We have all known someone who just loves to shop, be it an old girlfriend who was a clothes horse or a relative who just can't avoid a sale. It is not a universal trait, far from it, but there are a lot of people who just seem to get an inordinate amount of pleasure from going out and purchasing large quantities of goods.

Now, let us imagine that a man comes along who writes a thick, scholarly work explaining that rampant shopping is a good thing. It stimulates the economy, provides a safe outlet for one's greed, even provides health benefits to the shopper. He makes the rounds of the TV talk shows, ends up on Oprah, all the network morning shows. Of course some point out that his theory not only doesn't make sense, but contains internal contradictions, but their complaints fall on deaf ears.

Now my question is, if you were trying to assess the validity of this theory, would you trust your shopaholic acquaintance to make a rational assessment? Or would you think his predisposition might tend to slant him in favor of the theory, regardless of proof?

Well, I have a similar question about Keynesian economic theory. Keynesianism is essentially the justification for a shopaholic government. His theory not only justifies government control of currency and banking, as well as excessive tampering with the money supply, but turns government overspending into a virtue. He is exactly as I described the man above, a justification for shopaholics, though in this case government shopaholics.

So why do we trust governmental economists, politicians, and pro-deficit liberal theorists when they tell us Keynesian theory is valid? Why do we believe their assertions that massive spending is "necessary" to save the economy? In fact, given the poor track record of such schemes (eg. our Great Depression lasted years longer than the same recession in Europe), why do we give their assertions any credence at all?

Part of the problem is that Keynesianism has been so promoted that we think it makes sense, though if you try to apply the theories to your everyday life you will see how absurd they are. Suppose you don't make enough money, would you think borrowing millions of dollars to buy goods from yourself would make you rich? Yet that is the Keynesian dogma for the nation as a whole. Or, if you ran a car dealership, would you think you could succeed by giving a few thousand to a customer so he could buy cars, allowing you to get rich on the commission? But that is the Keynesian justification for foreign aid, that the money we give away allows them to buy US goods, making us rich. This is the reality behind all the high sounding rhetoric, we hope to get rich by borrowing from ourselves or giving away money to customers so they can buy from us. I know we have become used to the state justifying such acts, but stripped of their rhetorical cover, do they make even a tiny bit of sense?

Nor is Keynes even internally consistent. I won't go into all the technical matters¹, so let me just point out one really obvious flaw. Early in the General Theory, Keynes states that, properly defined, savings and investment must always be equal, being aspects of the same thing². He then ignores this, and spends the rest of the General Theory arguing that all our problems arise from savings and investment becoming unequal, and the need to balance them. Of course the reason Keynes can argue both sides is that he muddies the waters, confusing real value and nominal dollar value, which, in his favored inflationary environments, allows him to argue that equal numbers are not equal³. Whether he is confused or dishonest in his argument I leave for the reader to decide. However, whether confused about the difference between dollar and real values or trying to confuse the reader regarding the same, it does not fill one with confidence that Keynes so obviously mistakes one for the other.

Actually, his confusion of the real and the nominal leads Keynes into many absurdities. For example, he, like most government economists, confuses GDP with real wealth. This lies at the foundation of Keynes' famous "multiplier", the argument that if the government spends one dollar, it will "circulate" many times over, increasing our wealth. If you want to see how absurd this is, just think of this situation. You have a sandwich worth $1, and I have $1, our worth is $2. If I exchange the dollar for the sandwich, we have economic "activity" of $2. Now, if you then buy the sandwich back from me for a dollar, and I buy it from you, and so on, we could get our "activity" up to $1000 eventually. And to Keynes, with his multiplier, we would be 500 times richer. But in reality, our worth is still just $2. That is the result of confusing the GDP with real worth⁴.

But enough on Keynes. I could go on all day tearing apart his absurdities, but you get the point. And, in any case, the falsehood of Keynes' theories is not my point today. Instead, what I want to ask is this: If a theorist arises who proposes massive government spending, deficit funding, and government control of the currency⁵, would you trust the government itself to give an honest assessment of the truth or falsehood of that same theory? If not, then why do we accept government assertions that Keynesian "pump priming" and massive bailouts are the solution to our current economic woes?

