http://safetyharbor.patch.com/blog_posts/a-deviation-from-keynesian-and-return-to-capitalism
Melissa's argument! My comment in quotes:
The economy has cycled through various paradigms over the centuries. It has shifted from feudalism to capitalism, capitalism to communism, and finally a mixed economy based on Keynesian principles. I contend that the Keynesian economic policies that have been in practice for the last fifty years have not engendered the same success as Adam Smith's laissez-faire economic policies.
"What do you mean Melissa? Keynes main argument was that laissez-faire did not achieve full employment and consequently was underachieving as regards job creation and retention. He explained that this was due to laissez faire arriving at equilibrium where no lowering of interest rates could stimulate achievement of full employment. We have such equilibrium now and the achievement of new jobs in America is as elusive as ever without US government intervention. How long do we have to wait for laissez faire to bring about full employment? Laissez faire has created lots of jobs in China! The problem with laissez faire is that it leads to the hog cycle of excess production followed by deep lasting recession! There is so much debt and overproduction in the housing industry that we will suffer for years. So, Melissa had the government intervened and stopped Bush era excesses of laissez faire we would still be building houses and debt burdens would be manageable. The problem with Bushes administration was that it did not recognize inflation in house values as a guide for government to intervene. Laissez faire really let us down. It was neo-classical economics not Keynesianism that were operational during the Bush administration. People thought it best to laissez faire and house price inflation continued unabated. Had Friedman, the right wing economist, been alive to advise Bush he would have cautioned against money supply growth going to the housing market. Friedman was a very wise economist."
The Keynesian economic policies used are stifling and limit the individual, whether a person or a business.
"Poor Keynes, who was a bit of a speculator could never have seen it the way you do! It is negative freedom which limits potential because laissez faire evolves very rapidly into economies of scale which mean that the largest firms dominate an industry putting small firms out of business. Alwats the largest scale wins in laissez faire world! Variety suffers and unemployment arises as equilibrium is achieved in the economy with loads of people out of work and loads of firms going to the wall. Read Joseph Schumpeter the economic historian and business cycle specialist on this"
I will demonstrate that while Keynesian economic policies may have been appropriate during the economic environment after World War I, they have become outdated and are unable to meet the economic issues that we are facing today.
"On the contrary, Keynesian economic policies are always appropriate because all economies are subject to scale economies, to disequilibrium arising from new technology, to the weaknesses of enterprise in addressing externalities that have to be covered by government programs."
Keynesian economics and the welfare programs currently used throughout the world create governments that are too big and unwieldy and strip the individual of their basic rights and moral ethics.
"Actually the cause of big government is laissez faire which gives rise to huge negative externalities from wasteful polluting production and marketing, resource pollution, environmental degradation, unemployment from job migration to Asia, over investment in housing and economic cycles, inflation and external imbalances, debt and depression."
I will provide my view on how an individual's interests are best served when capitalism reigns free and individual rights are restored.
"You don't make sense Melissa! The problem with capitalism is that it relies on market signals that do not work. These signals produce massive swings in the economy called cycles and overproduction is followed by underproduction and the level of underlying unemployment rises along a long term Schumpeterian technology driven trend line of greater and greater unemployment. The government has to intervene, provide education to bring the average up and avoid extreme desparit of incomes."
In The New Liberalism Keynes outlined the economy's development throughout history. During the 15th and 16th centuries, there was maximum governmental control and minimum individual liberty. The power elite held control based on physical coercion of the masses, for example through wars. From the 17th and 19th centuries there was an era of abundance with maximum individual liberty and minimum governmental influence.
"I suppose Queen Elizabeth I was a Keynesian in spirit? You don't make any sense Melissa with your silly generalities."
This was the age of the laissez-faire economic theories postulated by Adam Smith in his book The Wealth of Nations written in 1776. During this phase large corporations conducted their business without interference from the government.
"Melissa, you seem to have missed Malthus and Jevons in your discussion. Smith showed that overpopulation limited India and in any event any prosperity was achieved through merchantism and colonialism!"
The invisible hand controlled the markets when the individual choices of buyers determined where the resources were directed. The markets were free to cycle with little to no regulations. The final stage of economic development was a period of stabilization.
During this stage individual liberties began to decline and governmental control of the markets increased. The government was tasked with creating a stable economy and promoting social justice.
