Monday, August 29, 2011

Keynesian Economics for Dummies (i.e. Conservatives)

I can’t possibly cover the scope of Keynesian Economics with one post, or even a series of posts. I don’t even agree with the Keynesianism school as a whole, so I would have little interest in delving into every aspect of the ideology. Some aspects of Keynesianism (monetary policy comes to mind) are also too complex for a layman like myself to understand (or care to learn about), and I doubt I could convey in a meaningful way anything that I just learned, anyhow.

However, the most common complaints against Keynesianism come from conservatives, and they are generally regarding policies which are empirically proven to successfully do what they aim to do. The complaints come in the form of general opposition to government market intervention.

The labor market in particular gets a fair share of attention, especially in these times of high unemployment. Keynesianism is said to suggest that the government essentially pay people to dig ditches, and then pay people (the same ones or different ones) to fill those ditches back in.

This is a time tested strategy. It seems stupid, but the mechanism is quite simple to understand. The government has created jobs where there were none before, and after the ditches have been filled in, those people now have job experience, even though there is no product to show for their labor.

In theory, no utility is supposed to be created under these programs, because if the government pays people to, say, grow corn, the corn would have to be destroyed at the end of it, or it would distort the corn market and hurt private corn growers. A similar principle is at work behind subsidies; the government sets a minimum price floor and will buy a product at the price, which artificially raises the marketplace price for that product.

We got a lesson in what happens if you try to provide a benefit through these programs when Reagan introduced us to “government cheese.” Basically, the government was buying cheese in order to artificially raise the price of cheese, and then all that cheese would just sit in warehouses rotting. Reagan thought, “Why not give it to poor people?” A noble idea, and perhaps the most liberal-esque thing he ever did, but it created a fiasco in the cheese industry because people were able to get cheese for free, which devalued cheese in general.

The beauty is, we don’t have to worry about this inefficiency in real-world applications of Keynesian labor economics, thanks to externalities.

Externalities are costs or benefits not transmitted through prices that affect people who did not have any involvement in the transaction. When power companies spew pollution into the air, that is an externality paid by all of us. When a company dumps chemicals in the water, it’s the same thing. Really, any form of pollution is an externality. Some externalities are positive, and this is where Keynesian economics comes in.

The classic example of a Keynesian labor project is road construction. No one is out building roads privately. Sure, it happens, but it’s not a very large-scale operation, and it is generally accepted (outside of Fox News) that without government intervention, highways in particular would not exist. When a government pays a construction company to build or repair roads, it creates a demand (and means of paying) for labor that did not exist before. And rather than just digging and filling in ditches, the end result is a positive externality which provides a benefit for the nation’s citizens and economy.

Other projects, like mass-transit and monument construction, are also remarkable in their ability to stimulate a stagnant labor market. These policies helped pull the US out of the Great Depression. Even war (and the related military industrial complex) operates on Keynesian principles, whereby ditch digging and filling is replaced by bomb making and dropping.

This is sort of the dilemma in Keynesianism: the government has the ability to stimulate economic growth in many ways, including war-mongering. And it works, so it almost seems to justify war. And yet, I generally disagree with the military application of Keynesianism, and prefer only to reserve the use of deadly force for purposes of self-defense. There are so many better ways of applying our tax dollars than by creating an artificial industry of war.

In fact, there are many things we as a country could be doing with that money. Healthcare comes to mind, but suppose you find the idea of not letting poor people die of preventable illness to be appalling. There is another industry that, like road construction, can provide a national benefit that we sorely need to succeed.

In an effort to pinch pennies, those on the right continue to demand education funding be cut, despite under-performing students and financially-strapped school systems. If the government doesn’t fund education, there aren’t others lining up in the wings to take over. Religious private schools get a lot of attention, but trust me: you don’t want our future children’s education in the hands of churches, and that’s not even taking into account that without public schools, only a lucky few could afford a school that costs as much in yearly tuition for K-12 as an out-of-state college.

These are the things our taxes should be going towards: educating our fellow citizens, building the means of transportation that make travel possible in our vast nation, maintaining parks, cleaning environmental spills and accidents, even etc. Yet, many of these things are getting done, while a large chuck of our money goes towards paying people in the arms industry, who are given our hard-earned tax dollars in order to build something we intend on exploding over individuals we know little or nothing about.

It’s a real shame that some of the best ideas can be used to do such stupid and horrible things.


  1. Thanks a lot for your post. I guess one example of keynesian economics is Portugal. Between 2000 and 2008 many roads were built. That in turn reduced unemployment.
    The problem is that Portugal lost its ability to print money so deficits were " filled" with borrowed money. Interest rate start rising around 2008 , 2009 , that increased deficit , and now country is bankrupted.

    So I guess in the european union, from the point of view of an individual country, keynesian economics do not work since such country does not have the power to create currency.

  2. The idea is that road building is a good thing by definition. The state borrows to change behaviour and reduce unemployment shock, but the key idea was to pay back what you borrowed. You either invested the borrowed money wisely and obtained a return that paid off the debt, or you tighten the purse in good times and pay it off. Neither happened in practice. The Western World is spiralling down into bankruptcy because the Keynesian investment was not wise and only realized two catastrophic outcomes: a sense of entitlement among people and an ever growing government. The earlier comment shows how this played out in Portugal. The practical (as opposed to theoretical) application of Keynesianism has reached the end of the road because the credit card maxed out. The modern last resort is wild currency manipulation and unprecedented printing of valueless money. In adition of devaluing pensions and people's savings, the so called "quantitative easying" is proportional with the inability of govrenments to borrow. Only an irresponsible individual would refuse to acknowledge that this is the end of that road. Do you happen to know whet Keynes thought of printing money non-stop?


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