Friday, February 26, 2016

The Flaws and Fallacies of Keynesian Economics

Richard Ebeling emails:

Dear Bob,

I participated in the February 24, 2016 “Libertarian Angle,” webinar sponsored by the Future of Freedom Foundation, with the Foundation’s president, Jacob G. Hornberger, on the topic:“The History of Economic Thought, Part 6: The Flaws and Fallacies of Keynesian Economics.”

In this new part, the theme is a critical analysis of John Maynard Keynes’ economics and the Great Depression. Keynes had been one of the most well-known British economists even before the appearance of his 1936 book, “The General Theory of Employment, Interest and Money.” He had opposed the gold standard, called for domestic monetary and fiscal manipulation to “stimulate” domestic demand and employment, and called for government to increase its intervention in the marketplace.

“The General Theory” was clearly an attempt to provide a theoretical foundation to his ad hoc economic policy proposals and stances. But when looked at in detail, every one of the building-blocks for his new macroeconomics – people’s asserted “psychological law" of a "propensity to consume” out of income; a supposed “money illusion” on the part of workers concerning their wages: a view of businessmen as dominated by irrational “animal spirits” in their investment decision-making; and a belief that government’s could micro-manage the “macro”-economy through monetary and fiscal policy – were and are all fundamentally flawed.

Dominating the economics profession for more than two decades following the Second World War, Keynesian Economics continues to misdirect economic understanding and thinking about how the market economy actually works, and what are the sounder policies for long-run economic stability, growth, and coordination of supply and demand.


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