Keynes Didn't Understand Today

Keynes is wrong. He may have had an argument in the 1930s, but that argument fails to hold water in today’s socioeconomic structure.

Keynes proclaimed that when the market fluctuates downward, it causes an emotional reaction of the populace (“animal spirits”) which causes them to protect their wealth by hoarding it. This causes the downturn to deepen as demand for products shrivels up because the masses are afraid to buy, and the emotional reaction worsens as the market falls. This downward spiral continues until the economy as whole hits rock bottom, where there is only spending on necessary goods. But we can short stop the spiral with a boost to the weakened aggregate demand. Since private parties are unwilling to spend their own money, the government can borrow and spend money to push demand back up, thus aborting the downward cycle.

The theory was tested during the Great Depression, and failed miserably. Yet, remarkably, the proponents of the theory found a way to claim success and attribute the exit of the Depression to the policies put forth by the theory. The timing of the exit gave those theorists an event to credit (World War II), and the theory lived on for a few more decades, until logic prevailed and the theory was let go, only to be resurrected whenever politicians needed an excuse to buy power by spending borrowed money.

The current economic policies of our government are founded on this theory. But while Keynes may have been able to make a convincing argument in the 1930s, his argument is fatally flawed in modern times.

Keynes feared that human reaction is to hoard one’s money to protect it during a downturn. But in modern society, how does one hoard their money? How many of us keep our savings in hard currency, stored in a safe or a mattress?

We put our money in banks, bonds, safe investments. That’s how we “hoard” our money. In other words, we don’t. Our money in banks gets invested, albeit more cautiously. Our investments continue to roll on, as companies fight to outlast the downturn. The paradox of thrift is a non-issue in our modern economic structure. We “save” money by investing it cautiously and wisely. No one literally saves money.

Thus, the idea that government must intervene by spending money in order to prop up weakened demand is a fallacy. If the government pulls the funds from the private sector, the money that would have been invested wisely in secure investments is instead taken from the private investors and spent frivolously by power-seeking politicians. If the money is instead borrowed, the nation is saddled with debt and interest payments that delay a full recovery. Granted, if the borrowed money is invested in a way that returns > the amount spent + the interest, then the investment was wise, and if such an investment returns quicker than the interest payment the recovery is hastened. But such investments are few, and the government has proven incompetent to seek out such opportunities. Even if such investments were available, private investors would be throwing their money at the opportunity to strengthen their weakened portfolio. So instead we get bridges to nowhere and tunnels for turtles (did you hear about that?), projects that return from nothing to very little on investment. Thus the interest payment of our debt is saddled on top of our economic woes and we have a massive debt to eventually repay to boot.

I’m having a hard time deciding whether the administration understands what they’re doing and is doing it intentionally, or if their economic advisors are really incompetent enough to not be able to see the fallacies of Keynes’ theory in modern society. I’m leaning toward believing that the economic advisory board is a combination of corrupt and stupid people, who are either giving their bosses what they want in order to get what they want, or were handpicked because they actually believe in what their bosses want.