“If it is the case that elected officials reflect the desires of the voters then we are in a world of hurt. Andy Cobb and the Partisans recently appeared at a rally carrying a sign that read, Obama is a Keynesian. Many were outraged and took Cobb to task for suggesting that President Obama was from Kenya. And, there is the American electorate for you – they don’t know the difference between a country and an economic system.” From here…
This is what we’re up against. Generally speaking, people simply don’t understand the foundation of the issues. And this is what we’re after with this series. We’re striving to grasp the differences between the Keynesian monetary controls and the Austrian free-market capitalism in an effort to grasp why it matters. And it does matter, for it affects every one of us.
As promised, today we’ll be considering the implications of Keynesianism. We’ve already taken an overview of what it is, but I found an article that gives us a nice brief definition of Keynesianism.
- People are too future oriented.
- Society tends to under-consume and over-save.
- Interest rates tend to be too high.
- Monetary policy can lower interest rates by money printing.
- The core of his theory is, “Unused savings interrupt the flow of money through the economy and lead to unemployment, reducing society’s income.”
In other words, as Hunter Lewis writes here, “Keynes believed markets to be fundamentally broken. Markets do not clear, the price system does not allocate resources, and generally, the entire system is unstable and possesses no self-correcting features.” Do you remember the first lesson you learned in any economics class you took? Supply and demand directly affect and regulate each other. Though it’s likely an over-simplification, Keynes didn’t believe in the self-managing effects of supply and demand.
By taking a walk through these five points we can grasp the implications of Keynes’ teaching.
People are too future oriented. This means they would keep their money out of circulation because they would be hoarding it. This, in turn, would stagnate the economy. At first glance this might appear logical. However, the implication here would be that people are selfish for preparing for the future because it harms the economy in the present. Put that way, we can begin to see how Keynes’ perspective could harm people in the long run, unless it lead to perpetual and uninterrupted prosperity.
Society tends to under-consume and over-save. This is clearly linked to number one, but encourages more spending, even if there is no need. Such a thought process develops and promotes perceived needs, or feeds on desires. We can be perfectly happy with our books until someone introduces us to a radio. Then we have to get a radio. Enjoying the radio on a regular basis, we think it couldn’t get any better than this until our neighbor gets a television. Wow, now we have to get one too, even if we can’t afford it.
Forget savings. Forget retirement. We’ll stimulate the economy through spending. Then we see a large entertainment center that makes the television we’re perfectly content with suddenly inadequate. We have no money, because we’ve bought into this lie. But we do have credit. So, let’s use credit to continue stimulating the economy. After all, we don’t want anyone to lose jobs, do we? Can you see where we’re headed?
Interest rates tend to be too high. Of course, that bothers all of us. We’ve become so used to cheap loans that we expect to be able to get them, failing to recognize the implications. Keynes taught that by lowering the interest rates the economy could be stimulated. Again, it seems to work wonderfully at first. People jump on borrowing since the interest rates are so low, borrowing for a bigger house, nicer car, newer furniture and even extended vacations. Nothing’s too good for us now. All we have to do is borrow and we can have all we want.
But interest rates once kept us honest. Again, it was a matter of supply and demand. If we borrowed too much, the currency supply began to dry up and become more expensive through higher interest rates. Demand would drop. This kept the value of the currency more constant and promoted self-regulation through simple economic principles rather than manipulations, as we see next.
Monetary policy can lower interest rates by money printing. This is where we find ourselves today. Money has become too cheap. If the interest rates were simply lowered without printing more money, then all the money would be borrowed in short order, leaving many would-be borrowers with no access to loans. So, in order to lower the interest rates, the printing-presses started to run. As long as the presses kept up with demand, rates could be kept lower. But, as with all resources, market saturation decreases value.
We’ve borrowed ourselves into slavery. This is most evident and does the greatest damage on a national scale. The US treasury has borrowed so much in order to “stimulate” the economy that it now cannot keep up with the interest, even though the rate is very low. And most of us have bought into the mentality, embracing the idea that we can accomplish more through debt than we can through responsible management of our funds. Eventually this catches up with us and we become slaves to our creditors. And when we’re all constrained by debt, we stop spending. When we stop spending then the economy slows down more and jobs decrease. This is what we’re witnessing today.
The core of his theory is, “Unused savings interrupt the flow of money through the economy and lead to unemployment, reducing society’s income.” This is the lie we’ve embraced. As the article linked above makes clear, the proposed paradoxes that Keynes promotes are not paradoxical at all. He was simply wrong. It is with recognition that Keynes possessed a superior intellect that Another Joe makes such statements. But the truth is evident on many levels. Simply walking through the logic of it exposes how Keynes’ teaching was wrong. It just does not compute. Ultimately, long-term stability and sustainability are sacrificed on the altar of short-term indulgences. And this truth is self-evident in the results of the Keynesian experiment we’ve all had imposed upon us. Perhaps the most maddening aspect of this is how they continue to attempt to implement these irresponsible ideas, which only serves to add naphtha to our inferno of debt.
While this overview gives us a general idea of the implications of Keynesianism, what’s happening today goes even further. For instance, when you apply for a loan today, there is no real money to be borrowed. The bank only has a fraction of what they loan out. What this means is that they loan money out that does not exist, charging interest. Of course, we all could do whatever we wanted if we could simply create money by typing in numbers. There’s a name for this. It’s called counterfeiting. You can get into some serious trouble if you try. But, when banks to it, they’re stimulating the economy.
If you had no clue about Keynesianism before reading this, hopefully you’ve been enlightened. If you had some knowledge and this helped clarify or solidify your understanding then we’ve accomplished our task. And if you’re an erudite economist and this was elementary for you, thank you for humoring us. We’re learning, and hope to help others gain better understanding of their situation through our study. Any comments below are encouraged in order to promote greater understanding.