Keynesian Economics: A Critical Analysis
**Item 8: Keynesianism**
Criticism of Keynesian Ideas
Analysis of the sovereignty of the producer: The consumer must submit to the producer. Should I eat, under any circumstances, whatever it is that employers offer us? Hence, if the consumer does not want to consume, it is the state that consumes for them. In a crisis, this means we have to keep the money flowing without a restructuring of the economy. If we continue to consume and spend in the same proportion as before, we squander the savings. In the long run, the economy will go into a huge depression. For the long run, it matters little.
That sovereignty is what consumers have, positive (or not), deciding whether to spend money on consumption, causing employers to adapt to the needs of consumers. There is what people want to consume.
From the standpoint of the investor, who has gold or is sovereign, it means you can, somehow, protest (if not invest or consume) at artificially low interest rates (time preference of economic agents), and the extent of credit expansion is limited.
Analysis of Liquidity
Keynesianism considers that liquidity has no function, that it is useless, and to the extent that we keep investing, liquidity is not harmful because the interest rate will be higher, the investment will be lower, and hence aggregate demand will also be lower.
Liquidity performs the function of sovereignty of the producer and consumer. From a business standpoint, to the extent that the media are irreconvertible capital and specific productive structures meet specific needs, if they change, the structure must change. The liquidity of the companies is what they have in cash; it is there to deal with unforeseen events and payments. Cash balances are a form of insurance against contingencies, at any time allowing them to adapt the business and coordinate with each other.
Liquidity allows agents to adapt to changes.
Capital Theory (Related to Liquidity)
Keynesianism considers that the production structure is timeless; whenever they want to consume, there is no production. Consumer spending is generated by production, thus equating spending with income (having income is allowing us to spend). Production consumption arises automatically, and it does not see problems in the capital. The mistaken belief arises that all idle resources can be put to use by pulling spending, not considering that to reuse the inputs at the wages they receive, what they came to do is to rebuild that structure.
Public Expenditure Multiplier
1 / (1 – PMC)
PMC (Marginal Propensity to Consume)
As we spend more on consumption, less is available for the new structure.
If 10 people are locked up in a room and exchange tickets, they would create wealth. This is false because the quantities exchanged are the same; we are as rich as before. Thieves are good to some extent.
Broken Window Fallacy
Imagine that a thug grabs a brick and breaks a window of a butcher. The butcher has to go to the glazier to repair it, then generates wealth because it has created a demand that was not there. But that is only because the glassmaker now, having to make glass, cannot buy a dress or something else.
Henry Hazlitt (Economics in One Lesson)
What distinguishes a good economist from a bad one is that the bad economist sees only the immediate results; a good one looks further and sees the distant consequences. The multiplier of any person is much greater than that of the State. To prove this, if the total economy income is Y, it equals the total income of all persons V and the sum of my money R: Y = V + R – V = 0.999999Y
Then R = 0.000001Y of the company’s income.
Then Y = 1000000R.
The fallacy is that it confuses causal functional relationships. It is clear that consumption plus investment is income; if 90% of income is consumption, consumption will increase if income is increased by the same proportion. The functional relationship is that investment is one-tenth of the rent. But the more a society consumes, the flatter its structure will be, the less productive it will be, and the less income it will generate because there are fewer savings available.
Keynes ignores the influence of time.
Savings do not matter enough. As spending generates income, income can take the place of savings.
The demand for productive factors varies in the same direction as the demand for consumer goods. This is wrong: if we eat more, we invest more; to invest more, we should save, and thus consume less.
Fourth Proposition on Capital
The demand for consumer goods is not equal to the demand for workers.
Designing money as a bond purchase. It adds to the Cartalist theory, money is a creation of the state that allows the movement of goods. Money comes when employers are seeking more illiquid goods to exchange for more liquid ones. Money cannot be just to spend it.
Keynes assumes that the interest rate is determined by the short-term supply and demand for money, and that the interest rate is determined by the long-term marginal efficiency of capital (return on investment). In fact, all interest rates in the economy are determined by time preference, both long and short. What happens is there is a very short-term interest rate, which is the price of money.
Keynesian Theory: A Distortion
Keynesian theory is a distortion and arises from a misunderstanding of the business cycle theory because, during the period of unsustainable growth (boom), industries further away from the consumer are developed, the most capital-intensive in the higher stages. Then it appears logical that many capitalists, newly rich in those, obtained many benefits and higher wages. Here comes his initial mistake: if profits grow, there will be a tendency for them to consume less. Not consuming enough to output all the productive stock.
When employers see this, they begin to hoard liquidity, the interest rate rises, falling credit demand, and investment falls. Only there has been a bad investment in some stages. The solution would be that we purchased the homes that were taking place. The need for adjustment is what is not there. The economy is sustained only through more spending.