Keynes is Still Wrong
John Maynard Keynes (1883-1946) rhymes in English with “brains” and “reigns.” He still reigns.
Keynesian economics rests on two premises.
One is “stagnationism,” based on a balloon theory of the economy—that people must keep puff-puffing by spending, or the balloon will collapse. The talk by journalists and many economists nowadays is that “consumption is the biggest part of GDP, and so any spending expands the economy.” Spend or die, which is a version of the more technical versions of Keynesian macroeconomics. It amounts to the old claim that expenditure on luxuries at least employs workpeople. Even Adam Smith deployed it, in one of his two very different uses in his published writings of the phrase “the invisible hand.”
The other Keynesian premise is that economists know best, and therefore should be recruited to head off stagnation. The Keynesians are pessimists. A perennially popular form of stagnationism is that the low-hanging fruit has been picked, and future improvements will be very, very hard to achieve. Keynes believed, as many economists still do, that static diminishing returns, which is true, applies also to innovations, which it does not. As late as 2013 the economist Tyler Cowen was announcing that “average is over,” and in 2016 the economist Robert Gordon was lamenting the end of innovation. Pessimism sells.
The Keynesians claim they can fine-tune the economy because they know the future at the macro level and the micro level. In 1946 the Keynesian Joan Robinson (1903-1983), asserted that “when large scale adaptions have to be made, central control is much more flexible” than private enterprise”.1 Odd that she did not go into business, profiting from her amazing knowledge of flexibility.
Let us, said the Keynesians, bring macro manipulations and micro regulations to save us from the horrors of stagnation and disorganization. Most economists in 1946 assumed, for example, that without their social engineering, the Great Depression would resume. After all the soldiers were coming home by the millions, to become unemployed. It didn’t happen, not even close.
The balloon theory and fine-tuning, then, are factually mistaken. Let’s stop believing in the Keynes’ Brains.
1. Joan Robinson, “Obstacles to Full Employment” (1946), in Id, Contributions to Modern Economics. New York: Academic Press, 1978, p. 27.
Weekly column in Folha de São Paulo, Brazil
Translated into Portuguese for the newspaper.
A child can understand that removing a bucket of water from the east end of a swimming pool and dumping it in the west end will not increase the quantity of water in the pool. Keynes was obviously smarter than I, but somehow not quite.