I actually posted this elsewhere, but while there it was primarily intended to educate, here the intention is to subject my writing form (and, if a flaw is found, by explanation itself) to critique. Obviously if I teach anyone here something that certainly wouldn't be a downside.
So, here it is:
Keynesianism has certainly found it's place among academic economists today. No, they might not all call themselves Keynesians, and they might disagree with Keynes on nearly every issue, but not many of them object to what I call "Keynes' fundamental flaw." My purpose here is to expose and destroy this flaw.
Keynesianism is the view that "aggregate demand for goods" might, at times, be "insufficient." Insufficient, that is, to meet "aggregate supply." This means, in other words, that sometimes consumers don't want to purchase the goods offered by suppliers at current price levels (in relation to their wealth).
In the Keynesian view, nothing is worse than to allow what is inevitable in this case. The businesses, no longer making money because their goods are not being bought, start to close or downsize, unemploying many people and making the problem even worse. These newly unemployed people, having lost their wages, will consume even less, causing more businesses to close or downsize, causing more people to lose their wages, on and on.
Keynesianism demands, in such cases, that the government intervene and attempt to increase "aggregate demand." Public works projects and the extension of credit are the two primary means of achieving this end that Keynesians put forth. It should be noted that Keynesians don't always advocate such measures during what they call "general gluts." Sometimes, Keynesians advocate measures to "stabilize" the economy even during times when there is no general glut, but for all intents and purposes both cases are one in the same: The Keynesians wish to "soften" what I call "economic re-calculation."
You see, Keynes considered his "point of departure" with "laissez-faire" economics to be his rejection of "Say's Law."
Say's Law states that "products are paid for with products." This certainly shouldn't be taken to mean that transactions are always, in fact, barters. As a general rule people pay for goods with money. But why is that money accepted? Simply: Because it can be used to acquire yet more goods. Thus, it is ultimately products that people trade. When you pay me five bucks for a hamburger, you're actually paying me whatever it is that I use that five bucks on.
But it is under precisely this point that Say's law is contended. Keynes argues that money IS demanded for it's own sake, rather than for it's value in purchasing goods. "Look at financial experts," say the advocates of his theory, "THEY often buy different currencies on the market for the purpose of preserving their wealth. They demand money for it's own sake."
But this is really an incredible failure to recognize the meanings of terms. What does it mean for them to "preserve their wealth" in money? What they are preserving, in fact, is their purchasing power. After all, if that money lost it's purchasing power, they wouldn't have preserved their wealth at all, but lost it. The money, STILL, is valued for what it can purchase, not for it's own sake. The investor bought that particular form of money because he believed that it would better preserve his purchasing power than whatever he traded for it.
But how does this relate to the problem of the general glut? Keynes' attack on Say's Law, in fact, turns Say's Law into a strawman, and in so doing makes it helpless to destroy the theories he advocates. Saving, or "hoarding", meaning the act of abstaining from purchasing anything with money acquired, proves that supply does NOT create it's own demand (the negation of his formulation of Say's Law.) It is demand, under this view, that fuels economic growth.
It is said that Say's Law would imply that there is never a general glut. In fact, many formulate it that way: "There can never be a general glut." Say himself offers the answer: "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another."
And so the strawman is accepted by mainstream economists through and through.
But Say's view of a glut might come with a different solution to the problem than Keynesianism, and indeed an explanation as to why the Keynesian solution is counter-productive.
A glut means that the current supply is not what is demanded by the consumers, and so they don't consume all of it. Resources have been wasted in a certain field of production. But Keynes' view of the situation is inaccurate, through his use of the term "aggregate" he fails to see the root of the problem. Current production is not in profitable fields, and it is by the profit mechanism that leads production into what might be called "economic" fields of production, those which yield the greatest value for the cost.
The Keynesian solution, the increased purchasing power of the consumers, results in consumption being "stuck" in unproductive fields. These fields, as Keynes intended, remain profitable. Those sectors don't shed jobs. This, of course, comes at the cost of future purchasing power, since the two primary means of achieving this are public works projects and the extension of credit. These can happen only be funded by taxation (either immediate or future taxation) or money printing. Taxation obviously takes money out of the economy, the opposite of Keynes intent, so he generally supports future taxation, so the cost is for the future to handle. Money printing will eventually cause price inflation, again meaning that future purchasing power will be less yet.
But Say's view of a glut implies something different. There is no use of the term "aggregate" here to hide the root of the issue. The wrong products are being produced. It can be seen, then, that the unemployment and closure of businesses is in fact a necessary medicine. Capital must be shifted from the fields which lack adequete demand, and into fields which lack adequete supply. When the mainstream economists say that they want to soften "the amplitude of the business cycle" what they actually mean is that they want to slow this process of re-calculation.
So the Keynesian economic theory causes harm to the economy in the long run, because capital is tied up in uneconomic projects (especially public works projects).
I would like, specifically, to pay homage to the various Austrian economists, particularly Ludwig von Mises and Henry Hazlitt.