Magazine article Ideas on Liberty

The Return of the Keynesians

Magazine article Ideas on Liberty

The Return of the Keynesians

Article excerpt

The Keynesians are back. After laying low in recent years, they are promoting their interventionist plans once again. Take Joseph Stiglitz, for example. He apparently waited until he gained the credibility of sharing the Nobel Prize in Economics in 2001 to become an unabashed cheerleader for Keynesian economics. Such a universally recognized accolade allowed him openly to support a body of economic thought that had recently been thoroughly discredited by its notable failures. His new book, Globalization and Its Discontents, is his most recent exercise in expressing contempt for free markets.

True to form, promoters of Keynesian economic theories are encouraging governments to engage in active policies to manage demand and consumption. Their selective memory contains a gap that overlooks the stagflation of the 1970s, soaring public-sector deficits of the 1980s and 1990s, and relentless growth in government control over private lives during most of the post-World War II period.

It would be wise for the rest of us to resist their belief that governments can fine-tune an economy by making adjustments in taxes or government spending or manipulating interest rates. This caution is offered since there is a dearth of evidence to support their views.

As it is, Keynesian policies are based on a widely accepted fallacy that economic growth is driven by demand, especially consumption spending. Perhaps unwittingly, those who support this view see savings as a nonessential and even counterproductive activity that undermines the health of the economy.

Nothing could be further from the truth, since economic growth requires the fuel provided by savings. When households decide to boost their savings, the pool of investment capital is increased. In turn, interest rates are pushed down naturally and a larger number of investment projects can be undertaken.

The negative view of savings is painfully familiar in Japan. However, attempts at demand management by Japan's government over the past decade have failed. Now that interest rates are virtually at zero and fiscal spending has become constrained by high debt levels, Tokyo has exhausted conventional policy tools to offset its economic malaise. The truth is that these traditional tools do not work.

Instead of the Keynesian presumption that demand drives economic growth, the reverse is true. Demand is the result of economic growth. Paraphrasing an economic law named after the nineteenth-century French economist J.B. Say, market economies work on the basis of the supply of one good creating the demand for one or more other goods. In other words, you must first produce to be able to consume.

Reviving the neglected verities of Say's Law requires debunking a belief system that is subconscious and seldom subjected to introspection. One problem in exorcising Keynesian policy influences is that the demystification requires understanding some basic economic theory that is hard to grasp. Further, many implicit assumptions behind much of Keynesian analysis will seem obscure in their effect or validity to lay persons.

Understanding Say's Law begins with the commonsense observations that purchasing power as the basis for consumption necessarily arises out of the act of production. Moreover, just as goods cannot be purchased unless people earn income from producing, so goods cannot be consumed if they are not produced. …

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