"Sounds like more confabulation, Melissa!"
In The Psychology of Modern Society, Keynes further theorized that under free market economics, the smallest segment of society held the largest portion of the money. This group saved the majority of its income and did not spend it which could have instilled growth in the overall market. Under capitalism, corporations or businesses owned the means of production. Individuals had to sell their labor in the market to gain access to those means of production and obtain the basic necessities such as housing, food and clothing. This was accepted as the normal standard.
Keynes believed that after World War I the working classes were no longer willing to accept this. They were no longer willing to allow a small percentage of the population to control the money and directly influence the markets. Keynes believed that in order to engender growth in the markets, money needed to be spent and the best authority to manage the economy was the government.
"This is a misreading of Keynes! The discovery of new gold controlled the money supply not individuals, which is why prosperty followed gold rushes! It was realized that an economy needed a central bank to encourage banks to lend outside of gold rushes. Also, the cental bank would act as lender of last resort to the weakest banks! The spending of money was not the source of growth. Keynes realized that bottlenecks existed within a laissez faire economy after it had picked all the easy investment opportunities and could not make the technical breakthrough needed to go on. Governments thus got into the business of education, health, roads, and warfare, the activities that laissez faure conomies could not accomodate. Now we would include environmental protection!"
Keynes economics influenced the creation of the New Deal, and became the established economic doctrine after World War II. Keynes wrote The General Theory of Employment, Interest and Money in 1936 and was attempting to create a new rule book that would allow the government to manage the economy through fiscal and monetary policies. Under Keynes view, the government was charged with stabilizing markets, provide for continued expansion of the market and achieving full employment of the working population. Government achieved these goals through spending, taxing and borrowing. The government became a consumer that borrowed money to spend on public works projects. The purpose of borrowing was to create a deficit which would in turn create jobs and increase the purchasing power in the markets. Further, in following the Keynesian principles the government assumed the responsibility of providing welfare benefits to the population.
"In America, racism created severe unemployment in black communities which needed attention that laissez faire would not accomodate! The purpose of borrowing was to finance road and dam building, education and infrastructural projects industry would not finance."
It is my contention that we are beginning to witness the dark side of Keynesian economic policies. I do not believe that Keynesian economics are able to meet the challenges of the economic crises that we have been experiencing since 2008. I believe that we are losing our identity under these economic practices. We are losing touch with the basic moral principles of frugality, industry, personal responsibility and common sense.
"This is not true Melissa. We could all have done with a proper oversight of inflationary pressures in the housing market! Laissez faire contributed to the oversupply of home loans and consumer credit which are at the root of present problems! Laissez faire in hedge fund gambling and in interest rate arbitraging (currency speculation) have been the bain of laissez faire."
Keynesian economics devalue the individual.
"Untrue! The economics give greater value to individuals by making people part of a highly educated workforce!"
Governments that follow the policies create welfare programs that engender the belief that the government will provide the citizens with the basic necessities of life. This creates an entitlement mentality and the expectation that the government will provide more benefits, when in reality it cannot afford these programs. This engenders the creation of individuals who are no longer producers in their own right and working for the benefit of themselves, their families, and their communities.
"The problems created by laissez faire combine to force a large scale investment in people and their health. Anything else is lamentable!"
Further under Keynesian economics the government has gotten too big and the resultant bureaucracy is unmanageable. The government is creating too many regulations that prohibit free enterprise and entrepreneurship. Prior to the housing market collapse in 2008, our country followed mixed economic policies that involved both Keynesian economic policies and free market premises. The government had no direct control over the market. However, after the economic collapse, the government began enacting severe regulations on the markets.
For example, the government created the TARP program that purchased the bad debts of millions of defaulted loans and other toxic assets from the banking industry. This was done to prevent the banking system from collapsing, however in return for accepting the monies, the banks were forced to follow the strict regulations enacted by the government. The government also bought stock interests in General Motors which effectively nationalized the company. Finally, the recent health care reforms that have been passed are attempting to regulate the health care industry. The crux of this program is the requirement that all individuals must have health insurance or else they will be penalized with a fine. This is an attack by the government on individual rights. This provision of the law is being addressed in the legal system to determine if the individual requirement of having health insurance violates the United States Constitution, and ultimately individual rights.
