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Thread: A Review of Keynesian Theory

  1. #1

    Default A Review of Keynesian Theory

    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

    http://www.huppi.com/kangaroo/Keynesianism.htm

    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.
    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."
    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?



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  3. #2

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    they buy into it because they are stupid. They see immediate results and attribute it to their economic meddling, but once the meddling blows up in their face (and it always does), they claim they didn't meddle enough. They completely ignore the fallout was their fault, as they are doing right now. They create inflationary booms and when the bust comes, they blame it on the free market. Furthermore, Austrians are hard advocates of "tough medicine". The idea of allowing people to suffer pain is not politically acceptable while the idea of bailing everyone out is. Consequently, the tough pain yields a healthier economy while the bailing out kills it.

  4. #3

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    they buy into it because they are stupid.
    I disagree, they aren't stupid, they might be ignorant or oblivious, but I can't buy into the idea that the vast majority of economists out there today are idiots. I would hope that there are sound reasons why they all buy into Keynes, and I really want to understand what they are so that I can explain to non-Libertarian folks why Keynesian theory isn't working better than the free market would.

    The idea of allowing people to suffer pain is not politically acceptable while the idea of bailing everyone out is. Consequently, the tough pain yields a healthier economy while the bailing out kills it.
    This is a great point.

  5. #4

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    I went to try to educate an economics professor on the gold standard. They are stupid. He tried to bring up examples of how we need government meddling and every problem that he tried to offer a solution to only came about because of government intervention. They lack an understanding of cause and effect plus what oakman said.

  6. #5

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    What is Britain's monetary system if it is not monetarism? They have the strongest currency in the world right now. It worth about double what our dollar is worth.

    I think the reason economists follow Keynesian economics is for the same reason that the status quo belief in this country is that the government should help everyone. Economists aren't really any different.

  7. #6

    Default

    Quote Originally Posted by mrwiizrd View Post
    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

    http://www.huppi.com/kangaroo/Keynesianism.htm

    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:

    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?
    100% of ALL STATISTICS... Can be made to say ANYTHING!

    Oh and never forget with history... The Revisionists have the say on how to rewrite history, for themselves. Usually always Government and Banks.

    Take that with a grain of salt
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  8. #7

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    My main problem with Kenyesian economics is the arguement that consumption drives the economy. They don't and will not grasp the fact that savings will ultimately bring us economic success.

    Most see that savings slows consumption (obviously), which in the short term slows the economy, but they need to look more into the long term. Savings turns into investments...and some believe they should be seperate.

    I also don't agree with this:

    Keynesians believe that in conditions of economy-wide
    unemployment, idle factories, and unsold merchandise, price and
    wages will not adjust downward to their market-clearing
    levels—or that they will not adjust quickly enough, or that the
    market process through which such adjustments are made works
    perversely as falling prices and falling wages feed on one
    another.

    Keynesians believe that long-run expectations, which have
    no basis in reality in any case, are subject to unexpected change.
    Economic prosperity is based on baseless optimism; economic
    depression, on baseless pessimism.

    In the Keynesian vision, a change in the interest rate has
    little effect on (aggregate) investment. In other words, the
    demand for investable resources is interest inelastic—a
    judgment that reflects the Keynesians’ short-run orientation.
    Privatize the profits, socialize the losses. - Government at its best.

  9. #8

    Default

    Quote Originally Posted by mrwiizrd View Post
    I disagree, they aren't stupid, they might be ignorant or oblivious, but I can't buy into the idea that the vast majority of economists out there today are idiots. I would hope that there are sound reasons why they all buy into Keynes, and I really want to understand what they are so that I can explain to non-Libertarian folks why Keynesian theory isn't working better than the free market would.



    This is a great point.
    Ignorant and oblivious? Sounds like stupid to me.

  10. #9

    Default

    Quote Originally Posted by ShannonOBrien View Post
    What is Britain's monetary system if it is not monetarism? They have the strongest currency in the world right now. It worth about double what our dollar is worth.

    I think the reason economists follow Keynesian economics is for the same reason that the status quo belief in this country is that the government should help everyone. Economists aren't really any different.
    umm, just because they have the highest ratio to the dollar doesn't mean they are the strongest currency. By that logic, the yen must suck.

  11. #10

    Default

    If you want some pure Austrian perspective; head over to the Mises Institute forum... simple copy and paste would suffice for your thread.

    Mises.org
    “I will be as harsh as truth, and uncompromising as justice... I am in earnest, I will not equivocate, I will not excuse, I will not retreat a single inch, and I will be heard.” ~ William Lloyd Garrison

    Quote Originally Posted by TGGRV View Post
    Conza, why do you even bother? lol.
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  12. #11

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    What kind of career could economists have if economics made sense?

    Do you think "professional" economists are going to espouse an economic view that makes sense to a ten-year old with modest intelligence?

    This way when people scratch their heads (about economics) they can pat you on the shoulder and say "there, there, it's OK - you're not an economist, after all."

  13. #12
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    Quote Originally Posted by icon124 View Post
    My main problem with Kenyesian economics is the arguement that consumption drives the economy. They don't and will not grasp the fact that savings will ultimately bring us economic success.

    Most see that savings slows consumption (obviously), which in the short term slows the economy, but they need to look more into the long term. Savings turns into investments...and some believe they should be seperate.

    I also don't agree with this:

    Keynesians believe that in conditions of economy-wide
    unemployment, idle factories, and unsold merchandise, price and
    wages will not adjust downward to their market-clearing
    levels—or that they will not adjust quickly enough, or that the
    market process through which such adjustments are made works
    perversely as falling prices and falling wages feed on one
    another.

    Keynesians believe that long-run expectations, which have
    no basis in reality in any case, are subject to unexpected change.
    Economic prosperity is based on baseless optimism; economic
    depression, on baseless pessimism.

