The dumbest article ever written

[Temjin]

Ahhh, the wonder of Keynesian economics. Keynes's teaching will save us all!

You have to really understand that these people have studied in his economic teachings for decades and it is emotionally impossible for them to change their belief of which they have invested so much into it. Tell them about Austrian economics and the first thing they will do is to criticize you for not thinking mainstream and is not acting in the interest of the public.

Yep, let's punish the savers. Might as well give every one a million to spend to simulate the economy.

 

[eladamrine]

Keynesian economics is sound and based on concrete theory. Saving does exacerbate recessions, even though it seems counter intuitive. If savings (leakage) increases as people become more thrifty, and investments (injections) decrease as business do not foresee any point in capital expenditure then the aggregate expenditure will decline greatly. Then there is an accumulation of inventory, which signals to producers to cut production. We know price-wages isn't completely liquid due to trade unions, contracts, minimum wage legislation, etc...so employment will go down. People have less to spend and aggregate expenditure falls. So instead, government intervenes by bailing out companies and giving banks money. Thats my two cents from reading a text book anyway, but i see nothing wrong with Keynesian economics.

 

[Stormin_Norman]

keynes was right.

it was his followers who werent.

schumacher and keynes were onto the same thing. the economists which took keynes' thoughts and butchered them are the problem.

keynes' thoughts are as much keynsian in practice as marx's were communism in practice.

keynsian economics bought massive budget deficits for the 50,60s and 70s. this caused a financial meltdown and massive inflation in the 70s and 80s until monetary economics reduced the government spending and money supply to restore price stability.

then they go and do it all again. make no mistake inflation was there. but this time in the asset markets, not the consumer market; thanks to cheap chinese imports.

the asset inflation caused the bubble which has so spectacularly busted along with huge government borrowings.

read keynes. ignore the bastardisation of his works by those which claim his name.

 

[wayneL]

keynes was right.

it was his followers who werent.

schumacher and keynes were onto the same thing. the economists which took keynes' thoughts and butchered them are the problem.

keynes' thoughts are as much keynsian in practice as marx's were communism in practice.

keynsian economics bought massive budget deficits for the 50,60s and 70s. this caused a financial meltdown and massive inflation in the 70s and 80s until monetary economics reduced the government spending and money supply to restore price stability.

then they go and do it all again. make no mistake inflation was there. but this time in the asset markets, not the consumer market; thanks to cheap chinese imports.

the asset inflation caused the bubble which has so spectacularly busted along with huge government borrowings.

read keynes. ignore the bastardisation of his works by those which claim his name.

Indeed,

Although I don't favour the Keynesian model, properly implemented, I can see some sense in it. The problem as you and others mention is the bastardization of it. I have mentioned this before quite often on this forum using the ajective of "perverted" Keynesianism, the model basically only invoked once everything is FUBAR.

Yep, if we must have Keynesian Economics, let's go the whole hog and have it in prosperous times as well. Theoretically at least, governments would be in a much stronger position to deal with a (probably much shorter and shallower) recession.

It's Laissez Faire mixed with deficit inducing pork barreling when it suits them with sudden reversions to Keynes when it goes t1ts up. It's political expediency economics rather than adhering to any coherent economic model.

 

[ducati916]

Keynesian economics is sound and based on concrete theory. Saving does exacerbate recessions, even though it seems counter intuitive. If savings (leakage) increases as people become more thrifty, and investments (injections) decrease as business do not foresee any point in capital expenditure then the aggregate expenditure will decline greatly.

Then there is an accumulation of inventory, which signals to producers to cut production. We know price-wages isn't completely liquid due to trade unions, contracts, minimum wage legislation, etc...so employment will go down.

People have less to spend and aggregate expenditure falls. So instead, government intervenes by bailing out companies and giving banks money. Thats my two cents from reading a text book anyway, but i see nothing wrong with Keynesian economics.

eladamrine

Depending upon which economic camp you sit in, Keynes is viewed either as a genius, or an idiot. I subscribe to the idiot school.