---------------------------------------------------------------------

1. Henry Hazlitt did a brilliant job destroying the General Theory, chapter by chapter, in The Failure of the "New Economics".

2. This is both true and false. Savings, if by savings we understand all money not spent on consumption, will usually be quite close to investment, with a small difference to account for a handful of those who hoard cash, as well as cash holdings of individuals and firms. That is, if we discount inflationary changes. Inflation obviously allows for unfunded "investment". However, as that "investment" comes from devaluing all cash, the real purchasing power of savings and investment will still be equal, inflation only allows the inflating group to steal some value from the rest and redirect it.

3. Ironically, through his promotion of inflation, Keynes' theories allows the nominal dollar-value investment to exceed savings. As I explained in the last note, in real terms the two are still equal, but in misleading dollar terms they do get out of balance. However, it is sad that a "brilliant" economist would be confused by the difference between real and dollar value to the degree Keynes apparently is.

4. As economic activity tends to increase during the early stages of inflation, especially once the inflation becomes obvious and people try to exchange their money for concrete values as quickly as possible to avoid inflationary losses, the GDP during inflation can be quite high, while the underlying economy is quite sick. However, by his semantic tricks, Keynes makes it appear inflation is actually beneficial.

5. It is not an accident that Keynes rose to popularity during the FDR administration, during the rise to prominence of massive, interventionist government. A more congenial theorist of massive government intrusion could not be imagined.

-------------------------------------------------------------------

POSTSCRIPT

I only wrote a few posts explicitly on Keynes, including "The Limits of Technocracy", "Spend for the Fatherland, Citizen!", "War Stimulates the Economy? Let's Nuke San Francisco!", "The Theory That Wouldn't Die", "People Are Not Idiots", "Bizarre Distinction", "The Limits of Econometrics", "Are You Serious?", "Critique of Krauthammer", "CNN's Keynesian Nonsense", "I Should Not Watch Financial News", "The Real Reason for the Bailout", "John Stossel Imitates Me Again", "Has No One Heard Of Lord Say?" and "Proof Keynes (and Krugman) Are Insane". However, Keynes, as an advocate of both protectionism and inflation, lies at the foundation of almost all modern expressions of those two economic errors. So you can understand a lot about Keynes, and his impact on modern thought, by reading my posts on protectionism, listed in the postscript to "Unfair Advantage and Foreign Trade" and "Protectionism Right and Left", and on inflation listed in the postscript to "Inflation and Uncertainty" and the links contained in the posts "A Thought on the Clinton Surpluses", "WSJ Misses the Mark AGAIN" and  "Place Blame Fairly, Regardless of Party". Keynes also hated gold even more than William Jennings Bryant, so it is probably worthwhile to read my post "Why Gold?" as well to understand what Keynes opposed. Finally, a lot of the argument against Keynes is contained in relatively simple form in my posts "Monetary Issues Made Simple Part I" and "Monetary Issues Made Simple Part II". And, while am at it, I should probably direct readers to "The Limits of "Scientific" Management", as it is the most basic refutation of everything for which Keynes argues.

POSTSCRIPT II

I realize that most modern economists do not subscribe to orthodox Keynesianism, but to some modern theory, be it "neo-Keynesian" or not. However, as all of what passes as "macroeconomics" in modern times is based on Keynes' theories, and as the fundamental theories he postulated are in error, whether modern economists explicitly draw their inspiration from Keynes (eg. Krugman) or not, they are still Keynesian at heart as long as they follow present "macroeconomic" theory.

I also realize that much of what Keynes proposed, from protectionism to "stimulating" through government spending, had been proposed long before him, most often by "pragmatists". In fact, many of the refutations of Keynes can be drawn from Bastiat who wrote long ebfore Keynes was born. However, by providing a theoretical justification for government policies, Keynes had much greater impact on economics than any of these earlier proposals of the same ideas, so it makes sense to attack Keynes rather than 16th century mercantilists or 19th century advocates of government spending.