Hello all,
I'm new to this stuff of economics theory. I have been exploring it lately as a result of reading blogs etc. durring Ron Paul's campaign. I have been comming across references to Keynesian Theory, and, finally took the leap and looked it up on Wikipedia.
Perhaps it is my own ignorance of the nuances of economics, but, in reading the explanations of this theory, I couldn't help but notice a fatal flaw in the reasoning. There is no basis in reality, in this day and age, for the most important aspect of this theory. What I mean is, the "Saving" portion of Keynes' theory doesn't exist!
No body "Saves" in the classical sense any more. Putting money into savings yeilds LESS money when it is withdrawn, in spite of the paltry interest earned on the money. Most people, "Save" through investment devices. They buy stocks, invest in mutual funds, and other things. We all know that a savings account is simply a glorified cookie jar!
How, then, can this theory hold water if half of the dynamic that it is based on doesn't exit? In times of recession, instead of saving, we are servicing the debt we accumulated during the expansion phase. We take the time to pay down the credit cards or pay off the car loan, so we can rack up more debt at vacation time or Christmas.
How does re-investment and debt service instead of savings affect this model? I don't see how the original General theory has any bearing on the policies in our current modern, debt ridden, world.
Most People, are Mostly good, Most of the time.
This is a shrewd observation to derive just from reading the Wikipedia entry. As the article indicates, Keynesian theory has changed dramatically over the years. In fact, a cliché among economists is that Keynes was not a Keynesian. Actual government policy has diverged from formal Keynesian economic theory for quite some time now. Nonetheless, policymakers and most media commentators continue to speak as if rises in consumer spending and consumer confidence were causes, rather than effects, of economic prosperity, and these are Keynesian ideas. Keynes’ General Theory has plenty of problems as it was written but when the underlying structure of it is ignored; it leads to even worse policy decisions.
I’m not going to try to figure out how the situations you described would affect the model because the model itself is flawed, and to try to adjust it to current conditions seems like a pointless exercise.
Thanks DougM,
I thought I had missed something in reading the wiki. So, basically, the Fed has only one function - control the throttle on the interest rate. And the treasury has the other - control the throttle on the printing press! And our function is to spend ourselves into the next decade durring the "boom" times, and to pay down some of our debt in recession.
Hell of a model for success! Thanks FDR. I LIKE this New Deal! (NOT!)
Yes I'm afraid that is indeed the essence of Keynesian theory. The idea of delaying a recession by spending yourself further into debt is absurd, yet it is taught in schools as the way for governments to get rid of economic cycles. The very idea that one could stop or smooth economic cycles is ludicrous, since the very attempts to stop them (interest rates lowered) are precisely what started many of them in the first place.
Every time I'm told that as Aggregate Demand shifts outwards, we have economic growth, I point out that most of the shifting is debt based. Even investment by businesses is all through debt, and expansion in AD due to debt will simply result in a bigger backlash in the opposite direction as interest accumulates in the long run. But then, Keynes and his ideas depended upon making the long run irrelevant. "In the long run, we're all dead" is both a lie (since in most cases the long run is far less than a lifetime) and a ridiculous justification for governments to act irresponsibly. If you realise that it's long term economic growth that is necessary, and not short term, then suddenly all of Keynes' theories fall apart.
The more you study mainstream economics, the more this fallacy comes up in justification of all sorts of dubious theories, and real economics nowadays seems to be to a larger extent spending time disproving the fallacies of Keynesians, neo-Keynesians, etc. rather than doing new research, which is a great shame.
If you try to trick the market, it will get its revenge.
Solreyus
I've thought about this a bit before, and I'll post my take on Keynesianomics below, but to answer your question.....
As I take it, the classical notion of 'saving' is essentially 'hording'. However, even with 'hording' activity, it should still balance. If I horde money, then I decrease the money supply causing readjustments to occur that way. The fact that keynesianomics, however, as you say, puts a low emphasis on savings and thus investments boggles me.
There are three main reasons why I don't understand the rationale to Keynsianomics:
1) You're creating more malinvestment. When the government introduces a stimulus package, it creates artificial demand, and just like with speculation, a bubble is created.
