Another Tilt at the Keynesian Windmill

Wonder why interest rates are ridiculously low? Wonder why governments are so much in debt? Wonder why economies are forever performing below par? Look no further than the malign influence of John Maynard Keynes. He, of course, was not a bad man; he just had bad ideas. This has proved to be no impediment to their continuing currency.

I have an article in the December issue of Quadrant magazine (“Making sense of negative interest rates“) on the topic of trying to make sense of very low interest rates. My final paragraph included a reference to The Economist opining as follows: “The ECB’s critics tend to miss the underlying cause of low interest rates: weak demand across most of the rich world.”

I retorted: “Economists wouldn’t talk like that if they understood how economies actually work.” And they wouldn’t, if they had not been schooled in Keynesian economics.

Keynesian economics continues to be a blight on the economics profession and, consequently, on mankind generally. It is true that a few conservative economists try to counter its malign influence. Steven Kates is one who has repeatedly set down the arguments in Quadrant, in books, and in professional journals. More modestly, I too have tilted at the Keynesian windmill on numbers of occasions. It does no good. Central banks and treasuries are in thrall of Keynesianism. It mars their every prescription and utterance. The world is thus a poorer place materially and philosophically.

But if opposing Keynesianism does no good, why keep on? I would put the position the other way around. How is it possible not to keep on in the face of repeated offences against sound economics, however intransigent are the perpetrators?

“Weak demand” is the sine qua non of Keynesian economics. Keynesian economics is all about explaining that weak demand (too little spending) is the cause of macroeconomic ills and it is about nothing else of substance. Let me repeat, it is about nothing else. You see, you don’t have to study economics to understand Keynesian economics. I have explained it to you in a few telling words. Equally, it doesn’t take many words to explain how nonsensical it is.

What does weak demand mean? If it means anything, it means that collectively we in the rich world are sated. We have had our fill of today’s and tomorrow’s material goods and services. So, reflect.

Your aspiration to buy a fancier car if you could afford it or that innovative gizmo not yet invented are figments. Those Black-Friday crowds jostling for bargains are figments. None of us really want more of anything. And to be a touch sexist, if you are a man and ask your wife whether there is anything at all she would like for Christmas she will clearly say no, I am replete of shoes, dresses, jewellery, perfume, everything.

I am making the point with a sledgehammer. Apart, perhaps, from Trappist monks and nuns, we can all think of things we would like but can’t afford. Our demand is not the least bit wanting. Our means are wanting.

Good economics, of the kind taught by John Stuart Mill in the second half of the nineteenth century, recognises the reality of insatiable demand and puts the emphasis in curing faltering economies on the supply side. What matters is investing in the production of things that people and other businesses want. An economy hums along if there is a match between what is being produced and what is demanded. But demand is a relatively passive partner in this partnership. The action is on the supply side. Helping the supply side is the key.

Targeting economic policy to lift demand is a ‘cart before the horse’ prescription. It is bound to fail and bound to make things worse than if nothing were done. Economic policy should be targeted to help producers produce more things, better things, new things, cheaper things. It’s not too hard. President Trump is doing it by removing regulatory barriers; by fixing trade deals, which have hollowed out American industries; and, as did President Reagan, by lowering business taxes. Demand will take care of itself; and should be left to take care of itself.

What would Australia look like if the Reserve Bank and the Treasury completely discarded their misguided focus on demand? Well, hundreds of highly-paid public-sector economists would have to do something to justify their salaries. Just maybe they would focus all their efforts on the supply side.

Maybe, under the force of their advocacy, the onerous and elongated regulatory processes involved in developing and expanding businesses would be streamlined, restrictive practices in product and labour markets would be eased, business taxes would come down, and we wouldn’t be so cavalier about letting our industries (like the car manufacturing industry) become defunct victims of a globalist fetish for open-slather international trade. Fewer Australians would be unemployed; most would be more prosperous. And, fear not, they would all buy lots of things.

Instead, we have Reserve Bank and Treasury economists poring over the need to stimulate demand by one way or another. And any old demand will do. Just think, we would apparently be richer if we all went out and spent more of our incomes on baubles. Really? To quote Orwell (and never has it been so apt): “There are some ideas so wrong that only a very intelligent person could believe in them.”

  • lhissink

    What seems not understood with kick starting economies is that it’s the entrepreneurial producers buying raw materials to manufacture goods that starts the economic process. Not spending by the end of process consumers to whom the producers sell to.

    Producers start consuming when they discover they can make future profit, everything else being equal. Recessions start when producers realise they no longer are making profits and which are actually their wages. But printing money to stimulate consumer demand doesn’t work because the end consumer is not the driver of economic activity. Profit seeking entrepreneurs are and they only produce when its profitable to do so. Figuring out why businesses don’t consume needs to be understood, and that’s a universal fact – hampered markets.

  • Bwana Neusi

    How very right you are Peter, but you fly in the face of the establishment.

    Artificial stimulus is the order of the day and if the peasants won’t step up to the plate, then the Reserve Bank and the Government will have to do so.

    Build a highway to nowhere, that should keep the wheels turning (sorry about manufacturing Eh?) but borrowing money to stimulate the economy and pay off debt has all the hallmarks of loan shark banking as an instalment for a future austerity measure (ask the Greeks as to how that works).
    But hang on there! What we need to do is force people to spend and what better way than to force superannuants (read legitimate pensioners) to spend their hard earned savings to save the economy. And when that is gone the economists can always tap into the family home and maybe build another road or stadium or school hall, or even (God forbid) give cash handouts to refugees to buy stuff.

    Sadly I still recall arguing about Keynesian claptrap at Uni. Our group came first in a computer model competition where we spent our way to first place.

  • talldad

    Since only One Person was truly Good, all people other than Him (whose birth we remember at this season), are by definition less than perfect including Keynes, you and me.

    Our badness includes insatiable greed (defined by a wise wit as “the human condition where one’s reach exceeds one’s grasp”) or in economic terms unlimited demand, particularly in the face of limited actual resources to meet such demand.

    As you point out, bad ideas have bad consequences. And to paraphrase Orwell, some of those ideas are so bad that only a Keynesian could believe in them.

    Merry Christmas
    PS: you may want to instruct your spell-checker on the difference between pouring a drink and poring over a chart or map. Alternatively, the RBA may want to consider what their staff are pouring down their throats 🙂

    • Roger Franklin

      Pouring fixed, Tall Dad. Merry Christmas and thanks for the present of that correction. — roger

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