Sun, 12 Mar 2006

Keynes Was a Socialist

Brad Delong (via Calculated Risk) has posted part of Paul Krugman's introduction to Keynes's General Theory of Employment, Interest and Money. Having not ready General Theory yet, I'll have to comment on Krugman's interpretation of it.

Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

  1. Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment
  2. The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully
  3. Government policies to increase demand, by contrast, can reduce unemployment quickly
  4. Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach

Sorry if my comments are naive; I am but a budding student of economics.

1. How can an economy suffer from an overall lack of demand? The overall demand in an economy is made of up of individuals' demand. Who is Keynes to say that my demand is too high or low? The most I could demand today is limited by my productivity since birth plus any wealth gifted to me. If I decide for forgo consumation today for tomorrow, no one has the right to demand that I trade with them today.

2. If there isn't enough demand for what I can supply, I must find something else to supply. For example, if I decide that the demand for my services as a computer consultant are not sufficient to generate the income I desire, I might go back to school to study economics. (Yes, I know I'm probably deluding myself to think that my services as an economist will be more valuable to society, but at least it's fun.)

3. How can government increase demand and reduce unemployment quickly? Let's see. They can print out some money. Of course, they have to do this sneakily. If they were to announce, "Tommorrow, we are going to increase the money supply by 1%," everyone would increase their prices right away (except for those lenders and employees with dollar-denominated contracts; they're screwed). Instead, people must be caught by surprise that they now have come into more money, thinking that it must be due to their prowess and innate brilliance, so they go out and spend their new dollars of spinning hubcaps and macaws.

4. Or, rather than just injecting money into the economy, the government itself can go shopping. Of course, since the government doesn't actually produce anything, it can only spend the wealth that it confiscates from its citizens. Now, they might not take that money from you today, but they'll get you for it later. And to make matters worse, when the government goes out to Walmart to spend some money, they're competing with you, and thus forcing prices up.

economics | Permanent Link

The state is that great fiction by which everyone tries to live at the expense of everyone else. - Frederic Bastiat