2) This whole concept of the multiplier which I so initially agreed with is something that I can not see as a "There Ain't No Such Thing As A Free Lunch" (TANSTAAFL) philosophy. The idea, as I understand it, is to justify government spending by saying that spending actually gets multiplied. And how does this occur? The story almost exactly parallels a Ponzi scheme. A man consumes $X and saves the rest, the amount he consumes passes to the next consumer, and so on, causing a geometric sum of money to come from the $X. If we borrow the money, then we have crowded out investment meant to increase production..... for..... the goods..... of whom's demand has risen..... I can (and should) go on with other things I believe is wrong with this philosophy. Including rampant consumerism and in my opinion one of Friedman's best quotes (paraphrasing), "It will enable the American people to do what the American people want to do, not what Bob Solow thinks they ought to do.".
3) The FED and Congress, acting as saviors of the economy, are acting like planning agencies. Trying to calculate (!) the amount of demand needed for the economy, what interest levels are the best. And thus all the arguments about planning agencies necessarily fall to the FED and Congress
(Edit: I'm quoting that, "Keynesianomics is a Ponzi scheme")
"Keynesianomics is a Ponzi scheme."
"You are correct in that Capitalism does not help with poverty, because it eliminates poverty altogether..."
"That wonderful strawman: greed."
Inequality bad.
I have a very different view of these concepts. My view, comes from my background in electronics. I see production as voltage. I see savings as capacitance. I see currency as current, and I see resistance as resistance.
I know now that my view is not far off the mark at all. Every individual is a component in the circuit, and, using superposition theorem, can be described at any given moment as having a characteristic resistance and capacitance and voltage drop.
The key is that these components change their characteristics, and their interconnections constantly. The idea of cause and effect being applied to any one point at any given time is valid only for that point and at that time.
Furthermore, the interconnections themselves have characteristics of their own. Individuals are also complex circuits, with feedback loops that are both positive and negative.
Overall, any group of individuals will behave like a neural net, of neural nets. The overall outcome of any given force or input being a summation of the individual elements within the net.
There is a ground state in this model. Positive voltage is created when individuals produce. Their production raises their voltage abouve ground. What Fed is doing, is analogous to running a generator that is pulling the voltage below the ground state. It takes positive production to fill the void, or in Keynes original thinking, the spending of savings (current stored in a capacitor) to offset this negative, and move back towards the ground state. However, the current stored has to already be there before it can be used! In our present economy, our capacitors are now negatively charged, and so we must service our debt to them in order to reverse the flow and get back to the point in which we are actually saveing Positive energy.
This is not rocket science. The metaphore holds up under very close scrutiny, and the science of circuit analisys is well defined. In fact, the same formulas are used in hydrolics. Why are we not talking about economics in these terms?
Because this assumes that the government can calculate.
LOL. In a way you are right! I think what they do is leave certain embarassing facts out of their calculations! How about this for an analogy: If you blow into a balloon, you are applying positive pressure to the inside of the balloon and it expands. This is an example of positive stimulus. This is what happens when an investor invests in a successful business, and the business produces. What the Fed is doing is sucking the air out of the room, and when the balloon expands, they say, "Look! We blew up the balloon!". Meanwhile, back in reality, everyone in the room is gasping for air! So much for positive stimulus. And to take it a little further, in this scenario, Keynes is right, "In the long run we're all dead", Only we die of asphyxiation! How embarassing is that!?
the problem with using the "electronics" methaphor is that it cant include exogeneous variables from the actual circuit.
also Savings = Investment every sense
Oh? How do you figure? If that were so, there would be no way to account for rheostats, thermocouples, signal reception, potentiometers, halleffect transitors, reed switches, wall switches.... The whole industry exists because we can model a circuit that has exogenous variable inputs. The keyboard you used to type your message is just such a device. As for Savings = Investment, I don't agree. Investment puts the current back into the circuit, whereas savings stores it up in a device. Buy Gold and you are saving. Buy stocks and you are investing.
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