Monday, December 1, 2014

Of Course The Keynesian Model Is True; That's How We Define The Keynesian Model

Tim Worstall nails it:
Scott Sumner points us to this interesting proof that the Keynesian economic model must be true. For the Financial Times is crowing about the fact that when government spending rises then so does GDP. And when government spending falls, so does GDP. Thus, getting government to spend more increases GDP. Proof perfect that the Keynesian model works! Unfortunately there is a little flaw with this argument. That flaw being that right at the beginning, when we define GDP, we say that an increase in government spending increases GDP. It’s absolutely nothing at all to do with the Keynesian model, nor any other economy model: it’s an attribute of the way that we calculate GDP, nothing else...And if we look closer at this, and we find that the relationship is actually only one to one, then we’ve a disproof of the central Keynesian contention. Which is that a rise in government spending (when in recession, when there’s unused assets lying around) increases GDP by more than the increase in government spending. We were certainly in recession, government spending certainly changed, but if GDP only changed by the amount of spending change then that’s a disproof, not a proof, of the central Keynesian claim.


  1. Man, I've been saying this for years!
    Formula: GDP = C + I + G + (X - M)
    The big ol' "G" in the formula is tada! Government SPENDING. So, what a sooprize that when it goes up, GDP goes up. Them Keynesians is DUMB!
    I agree with Rothbard; the G should be (-G), since that value has been stolen from the productive sector.

    1. Exactly Capn. How can anyone look at government spending as anything else other than moving money from one pocket to another? Because that's all they're doing. Government doesn't produce anything. It just moves money around. How dumb can they be?