Magazine article Ideas on Liberty
The Failure of Keynesian Economics
That anyone can still believe Keynes's General Theory holds any answers to the world's economic problems is one of those sad facts that make one realize just how difficult it is to gain headway in the dismal science. An article on John Maynard Keynes in the Washington Post late last year, which argued that "Keynes's work on the Great Depression was remarkably relevant to the dilemma Bush and Greenspan face now," is a reminder of just why our economic difficulties seem to multiply rather than diminish.
That Alan Greenspan thinks of the General Theory as his font of economic knowledge only adds to the depressing quality of this article. There it said that "the Fed Chairman has been known to rise from his chair midconversation and read aloud relevant passages from that 65-year old book for visitors." It is anyway quite clear from the actions he takes that Greenspan does think this way, but it is only one more indication of just how deeply ingrained Keynesian theory has unfortunately become.
Even the simplest distinction between public spending and tax reductions seems too difficult. It is all stimulus, and in the structure of a Keynesian model it all comes to the same thing. Yet the two could not be more different. Tax cuts move expenditure out of the hands of the public sector and, so long as the budget remains in surplus, adds to the momentum of the economy.
In contrast, unproductive public spending pulls an economy down with a relentlessness apparently impossible for any Keynesian economist to fathom. Such public spending, especially if it takes budgets into deficit, inevitably makes matters worse.
Keynes's only interest in writing the General Theory was to encourage greater levels of public spending. He had been an advocate of higher spending for a period going back more than a decade by the time his magnum opus was finally published in 1936. There is nothing Keynesian about tax cuts. Tax cuts were never on Keynes's agenda, and to infer that lowering taxation is in any way a "Keynesian" approach is an anachronism read backwards into what might have been said instead of what actually was said.
And we have an example of such Keynesian expenditure policy before us, if anyone would care to look. …