11.8 percent. Between 1979 and 1984, manufacturing output fell 10 percent, and manufacturing investment fell 30 percent. Eventually, the Bank of England came under overwhelming pressure to abandon monetarism, which it did in 1986. The experiment was such a failure that not even conservatives abroad wish to repeat it.My ultimate goal is here is to try and be able to articulate and explain to others exactly why Keynesian theory is flawed and has led to economic turmoil. I understand why the Austrian theory appears logically sound, but what I don't understand is why most intellectuals do not?In seven short years, under massive Keynesian spending, the U.S. went from the greatest depression it has ever known to the greatest economic boom it has ever known. The success of Keynesian economics was so resounding that almost all capitalist governments around the world adopted its policies. And the result seems to be nothing less than the extinction of the economic depression! Before World War II, eight U.S. recessions worsened into depressions (as happened in 1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937). Since World War II, under Keynesian policies, there have been nine recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92 ), and not one has turned into a depression. The success of Keynesian economics was such that even Richard Nixon once declared, "We are all Keynesians now."