So I talk a lot about how bad Keynes is and I talk a lot about how I disagree with the pseudo economics that has in large part run our government policy over the past century. I want to explain briefly why these standing theories are so dangerous and why they are wrong. Keynes spoke the mathematical economic speak and was thus accepted by the field. Furthermore, he is a godsend to politicians whose rational person interest is to add to their power and the power of their branch. This way of thinking, that government can manipulate and steady the economy through mathematical calculations and artificially set interest rates and money circulations allows government to vastly expand their role and power in this country making their positions of more value and thereby giving them an interest to follow this methodology.
So what’s wrong with the ideology that government can act as a stabilizer in the economy? Well basically the premises are wrong. The first premise is the assumption that the interest rate that the market gives us isn’t the optimal interest rate. I have found no proof that the market interest rate is faulty. Secondly, they presume that they are capable of finding a better interest rate for the economy assuming already that one can be found. This is not only unproven but beyond unlikely and against history since government central planning has never added to the overall wealth of an economy in the long run. Lastly, the most important premise is that there is no adverse effect to this government control that outweighs the assumed benefits assuming the process is possible which of course I think it is not but giving them the benefit of the doubt if they are 100% correct they must still account for negative effects. So what are the negative effects?
This will be my focus because the first two are relatively self explanatory to anyone with knowledge of history and economics unless of course you are already drinking the Keynes Kool-Aid in which case this argument is far more likely to capture you attention than the first two. The largest adverse effect that I see in this big government scheme is found in the theories of time preference. Interest rates are based on time preference. Now time preference on an aggregate level is in a relationship with aggregate demand. Future demand and present demand are linked through time preferences of consumers and that is a major component of market based interest rates. So what does this mean for the economy? In the economy people earn income and then from this income some they will spend in the present or short term but people attempt to level out their standard of living and plan for large purchases to allow for a similar long run standard of living and the purchase of large products like retirement and college for children and thus they save a portion of their income for future consumption during hard times and for large purchases. This savings is determined by their time preference for consumption and represents a time function on aggregate demand because savings is essentially pent up demand. That level of pent up demand is to some extent effected by interest rates and to some extent it helps determine the interest rate as the market rates move towards equilibrium. Now the other side of this market is the demand for these savings. There is demand for savings because savings are borrowed by industry to build capitol (and by other consumers but since we are talking in aggregates we will ignore that portion). Borrowing for capitol increases is also a time issue because capital investments relates directly to future supply availability. So, time preference for consumption determines savings rates and then savings rates determine capital expenditures which determine future supply right? So then there is a link between aggregate supply in the future and aggregate demand in the future created through the process of reaching equilibrium interest rates, right?
Wow, that means that without the process of setting equilibrium interest rates we will have the wrong amount of savings and businesses will invest the wrong amount in future production capabilities and therefore aggregate demand and supply won’t match up right in the future right? SO what does that mean? Well it will either be a shortage or a surplus of supply and since labor is the short run fix for inequality it means we should sweep from vast unemployment and depression to booms with very high unnatural employment. While this is great for political gamesmanship it is bad for us the common people and if only everyone could understand how this worked we would run these Keynesian economic politicians out of Washington on the rail and demand a standardized money supply and a market controlled interest rate structure!
So what’s wrong with the ideology that government can act as a stabilizer in the economy? Well basically the premises are wrong. The first premise is the assumption that the interest rate that the market gives us isn’t the optimal interest rate. I have found no proof that the market interest rate is faulty. Secondly, they presume that they are capable of finding a better interest rate for the economy assuming already that one can be found. This is not only unproven but beyond unlikely and against history since government central planning has never added to the overall wealth of an economy in the long run. Lastly, the most important premise is that there is no adverse effect to this government control that outweighs the assumed benefits assuming the process is possible which of course I think it is not but giving them the benefit of the doubt if they are 100% correct they must still account for negative effects. So what are the negative effects?
This will be my focus because the first two are relatively self explanatory to anyone with knowledge of history and economics unless of course you are already drinking the Keynes Kool-Aid in which case this argument is far more likely to capture you attention than the first two. The largest adverse effect that I see in this big government scheme is found in the theories of time preference. Interest rates are based on time preference. Now time preference on an aggregate level is in a relationship with aggregate demand. Future demand and present demand are linked through time preferences of consumers and that is a major component of market based interest rates. So what does this mean for the economy? In the economy people earn income and then from this income some they will spend in the present or short term but people attempt to level out their standard of living and plan for large purchases to allow for a similar long run standard of living and the purchase of large products like retirement and college for children and thus they save a portion of their income for future consumption during hard times and for large purchases. This savings is determined by their time preference for consumption and represents a time function on aggregate demand because savings is essentially pent up demand. That level of pent up demand is to some extent effected by interest rates and to some extent it helps determine the interest rate as the market rates move towards equilibrium. Now the other side of this market is the demand for these savings. There is demand for savings because savings are borrowed by industry to build capitol (and by other consumers but since we are talking in aggregates we will ignore that portion). Borrowing for capitol increases is also a time issue because capital investments relates directly to future supply availability. So, time preference for consumption determines savings rates and then savings rates determine capital expenditures which determine future supply right? So then there is a link between aggregate supply in the future and aggregate demand in the future created through the process of reaching equilibrium interest rates, right?
Wow, that means that without the process of setting equilibrium interest rates we will have the wrong amount of savings and businesses will invest the wrong amount in future production capabilities and therefore aggregate demand and supply won’t match up right in the future right? SO what does that mean? Well it will either be a shortage or a surplus of supply and since labor is the short run fix for inequality it means we should sweep from vast unemployment and depression to booms with very high unnatural employment. While this is great for political gamesmanship it is bad for us the common people and if only everyone could understand how this worked we would run these Keynesian economic politicians out of Washington on the rail and demand a standardized money supply and a market controlled interest rate structure!
RSS Feed