If we take your first point with regards to "savings." I'm simply going to reproduce some posts from my blog;

Saving is a term that tends to be misused, or used to mean different things, depending on who you might be talking to. Therefore we shall initially define what is meant by saving in economic terms.

We shall approach the savings rate from the perspective of the consumer. The consumer will allocate a percentage of their disposable income to saving. Thus they will deposit this excess cash into a savings account.

This cash, forms part of the Banks’ Balance Sheet, under, deposits. The Bank will be paying interest on this deposit to the consumer, thus to pay this interest, the bank must invest this money somewhere that will earn a higher rate of return.

Banks lend out their Balance Sheets to finance Capital Goods. Capital Goods increase the productivity of an economy. Through an increase in productivity, so the wealth of an economy is increased. To import goods, you must export goods to pay for the imports.

Therefore to increase production, if we simply allocated 20% of income to savings, the following results would accrue from this savings rate to productive capability.

Year…………………Total Production………………Consumer Goods…………….Capital Goods
1………………………….100………………………………….80……………………………..20
2………………………….102.5……………………………….82……………………………..20.5
3………………………….105…………………………………84………………………………21
4………………………….107.5………………………………86………………………………21.5
5…………………………110………………………………….88……………………………..22
6…………………………112.5……………………………….90………………………………22.5
7…………………………115…………………………………92……………………………….23
8…………………………117.5………………………………94……………………………….23.5
9…………………………120…………………………………96……………………………….24
10………………………..123.5………………………………98……………………………….24.5
11……………………….125………………………………..100……………………………….25

The first thing to notice is that “total production” increases each year due to saving. The saving has been used each year to replace or improve the capital goods population.

The problem or fear, and the one that we are currently experiencing is the sudden change, either increasing or decreasing, of consumer demand. A sudden increase, drives inflationary pressures from the resulting lack of consumer goods available. A sudden decrease, drives disinflationary pressure, due to excess consumer goods available.

This increase or decrease in consumer demand would be reflected by either an increase in savings or possible hoarding, or a decrease in savings, resulting in an inability to fund and therefore increase capital goods. Both scenarios however require the action to be sudden.

What if the investment opportunities are limited? That the savings continue to accumulate, but that there is no requirement by industry to increase capital goods. This is referred to as a stagnant growth period. The solution often proposed is one of government intervention. For government to expropriate the surplus savings via increased taxation, and spend it on creating jobs via [for example] infra-structure building. Is this a viable government policy? I will explore the ramifications in a follow-up post.

The hole in the argument is that “savings” can only exceed “investment” by the “hoarding rate.” The hoarding rate is [generally] insignificant. Today, we see the Banks due to decimation of their Balance Sheets, are potentially hoarding. If this were true, then an increased savings rate would move to repair their Balance Sheets, returning the savings/investment equilibrium.

This is only another way of saying that savings and investment constitute the supply and demand of the commodity known as money. The cost of this commodity is priced by the rate of interest.

When the rate of interest is lw, the demand for money will rise. The lower the rate of interest, the greater the demand, which at some point brings in the marginal borrower. The marginal borrower is most easily defined as the borrower who invests the money at a hurdle rate below the cost of that capital. Thus, by definition, destined to lose money.

This is of course the exact outcome that we are now experiencing due to the excessive policy of Chairman Greenspan. Easy Al, drew in the marginal borrower, who is now increasingly in default, which magnified by the leverage of the banks, has almost collapsed the banking system.

It is interesting that currently the solution, mirrors the causation. There is therefore a strong argument for removing the power of the Federal Reserve to “set” interest rates, and move to a self-adjusting natural rate as I proposed in a previous post.

