вторник, 11 августа 2009 г.

Why Keynesianism is Unscientific

There are multiple ways to criticise Keynesianism.

One way is to say that it deals only with the seen side of the equation while ignoring the unseen, thus representing a classical broken window fallacy. A similar approach is to point at potential crowding out of the private investment by government spending. Yet another version of this view holds that it is logically impossible for the government to increase output by pumping money into the economy because it must first take money out of the economy. It is usually ridiculed by Krugman and the like as the so-called Treasury View.

Although I think that an increase in output (GDP) through government spending is not impossible, it is actually possible under very unrealistic conditions. But it is not even the voodoo multipliers that I would like to address in this post.

One should ask oneself a question. Even if the government could raise output for some short period of time through activist fiscal policy, why do that? Why prefer the imaginary present over not so distant future, the short term over the long term? Why believe that the consumers should spend the money now rather than later? Why reduce demand to spending on whatever has been produced prior to an economic slump?

Remember that Keynesians go so far as to claim that in the short run period of a recession caused by a fall in the aggregate demand (the demand is equated with total spending) the normal laws of economics do not apply, as masterfully exposed by Casey Mulligan in this video debate with Robert Reich.

Moreover, in the words of Keynes himself:

Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Keynes probably was not saying that the long run is utterly irrelevant. But he still expressed a clear preference for the short run outcomes.

And on this preference the whole Keynesian paradigm is built.

But this preference is clearly a verboten normative judgment. It does not have anything scientific about it.

Now you might say this is dishonest. After all are not the Austrians or Chicago School theorists expressing preferences for free market in their paradigms?

But before dismissing me as an ideological libertarian (and libertarian I am) you may note that in my critique of Keynesianism I did not even mention that it favors Big Government.

For me, the Austrians' preference for free market and the Keynesians' preference for more government are policy conclusions, not assumptions. The policy conclusions are by their nature normative.

But the Keynesians' preference for the good short run outcomes is not a policy conclusion. It is a normative assumption that short term effects are more important than the long-term ones. Keynesians do not even bother to provide a scientific justification to this. They just assume that involuntary unemployment and economy operating below so-called full capacity is somehow inherently bad, even if the underlying processes may have beneficial effect in the long run.

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