Economist William Anderson dispels a couple of Keynesian fallacies in this excellent piece.
There are many unfortunate legacies of Keynesian “economics,” too many to list in this brief column. However, I concentrate on two of them: the notions that recessions change economic laws and that government borrowing equates to business borrowing.
Both views are championed by Paul Krugman. In The Return of Depression Economics he declares there really is a “free lunch” when the economy implodes and government must open the money spigots to “find it.”
Confusion exists because during an economic downturn, certain factors and the goods they are used to create no longer are in demand because they are part of a pattern of malinvestment that occurred during the preceding boom. According to Keynesians, an injection of government spending or new money will put those idle factors back into employment– the Keynesian version of the “free lunch.”
As Henry Hazlitt noted in his 1959 classic The Failure of the “New Economics,”these factors are idle for a reason — something the Keynesians ignore because they attribute the situation to a sudden fall in “aggregate demand.” Austrians, on the other hand, believe those factors are unemployed because of malinvestments commenced during the preceding unsustainable boom. In that view, injections of new money only expand the economic distortions instead of “stimulating” the economy.
Econometric aggregates are attractive to arrogant economists and politicians because they serve as the “science” cloak under which they can implement greater control over our economic activity. Unfortunately, such aggregation makes for bad economics and the outcome is policies that not only make us economically worse off but less free.