Wednesday, January 27, 2010

The Fatal Flaw of Keynesian Economic Policy....

Keynesian policy does NOT differentiate between positive and negative action.

And THAT is its fatal flaw.

Keynesian economics posits that “government spending and government jobs can generate as much productivity and GDP as private sector jobs.”

That is a ridiculous, even an absurd assertion. Public sector jobs (teachers, cops, firefighters, social workers, etc.) exist, only because they can be and are paid for by private sector revenues based entirely on producing value and making things and as such. Public sector jobs, are entirely funded by tax revenues and as such, they are a net drain on GDP. That’s why the public sector must be coldly efficient, utilizing small workforces that work smarter to constantly do more with less, so that the private sector can not only flourish, but expand, because the private sector’s gains allow the public sector to exist.

Harare, Zimbabwe has as many needs as any American city, perhaps even more, BUT there is no money in Zimbabwe to fund all those “necessary” public services.


Primarily because there’s no vital, expansive private sector to provide those revenues, from which a workable public sector might be funded.

Keynesianism’s flaw is best represented by its own “broken window” theory. John Maynard Keynes (pictured on the Time Magazine cover above) saw a vandal throwing a brick through a storefront window as “a good thing” because it resulted in a good deal of economic activity. He started off with the premise that the store owner, himself, was inconvenienced, but effectively unharmed, since that storeowner was insured. From there, John Maynard Keynes outlined a flurry of activity that Keynes believed led to a greater overall economic vitality, as from there, the insurer goes to work, the insurance company sends in the assessor and the assessor gets to work, after that, the glass maker, the window framer and the glazer all get work...and so on.

The key flaw is that Keynesianism makes no distinction between positive (productive) and negative (destructive) activity. That’s as absurd as someone observing two people in two different scenarios, in the first, seeing two people engaged in a cooperative, productive venture, while in the second, seeing the same two people observed in a brawl, rolling around on the floor throwing punches...AND making no real distinction between them, as in the second scenario, the emergency room doctors get work, perhaps the local dentist, as well as the police and court officers and eventually, defense attorneys all get to work. If the two combatants must buy new clothes and other items damaged in their brawl, even more economic activity is generated.

That failure to distinguish between positive/productive action and negative/destructive action is the real flaw of Keynesianism and why Keynesianism fails to realize that ALL productivity and creation is delivered by the private sector, as it’s produced by a combination of investors, entrepreneurial owners and workers who cooperate in producing all that.

That, in a nutshell, is why Keynesian economic policies always deliver poor economic results. Of course, Keynesianism is the predominant liberal economic orthodoxy of the day, but most “Moderate” or “Rockefeller-wing” Republicans are Keynesians too. Herbert Hoover, FDR, LBJ, Richard Nixon, Jimmy Carter, George Bush Sr., G W Bush are some notable Keynesian Chief Executives. Barack Obama is best described as a “hyper-Keynesian.”

There are still Keynesians who argue that, “At least the poor are better off, when wealth is redistributed from the rich to the poor,” always conveniently leaving out that the “political class” is also better off, much, MUCH better off, when it’s THEY who do the “redistributing.”

But Margaret Thatcher captured the sentiments of the political class perfectly when she said, “In the end, you’d rather that the poor are poorer, so long as the rich are less rich.”

Of course, that which Maggie Thatcher criticized was NOT the fault of Keynesianism, but a flaw of human nature and perhaps the fatal flaw of the venal “political class” at all times and in all places.

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