Thought for the day: Keynesian folly

Over on Econbrowser, there's another discussion about how weak economies are a result of not enough government spending.

This is a recurring theme, central to the prescriptions of uber-Keynesians like Paul Krugman and his acolytes in government (though Keynes himself would likely have been horrified at 10% GDP deficits or running large, recurring deficits years after a crisis).

The problem is that the Keynesians are slaves to absurdly simplistic macroeconomic models that don't consider the impact of central planning decisions on the behavior of people and businesses in an economy. Their model sets GDP growth as the goal and states that government spending is a direct input to GDP growth. Obviously, then, the prescription will always be for more government spending to increase GDP growth!

But the Keynesians' models, and the Keynesians themselves, consider little, if at all, the impact of central planning on misallocation of resources, market incentive effects, or price signals (hint: it’s huge. See France, Greece, or the Soviet Union).

Keynesians' reliance on simplistic models to prescribe command-and-control recommendations for a complex economy reminds me of Moody's use of credit score models for mortgage securities: "Why should we consider a decline in house prices? House prices never go down!"


Doo Doo Econ said...

Keynesians simply want to believe they are smarter than the market.

drB said...

I think the Keynesians of today are actually not following what Keynes said, and hence they should not be listened to. Keynes actually said that when economy expands, government should save money, and when it contracts, government should spend the saved money thus smoothing over the effects of contraction. I have to see which US government in last 60 years has actually saved money during good times as opposed to blowing it and more.

Happy Super Tuesday!