To attract increased savings, the interest rate needs to be higher. With increased savings, the banks will recapitalise their Balance Sheets. The absolute rate is irrelevant to a bank that earns on a spread. With higher interest rates, marginal borrowers are eliminated, and we return to capital projects that again increase productivity.

In summary, savings are thus crucial to an economy as they are the means by which increased productivity, wealth and consumption can be increased incrementally over time.

http://leduc998.wordpress.com/2008/12/04/saving/#comments

I'll let you have a think about this part of my argument before addressing your other points.

jog on
duc

 

[wayneL]

eladamrine

Depending upon which economic camp you sit in, Keynes is viewed either as a genius, or an idiot. I subscribe to the idiot school.

I am keen to explore this line of thought.

 

[ducati916]

enzo

I have just finished reading "The General Theory..." and it is a tortured read. So many fallacies, liquid definitions, pure bunk, with some really communistic tendancies.

Unfortunately, Lord Keynes was British. As he was part of the Bloomsberry sect, as was Blunt etc, I'm now convinced he was really a Russian, or taking part in the most monumental piss-take ever.

jog on
duc

 

[ducati916]

Originally published in 1936 “The General Theory of Employment, Interest and Money” has been considered by the two primary economic camps as a work of genius, or the scribblings of an idiot. I fall into the scribblings of an idiot camp.

That governments periodically return to Keynes [while some never abandoned him] is quite easy to demonstrate. I shall reproduce directly from Keynes, pg. 330 of “The General Theory”

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping in permanently semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

Thus it becomes easy to discern where the monetary policy of Alan Greenspan originated. Greenspan was a desciple of Keynes. Unfortunately, so it would seem are Bernanke and Paulson. The solution that all the above have reached, is a pure Keynesian solution to the popping of a bubble, cheap money, re-inflate the bubble.

It would also seem that Obama is reaching for a Keynesian solution to the increasing unemployment by advocating government [deficit] spending on “Public Works” as are [from previous post] numerous governments around the world.

In essence, governments intend to “inflate” their way out of the problems incurred via cheap money and malinvestments. This is analogous to the “hair of the dog” cure for a hangover.

The result will be inflation. The inflation will be serious, as the debt destruction, or credit contraction, has due to the level of malinvestment, been huge and looks not yet to be over.

 

[wayneL]

enzo

I have just finished reading "The General Theory..." and it is a tortured read. So many fallacies, liquid definitions, pure bunk, with some really communistic tendancies.

Unfortunately, Lord Keynes was British. As he was part of the Bloomsberry sect, as was Blunt etc, I'm now convinced he was really a Russian, or taking part in the most monumental piss-take ever.

jog on
duc

He was also a member of The Fabian Society, which explains much of your observation.

 

[ducati916]

He was also a member of The Fabian Society, which explains much of your observation.

I've never seen him linked to "The Fabians." Which is not to say he wasn't, but you would have expected such a prominent figure as Keynes to be listed amoungst their alumini.

However, it is his economics that I have issue with. Of course, your politics may well influence your economics.

jog on
duc

 

[wayneL]

I've never seen him linked to "The Fabians." Which is not to say he wasn't, but you would have expected such a prominent figure as Keynes to be listed amoungst their alumini.

However, it is his economics that I have issue with. Of course, your politics may well influence your economics.

jog on
duc

Duc,

he is mentioned in this article, amongst others.

http://www.newworldencyclopedia.org/entry/Fabian_Society

 

[ducati916]

Duc,

he is mentioned in this article, amongst others.

http://www.newworldencyclopedia.org/entry/Fabian_Society

So he is. A socialist masquerading under the sobriquet of capitalism.

jog on
duc

 

[Ageo]

Keynesian economics is sound and based on concrete theory.

hehehehe this line made my day I think history has proved that its anything but sound.

I still cant believe that people think the current economic structure we live in today is sound and the right 1 to practice??? its the whole reason why boom and busts happen in the 1st place. And all these business's crying poor shouldnt have been that big in the 1st place.

