Best Arguments Against Keynesian Economics (VANITY)?

[camerongood210]

Could I trouble my fellow FReepers in answering this question? What is the best argument against Keynesian economics? I have just learned a family member has been brain-washed into believing this economic theory by his Econ professor and figured I would take a shot at converting him. I know the basic arguments but he is an ECON major and probably has some good rebuttals. That being the case, what do you guys think?

[Wildbill22]

First task is to understand both arguments. This is a fast paced intro to econ theory;

http://www.youtube.com/watch?v=d0nERTFo-Sk
and the explanation;
http://econstories.tv/

F. A. Hayek (The Road to Serfdom) is the student of Ludwig Von Mises, both of which are the authors of “Austrian” economics. Milton Friedman and Thomas Sowell followed. Austrian theory holds basic conservative principles, spend less than you take in, don’t over tax the economic engine, don’t dilute the money supply with devalued capital to pay for it all. This causes real economic growth, although at a slower pace than Keynes’ theory.

Diametrically opposed is John Maynard Keynes who claimed any spending would cause more spending, “priming the economic pump” so to speak. So Government spending, according to Keynes, even deficit spending would create economic growth.
The fault in the theory, IMHO, is that governments spend money inefficiently compared to having that same money in private hands where people, and banks, and investors have skin in the game. Governments don’t have a existential reason to spend that money wisely or efficiently, and in fact quite the opposite. Money spent for political purposes (ultimately in the interest of the politician in control of the government purse strings) is intrinsically inefficient.

Basically money in private hands creates real growth, while “stimulus” spending just creates the bubble that ultimately bursts.

You cannot ‘steer’ markets like Keynes wishes. The literally billions of value judgments that happen every second in a truly free market cannot be artificially reproduced without grave consequences, leading ultimately on what Ayn Rand referred to as “force on man”.

Hayek had a great quote;
“The curious task of economics is to prove to man how little he knows about what he imagines he can design”.

[CharacterCounts]

True Keynesian theory (which would call for a balanced budget over the business cycle would, at best, have the effect of leveling out the upward and downward swings in an economy. Even this is not without a cost and over many years a society would not be as wealthy under Keynesian theory as it would under a free market approach.

[Wildbill22]

“The free market has an anti inefficiency mechanism by punishing the wasteful and inefficient, while politicians are regularly rewarded for the same conduct.

Taking money out of the free market and having the government spend it does nothing more than introduce a whole new layer of inefficiencies.”

-Well put.

[SeaHawkFan]

Did the Keynesian TARP or the Stimulus package do any good?

No! In fact, it made the situation much, much worse. What else do you need to know.

[Arizona Carolyn]

We had a recession in the 1920’s where the government allowed the market to self-correct and it lasted 17 months. FDR took a recession and Keynes and turned it into the Great Depression — lasted 8 times longer than the 1920’s recession — unemployment on Pearl Harbor Day was 17%... Keynes is like trying to have your cake and eat it too and not gain any weight in the process.

[SeaHawkFan]

Ask your family member if you can decide how his money is spent and that you will only charge him 30% fee to do so.

That is a micro-economic application of Keyneian economics.

A macro-economic example is having the government telling people how they are going to spend their money and charging 50% to do it.

[Redmen4ever]

Here’s the best argument against Keynesian economics. It is that Keynesian economics presumes that the government is generally or most of the time following a non-Keynesian policy of sound money and fiscal solvency. Under these conditions, Keynesian policies can be helpful in softening a downturn in the economy.

Everyone, including the Keynesians, nowadays accepts the sound money part. The fiscal solvency part is not currently part of the dialogue. It was a few years ago, under what was called Robert Barro’s rehabilitation of a point once made by David Ricardo. Also, in a little but powerful paper by Thomas Sargant and Neil Wallace. The point is this: when deficits threaten future tax increases and/or inflation, they do not stimulate the economy. I think the impotence of the stimulus package can cause the profession to reconsider their amused dismissal of the points made by Barro, et al.

So, Keynesianism works when it’s not much used, and is used only sparingly, from time to time. That is, the government puts out some stimulus, but this doesn’t raise any anxiety about future tax increases or inflation, because the government is in basically good financial shape.

When Keynesianism is used all the time, like under Bush, so that we have deficits even in good years, then there’s no way deficits can be used during a recession. Then, when you take Bush’s foolishness and multiply it by a factor of five, a la the Bailouts, the Stimulus and now the QE2, you actually depress the economy.