Rich On Money

Does Keynesian Economics Still Work or did it ever Work?

 The United States entered the Great Depression in 1929 subsequent to the stock market crash. The crash did not create the Depression, but was certainly a major symbol of it. At the end of the day, if you put liberal and conservative economists in a room and put a gun to their heads and said, what caused the Great Depression, the answer they would give is an ABSENCE OF DEMAND. 

Consumer Demand collapsed very quickly after the stock market crash in 1929, and then production immediately collapsed with it, since people were not buying much of everything. So Demand went down and Production followed, and then people were laid off, because Production was down. This caused a further decrease in Demand, and a further Decrease in Production. What you are seeing is a SPIRAL on the downside that keeps getting bigger and bigger until finally somewhere Demand Equals Production. 

Franklin Roosevelt and his advisors tried everything, and the President did have the finest collection of minds around him since the founding fathers occupied office. Nothing seemed to work because no one had yet formulated a theory to understand what was going on? 

Enter John Maynard Keynes  

It wasn’t until 1936 which was several years into the Depression that British economist John Maynard Keynes published a book entitled “The General Theory of Employment Interest and Money.” This book and Keynes’ theory became the working explanation to resolve the Great Depression. In essence Keynes said that when consumer demand collapses, the government must substitute ITSELF in place of the consumer as the SPENDER OF LAST RESORT. The government must continue to spend until the economy grows and the consumer begins to spend again. Sometimes this can take a year or two. Where the politicians get it all wrong is that their attitude is to spend, spend, and spend some more. They run deficits in good times and bad times.

Keynes wanted governments to run SURPLUSES in good times, and not continual deficits. This is the classic difference between true Keynesian theory and the nonsense that politicians expose. You run deficits in bad times and surpluses in good times. Last night the President proposed a 450 billion stimulus program. This would be in line with Keynesian theory. 

The problem is he will probably waste much of the money by spending it on the wrong things. As an example he wants to put money towards saving the jobs of tens of thousands of teachers. That’s not Keynesian economics. Keynes would say hire 50,000 new teachers and get people off the streets. Obama wants to help states with their deficits. That’s not Keynesian, the economist would tell you to start new production programs and put people to work. Build dams, bridges, paint schools, build new schools, just get money into people’s pockets and they will spend it, and spending expands the economy.