"Melissa, you are so far off the track that It seems you have not bothered to read basic information available! Bailing out the banks and industries acting as banks requires appropriate accounting and repayment. It was the right thing to do, but laissez faire forced it upon society not the other way around! Health insurance is something firms should cover but not for a few lucky people. It needs to be universal!"
These regulations are evidence that our government no longer promotes a mixed economy and is entering into the area of central planning in an attempt to control the market. Further, it is my opinion that the government is using these fiscal and monetary policies to encroach upon the rights of the individual, both people and businesses.
Keynes was right in his analysis of the progression of society in terms of its economic development. However, the practice of Keynesian economics has supported the development of an anti-capitalistic viewpoint. Businesses are punished with high taxes and sanctions. The producers are vilified for accumulating wealth. The government is acting under the guise of preventing the businesses from abusing the system and attempting to keep them honest. Yet under the current regulation, a company that has altruistic purposes is also being punished and limited in their development. Such regulations and controls on the markets are not the answer to solving our economic issues. These regulations stifle and prohibit growth. Under these conditions, the government becomes the strongest entity and controls the markets. We are no longer a mixed economy; we are becoming a centrally planned economy.
The government is in essence punishing a successful individual for achieving their goals and earning their reward. This can instill a belief that it does not pay to work hard or be creative as the government will simply take the reward. Further, the welfare policies in place create a dependence on the government and the expectation that the government will provide services from the cradle to the grave; in other words a nanny state.
The ultimate power of deciding which regulations and programs to enact is held by small group of individuals, for example to Federal Reserve, Securities Exchange Commission and the United States Treasury. This premise goes against Keynes original critique of capitalism with a small group of people having control of large amounts of money. This small group of individuals are attempting to predict how the markets will react to the measures they put into place. With respect to the social justice movement, this group is also attempting to predict the wants and needs of the citizens. This group of individuals has the power to make policies, create restrictions and attempt to control every aspect of our lives.
The best approach to resolving the economic crises is a return to the laissez-faire markets. The free market principles support individual rights and rational actors. It assumes that individuals will act in their own self-interests and are able to make rational choices. It assumes that people can rationally decide what they can do without versus what they need and will make the appropriate choice. Keynes economic policies take that rational choice from the individual and make the decision for them. The government is thinking for its citizens, they are no longer thinking for themselves.
The government needs to be downsized. The unwieldy and expensive programs set forth by the government need to be returned to the private sector. Also due to its sheer size, the government is not able to respond quickly to a crises when it arises. Alternatively, a business is able to react quickly as it is specialized and focused on one aspect of the market and not like the government attempting to control and predict the activities of the entire market.
Also, the countries that have Keynesian policies in place are reverting to free market practices. China is an example. Their economy was centrally planned, but due to the severe limitations and lack of ability to accurately predict the wants and needs of the market, China began to emulate free market practices. China is now on the threshold of becoming the dominant economic power.
As further support for the free market, it has also been proven that capitalism raises the standard of living for everyone. Capitalism was responsible for the technological advancements in medicine, science and computers. It also engenders competition between businesses which allows for those companies to better themselves and thereby create better products and services that are purchased on the market.
While I do not want to return to the dog eat dog capitalism that was popular prior to World War I, I think that the current economic policies stifle the individual and that the ultimate answers to the economic crisis actually lie with the individual. Businesses do need to be observant of the basic moral principles of responsibility, honesty and integrity. The government does need to be involved in overseeing the economy to make sure that there are no abuses of the system and also enforce reasonable regulations on businesses that violate the rules. However, the government should be once again limited from interfering with the markets with monetary policies. The government is closely approaching a centrally planned system that as we know from history has always failed. If the role of government is not curtailed there is, in my opinion, no foreseeable resolution to the economic crisis but the bankruptcy of the United States and other nations.
In closing, the ultimate responsibility lies within the individual. We are partially responsible for the current economic conditions. We must begin to educate ourselves about the issues facing the nation. An educated populace is the best protector of their own freedom and self-interests. The better educated we are and the more actively we are involved in monitoring the government and businesses, it will in turn force them to be more aware of where the power ultimately lies and the policies will begin to change. We need to return to the values of hard the work, honesty, a sense of purpose and accountability for one's actions. If the government continues using Keynesian economics we will be living in a nanny state and H.G. Wells 1984 will become a reality.
"Melissa! You are silly...."
