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What is Keynesian economics based on?

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I have a very liberal friend who always complains that Republicans don't know enough about economics to learn that Keynesian economics dictates that a type of utopia can only be acheived through consumer spending, and less gross savings. I haven't quite come up with a free market reply to that, because I am just now getting into economics seriously, and particularly free market capitalism.

*Personally, from what I've read of Keynes, I think he was a lunatic.

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In part he is right: Republicans in general don't know that much about economics. But then he himself doesn't know that much about Keynesianism if he thinks it only requires more spending and not investing. At its heart, Keynesianism is a political solution that makes it the function of government to fool people into acting how they otherwise would not.

Take the use of government debt spending to artificially increase demand, which otherwise would not exists and "crowds out" others wanting credit for their projects. It believes people are unthinking machines to be manipulated by false economic signals.

This is a simple debate. His is demand-side economics that believes there is an underconsumption by consumers and investors, so someone--government--needs to step in and fill the gaps. But there is no reason to assume such underconsumption exists; there is an unending demand for labor to satisfy needs and wants. Say's Law, which states supply for one product creates demand for the things needed to create it, put the idea of underconsumption to rest long ago.

Even ignoring that line of argument, Keynesianism is absurd on its face. Imagine you were Robinson Caruso on a deserted island and you were faced with the likelihood that you would be stranded there, by yourself or with in a group, for a long time to come. Which would be a better plan to survive? Consume all your resources as quickly as possible. Or save some resources for a rainy day in order to use them later in building better tools to survive.

Instead, history has shown that the richest nations in history are the ones that have the largest portions of their incomes held in savings. Without savings, you are unable to purchase large capital-goods products like cars and homes. The individual buying the home doesn't even need to be the one doing the savings, so long as others have put money away in banks for example. These capital-intensive goods are responsible for increasing worker productivity and wealth.

I suspect your friend could then take the tract that government could just as easily collect those savings through taxes. But that neglects the history of governments, that they are a costly and usually unwise means of transferring property, saying nothing of the ethics of it.

Ask him to explain the existence of stagflation in the 1970s, which Keynes did not believe possible. Most liberal economists reject Keynesianism in favor of a "New Keynesianism" that talks of supposedly inflexible wages.

That’s good for now.

Edited by Justino

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I think my friend is refering to Keynes's utopia where interest rates become 0% so that the capitalists get choked out of existence. And so that all resources are used now to create Keynes's "wonder cities." Keynes and my friend believe that savings keeps us from acheiving our best standard of living. Thus Keynes's end goal was to do away with savings by using government to make interest rates 0% and thus rendering savings useless, so that people consumed all that they could and used all resources to acheive his G.E. Moore-ian ideal of living in the moment and making the most joy out of it.

(Edited to remove quoting of the entire previous post. - softwareNerd)

Edited by softwareNerd

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How, exactly, would people spending more without necessarily producing more lead to a utopia? What is the cause-and-effect relationship?

I don't know. I'm not advocating this; Keynes is. Although he doesn't expect them to spend more than they produce, to be fair. He just says that if he can get the savings down to 0% interest rates, then there will be no reason to save so that we spend all our productive activities on producing his "wonder cities," rather than the "slums" that capitalism builds because it saves productive assets for the future. I told you Keynes is crazy.

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Does he want savings at 0% or the interest rate? Even if the interest rate is null, people will continue to save because they each have their time preference. It would not be possible to eliminate the time preference unless you eliminate uncertainty about the future; paying interest only encourages, not entirely produces, savings.

Regardless, if savings were zero then how would we afford to produce these wonder cities? No one has saved the money to afford expensive capital-intensive machines to build the skyscrapers, which also takes sometimes billions of dollars. I suppose he could argue that this could be done by investments, but that would require people to put off consumption for some time and reap the rewards at a later time.

Ask him what he thinks happens to money when it's saved, stuffed into a mattress. It's in a bank, where others who have a more urgent need for the cash, go to spend it somewhere. The money is spent in either case, but in this scenario money is not distributed blindly. They make investments into machinery, increasing worker productivity and therefore earnings.

There is no reason to believe acting prudently is something to discourage.