And can a Keynesian pro please answer me this....... If im broke and maxed out my credit cards would it be wise financial advice to tell me to spend more on credit and consume or should i save and invest (or reduce debt)?

Because for some reason it seems the whole world is encouraging the 1st line and thats due to Mr Keynes economic theory.

I shake my head and sometimes wonder how many people in their powerful positions actually know what their talking about (except for Ron Paul of course )

 

[mayk]

And can a Keynesian pro please answer me this....... If im broke and maxed out my credit cards would it be wise financial advice to tell me to spend more on credit and consume or should i save and invest (or reduce debt)?

What if you are given the option that your, yet to born, grandkids can repay your debt. What will you do then? Leaving the morality issue aside.

Ducati,

In your example, you mentioned a saving of 20% but because of fractional reserve banking, wouldn't it increase by a multiple of 10? Or if we take an average increase by only a multiple of 5, would it change the model, or the relationship will remain the same.

 

[Ageo]

What if you are given the option that your, yet to born, grandkids can repay your debt. What will you do then? Leaving the morality issue aside.

Well considering the idea to spend spend and spend some more will just leave my kids and grandkids in a shatload of debt i think the option is stupid. Of course if i could just write the debt off and continue to borrow for many yrs to come then the system would be fantastic.

 

[mayk]

Well considering the idea to spend spend and spend some more will just leave my kids and grandkids in a shatload of debt i think the option is stupid. Of course if i could just write the debt off and continue to borrow for many yrs to come then the system would be fantastic.

If it is recursive, meaning your grandkids will also have the options to leave the repayments to their grandkids. I think at the government level this is the system they are pursuing, borrowing from their grandkids generation and spending it today.

 

[Temjin]

I prefer not to get into this economic discussion in details, but will give it a small try. I only claim to know a little more of Austrian economics than Keynasian, so yes, I do subscribe to the "idiots" side.

Common sense tells me that economic propersity is achieved through effective use of resource and increased productivity. Saving should be encouraged in which they should be reinvested to enable higher productivity.

The policies being adopted by these Keynasian insired economists make absolute no sense to me. If "reckless" spending beyond your mean is so good for the economy, why not just give everyone a million dollars and make everyone rich??

Keynasian economics also completely ignore the concept of external shocks. The Market Efficient Theory is just plain stupid too as if they are treating humans are perfectly logical mammals and will never become emotional when they make investment decisions. That's why most of the mainstream economists (Keynasian inspired) DID NOT predict the incoming crash. Only a few economists / independent analysts, whom most of them follow Austrian economics, have predicted this for a long time.

So who do I trust, mainstream Keynasian or the "idiot" Austrians?

www.mises.org have tons of article that are highly critical of the Keynasian economics.

Here is a good article to read.

http://mises.org/story/3279

Why Congress Must Stop the Fed's Massive Pumping

selected text below

Can fiscal policy revive economic activity? At the G20 summit on November 15, 2008 leaders stressed that fiscal policy ”” strong increases in government outlays ”” will have a bigger role to play in reviving economic activity. US President-elect Barack Obama has suggested that one should not worry about budget deficits ”” what matters, he said, is to revive the economy.

But how can an increase in government outlays kick-start the economy? Any activity that the government would initiate requires funding. (Various individuals who will be employed by the government will expect compensation for their work.) The government as such doesn't create any real wealth, so the only way it can pay these individuals is by taxing others who are still generating real wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery. (We ignore here borrowings from foreigners.)

As in the case of money-printing policy, if the pool of real savings is declining, massive government outlays cannot revive the economy; on the contrary, they will make things much worse. The only way fiscal stimulus could "work" is if the pool of real savings is still growing. The increase in economic activity when the pool of real savings is expanding is erroneously attributed to the government's loose fiscal policy. If the pool is shrinking, real economic activity will continue to decline ”” regardless of any increase in government outlays. Again, government is not a wealth-generating entity; the more it spends, the more it takes from wealth generators, thereby weakening any prospects for a recovery.

