Dinner Conversation With Keynesians

Five Questions for a Keynesian

posted by Steven Horwitz, Guest Blogger at 10:28 AM on 12/24/09

In the wake of last fall's financial market chaos and the deepening of the recession, Keynesian economics, largely left for dead by the economics profession for the last 30 years, has made something of a comeback, at least among pundits and politicians, neither of whom have sterling reputations as sophisticated consumers of economics. But they are not the only group clinging to Keynesian fallacies in the current world of endless bailouts and stimulus packages. Many Keynesian fallacies have become part and parcel of the average American's understanding of how to fight recessions. It seems that, like foxholes and belief in God, a good recession turns everyone into a believer in big government. You may have even talked to some of these people, perhaps at a Thanksgiving dinner or holiday party.

So before you go to your next get-together where such a conversation might take place, I offer you five questions you might ask such a person, just to get their critical thinking juices going and perhaps poke a few holes in their worldview.

1. Why did Keynes think savings was bad if when people save through financial intermediaries they give control over resources to the banking system, which in turn will lend that out to firms to create capital and new jobs?

2. How does government spending create jobs and wealth if the resources that government spends must ultimately come from the private sector, through taxes or reduced borrowing due to government borrowing more (or inflation), and the private sector would have spent it either on consumption directly or on investment through savings anyway?

3. If one of the problems of the housing boom is that we put too many resources into housing and finance, how will a Keynesian government spending package know where that spending should have gone instead?

4. Keynes frequently wrote about the importance of the uncertainty of the future and the way that made things difficult for private investors and for the connection between savings and investment. Why doesn't that same uncertainty prevent governments from knowing exactly how much and where they should be spending in a recession, especially because markets have prices and profits as signals to help entrepreneurs navigate that uncertainty while government bureaucrats do not have similar signals?

5. Given the enormous role that government interventions played in causing the current recession, from the expansionary policies of the Fed to GSEs like Fannie and Freddie, to misguided regulations in housing and banking, why should anyone believe that the same government actors will know how to solve it?