Edited by Justino

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Sometimes people exaggerates a lot to get what they want. They might mean actually 0%. If someone spend all the government money on the buildings, the country will be poor. There has to be a way when the money goes in and out. It is also that your friend is a little bit right. Well, for the majority part, republicans might and might not know how to spend their money. Some do. Maybe republicans under the education of non-republicans, or raised by non-republican parents. It is also true that some people who are republican get to know how to spend the money even without that kind of education. I think he meant the majority. Sometimes people forgets details in their statements. :lol::D:pirate:

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For good ammo, get 'The failure of the New Economics' by Henry Hazlitt who read through Keynes and he could not find one statement in the book which was both true and original.

He found that Keynes was a revival of the mercantilist economists of the pre-Adam Smith era and the 19th century 'money cranks'.

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For good ammo, get 'The failure of the New Economics' by Henry Hazlitt who read through Keynes and he could not find one statement in the book which was both true and original.

You might also pick up the pamphlet "Production vs. Consumption" by George Reisman. He argues that there are two fundamentally different approaches to economic theory, characterized by different views of what the basic problem of economics is.

Consumptionist economics (of which Keynes is an example) views the basic problem of economics as maintaining a high level of consumer demand. Left to their own devices, people allegedly run out of reasons to buy new stuff. Demand falls off, and production withers. You get a depression. The way out is to "prime the pump" by taxing away people's savings and converting them into economic demand via government spending. This view of economics also tends towards the broken window fallacy -- if the problem is generating demand for goods, destroying stuff so it has to be replaced (or sucking goods out of the economy and using them up in the construction of pointless monuments) is economically beneficial.

Productionist economics views the basic problem of economics as how to create more wealth using fewer resources (i.e. with greater efficiency). Demand is essentially unlimited, or rather is limited only by the wealth people have available to trade. In this model, savings are vital because they are used to pay for a larger supply of capital goods, extending the structure of production and making it more efficient. Taxing savings and spending them on consumer goods, as the Keynesians would have us do, just shifts demand away from capital goods and onto consumer goods. The net long-term effect is a lower level of capital intensiveness in the economy, a less efficient production of wealth, and a lower rate of economic growth. (Or, in extreme cases, economic contraction.)

It's a short essay, 11 pages, but IMHO very enlightening.

(Reisman's magnum opus, Capitalism: A Treatise on Economics also spends at least two chapters specifically criticizing Keynes, if you want more depth.)

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I have a very liberal friend who always complains that Republicans don't know enough about economics to learn that Keynesian economics dictates that a type of utopia can only be acheived through consumer spending, and less gross savings.

You might point out to him that there are many nations on earth with zero gross savings, i.e. with populations that consume everything they have every day. North Korea comes to mind. Is that the kind of utopia he wants here in the U.S.?

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[Asking about Japan's interest rates.]

Is this true? Can someone get a link or something?

http://www.ny.frb.org/research/global_econ...con_charts.html

The charts available on this webpage only go back to 2000, when the whole world was in at least a recession. A look at the interest rates shows that short term debt, that is, risk-free lending, has been done at 0 (yes, zero, goose-egg, doughnut hole, etc.) percent since 2000. I recall coming across older sources claiming that Japan's economy is stagnant. The causes cited were that Japanese banks made loans based on the successes of pull peddlers and not value creators, and were not willing to declare default on non-performing loans. The Nikkei average is also trading well below its high, reached in the early nineties.

Japan is going to have more troubles ahead for it too, since its generous social welfare programs have required a growing younger population to serve as a leech base, yet nobody is having kids. At least Japan doesn't have to contend with a growing population of Muslims, like Europe does.

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Japan is going to have more troubles ahead for it too, since its generous social welfare programs have required a growing younger population to serve as a leech base...

"Leech base." What a great expression! I'm going to add that one to my rhetorical toolkit.

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Hasn't Japan had 0% interest rates for years with no effect?

I think it is important to keep in mind that japan has had "deflation"(negative inflation) for many years.(I am not sure whether this is still the case). Prices of goods and services have actually reduced over time. This means that even with an interest rate of zero percent, the "real interest rate" which is defined as "nominal interest rate - inflation" is positive. Thus people are still going to have an incentive to save because a yen tomorrow will be worth more than a yen today. [For the sake of clarity I should add that this post is not a defense of keynes whose ideas are silly.]

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