    In the Keynesian vision, a change in the interest rate has
    little effect on (aggregate) investment. In other words, the
    demand for investable resources is interest inelastic—a
    judgment that reflects the Keynesians’ short-run orientation.
    Here is Nobel prize winner Paul Krugman's Keynesian words on consumerism :
    ...the long-feared capitulation of American consumers has arrived. According to Thursday's GDP report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

    To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn't been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

    Also, these numbers are from the third quarter -- the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

    So this looks like the beginning of a big change in consumer behavior. And it couldn't have come at a worse time.

    It's true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent -- sometimes it has even been negative -- and consumer debt has risen to 98 percent of GDP, twice its level a quarter-century ago.....

    ....Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate...For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap....

    ....The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone's income.....

    ....if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment....

    .....For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It's true that Ben Bernanke hasn't yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it's hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

    The capitulation of the American consumer, then, is coming at a particularly bad time. What we need is a policy response.....http://www.startribune.com/opinion/c...D3aPc:_Yyc:aUU

  14. #13

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    frank shostak wrote a good article recently describing why keynesianism sucks

    http://mises.org/story/3169
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  15. #14

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    Quote Originally Posted by Number19 View Post
    Here is Nobel prize winner Paul Krugman's Keynesian words on consumerism :
    Mises.org

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    Quote Originally Posted by TGGRV View Post
    Conza, why do you even bother? lol.
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  16. #15

    Thumbs up

    Quote Originally Posted by slantedview View Post
    frank shostak wrote a good article recently describing why keynesianism sucks

    http://mises.org/story/3169

    good article, thanks for posting

  17. #16

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    "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." -- John Maynard Keynes

  18. #17

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    Quote Originally Posted by Truth Warrior View Post
    "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." -- John Maynard Keynes
    He wasn't warning anyone, he was explaining how it could be done... lolz..

    “I will be as harsh as truth, and uncompromising as justice... I am in earnest, I will not equivocate, I will not excuse, I will not retreat a single inch, and I will be heard.” ~ William Lloyd Garrison

    Quote Originally Posted by TGGRV View Post
    Conza, why do you even bother? lol.
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  19. #18

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    Quote Originally Posted by Conza88 View Post
    He wasn't warning anyone, he was explaining how it could be done... lolz..

    As it's OFTEN been done.

  20. #19

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    Quote Originally Posted by theoakman View Post
    umm, just because they have the highest ratio to the dollar doesn't mean they are the strongest currency. By that logic, the yen must suck.
    I don't get it. I looked at all the currencies in the world in comparison to gold.

  21. #20

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    Quote Originally Posted by Conza88 View Post
    If you want some pure Austrian perspective; head over to the Mises Institute forum... simple copy and paste would suffice for your thread.

    Mises.org
    great suggestion, I didn't even realize they have a message board over there, I found plenty of good data on Keynesian theory that pretty much answered my questions.

  22. #21

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    Many Austrians refute the widely held view that WWII ended the Depression. Actually, the work is more nuanced than that. In reality, WWII was no cure for the Depression, rather it merely redirected productive means elsewhere under a war-time planned economy. After the war ended we would have just slipped back into depression due to same policies still being in tact. However, the economy was more liberalized, and even though statistics show that economy shrank because they also measure government spending, and at the time government spending was greatly decreased, the private sector at that time exploded and made way for our recovery. I wish I could give you all the material Austrians have done on the Great Depression, but that would take too long. Just go to mises.org, fee.org, lewrockwell.com or Google Video and look up stuff there.


    From the article:

    "Almost all economists agree that World War II cured the Great Depression;"

    Austrian economists like Robert Higgs give reason to believe this is not so.

    "Keynesians believe this was so because the U.S. finally began massive public spending on defense. This is a large part of the reason why 'wars are good for the economy.'"

    Wow, this is dangerous thinking. Even Bastiat could have refuted this nonsense 2 centuries ago. Nonetheless, Austrians have also done some updated work on these notions as well.

    "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."

    Seven short years? That's a euphemism if I ever heard one. Actually, the Depression took like 15 years to recover from. The war was simply a distraction. Because once our boys came back, the economy had to be restructured and the planned war-time economy rejected.

    "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)."

    All those prior to 29 were actually rather short, but indeed pretty severe and sharp.

    "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.'"

    And yet when Nixon declared that we had some of the worst econmic years since the Great Depression (the 70s and early 80s). I find it amazing that many economists today credit the Fed and other policy makers for avoiding recessions during the last 30 year period, but investor Marc Faber made a comment a few weeks ago on TV that in consumption based economies, there is much less cyclicality--and this make perfect sense if you're aware of Austrian capital and business cycle theory.

    But Keynesian economics, and interventionist economics in general, have been discredited as well. Just ask the Japanese how the Keynesian presciptions have helped them. They've been in an almost complete stagnation for a couple decades.


    Anyway, that article sounds like it was written by a middle school student. OP, you ask the question as to why most academics and policy makers still believe in Keynesianism or interventionism, and all I can say is that it's ideological bias. I also believe they're control freaks and would-be social engineers, who absolutely hate freedom.

    If you want to get a good refutation of Keynesian theory, read Hazlitt's "Failure Of The New Economics" free at mises.org. However, most have already abandoned Keynesian theory in favor of more updated neo-classical theory, neo-keynesian theory or whatever.


    Here's an interview from Antiwar.com of Robert Higgs: http://antiwar.com/radio/2008/09/27/robert-higgs-2/. I think it's an ok introduction into the concepts I'm talking about. It could be a good starting point for branching out into other research areas of Austrian economics, the Great Depression, war etc.
    Last edited by Paulitician; 11-04-2008 at 05:33 PM.





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