 

[Temjin]

hehehehe this line made my day I think history has proved that its anything but sound.

I still cant believe that people think the current economic structure we live in today is sound and the right 1 to practice??? its the whole reason why boom and busts happen in the 1st place. And all these business's crying poor shouldnt have been that big in the 1st place.

And can a Keynesian pro please answer me this....... If im broke and maxed out my credit cards would it be wise financial advice to tell me to spend more on credit and consume or should i save and invest (or reduce debt)?

Because for some reason it seems the whole world is encouraging the 1st line and thats due to Mr Keynes economic theory.

I shake my head and sometimes wonder how many people in their powerful positions actually know what their talking about (except for Ron Paul of course )

Agree, and it's sad though that almost every economic graduates that comes out of University are Keynasian inspired. They didn't really have a choice on school of thought their text books are subscribed to. And the problem expands when they go out for work and their colleages, supervisors, managers, head of economic department, also studied on the same flawed theory.

Peer and social pressure along with how much they have emotionally invested in these studies would have forced them to stick to their believes contrary to conflicting evidences. If they abandon their believes, they would have to start all over again or try to go against everyone and might have trouble looking for job / promotion.

 

[eladamrine]

I prefer not to get into this economic discussion in details, but will give it a small try. I only claim to know a little more of Austrian economics than Keynasian, so yes, I do subscribe to the "idiots" side.

Common sense tells me that economic propersity is achieved through effective use of resource and increased productivity. Saving should be encouraged in which they should be reinvested to enable higher productivity.

The policies being adopted by these Keynasian insired economists make absolute no sense to me. If "reckless" spending beyond your mean is so good for the economy, why not just give everyone a million dollars and make everyone rich??

Keynasian economics also completely ignore the concept of external shocks. The Market Efficient Theory is just plain stupid too as if they are treating humans are perfectly logical mammals and will never become emotional when they make investment decisions. That's why most of the mainstream economists (Keynasian inspired) DID NOT predict the incoming crash. Only a few economists / independent analysts, whom most of them follow Austrian economics, have predicted this for a long time.

So who do I trust, mainstream Keynasian or the "idiot" Austrians?

www.mises.org have tons of article that are highly critical of the Keynasian economics.

Here is a good article to read.

http://mises.org/story/3279

Why Congress Must Stop the Fed's Massive Pumping

selected text below

"If "reckless" spending beyond your mean is so good for the economy, why not just give everyone a million dollars and make everyone rich??"

Because that kind of spending is unsustainable. The point of fiscal and monetary policy is to move the economy to non-inflationary levels of full employment. When unemployment levels deviate from the natural levels of employment you should stimulate the economy by increasing spending and the income from the created jobs can sustain the elevated levels of spending.

"Keynasian economics also completely ignore the concept of external shocks. The Market Efficient Theory is just plain stupid too as if they are treating humans are perfectly logical mammals and will never become emotional when they make investment decisions. "

I must admit i am having great difficulty recalling a lot of the economics material i've read but i always thought that it was the neo/classical economists who advocated the market as capable of self regulation and the efficient market theory. I thought the Keynesians argued that the market could not regulate itself and government intervention was required to reach full employment.

In addition, it was the classical economists that argued that savings and investments balanced out because they are governed by interest rates. The Keynesians are the ones who argued that investers and savers are a diverse group of people who are influenced by various factors, and not solely interest rates.

 

[Knobby22]

I disagree.
Isn't it obvious that if the present situation was left to run without any government intervention that the recession will be deeper.

I see nothing wrong with the government undertaking infrastructure works that keep people employed which in turn helps to keep retailers etc. employed also.

It's fashionable to bag Keynasian ideals if done properly - and I don't mean the kind of fascist socialism that Bush has employed so far, I don't see what is wrong with smoothing the bumps in this manner.