Thursday, February 05, 2009

The Economy and John Maynard Keynes

Welcome back John Maynard Keynes. All is forgiven. Poor JMK has been out of favor with economists for quite some time, that is since the seventies. JMK started as a true believer in monetary economics but changed his ideas with the onset of the Great Depression. By the 1970's Monetary theory was back in fashion thanks to Milton Friedman. Today JMK is back in favor although his ideas are little understood.

Economic stimulus or economic recovery package. Call it what you will, it's time to re-read our John Maynard Keynes. Time to pull out the multiplier effect and understand it.
Or to paraphrase a pundit, Keynsianism never went away, every time a government interfered in the economy it was always Keynesian concepts at work.
The free market ideology is merely an extra marital affair whilst the world remained faithful to JMK. And so on and so forth.
In Australia, the PM proposes a $42billion economic stimulus package.
In the U.S. Barack Obama announces an economic recovery package.

The only question in my mind is this. Is government spending on infrastructure more effective than government giving cash backs to voters? As far as I understand Keynes, he advocated government spending in infrastructure. What we are seeing in Australia is in fact a government squandering money without any real impact on the economy. At most, the lowest income families would get $950. Now whatever each family decides to do with this money, I don't see it as giving the economy a boost. For example, this amount is just enough to pay for home insurance for one year. Or a bit more than the cost or registering a family car. It's not as if $950 is going to buy anybody a plasma TV. Which is good because if everyone did that then instead of stimulating the economy the net result would be an adverse effect on our foreign exchange reserves and an increase in foreign debt. That's because most if not all consumer products are imported.
In contrast, government (should be) spending $42billion on infrastructure such as schools, roads, hospitals, public transport and much needed dams to relieve our drought situation which would create a true multiplier effect as John Maynard Keynes expounded.
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Anonymous said...

Adam Smith, "The Wealth of Nations", Book II

THERE is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called
productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit. The labour of a menial servant, on the contrary, adds to the value of nothing. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored,
together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants. The labour of the latter, however, has its value, and deserves its reward as well as that of the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion. That subject, or what is the same thing, the price of that subject, can afterwards, if necessary, put into motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leave any trace or value behind them for which an equal quantity of service could afterwards be procured.

Culturist John said...


According to your logic, would infrastructure building add to the value of the subject? It is not vendable. But it adds value to the nation upon which it is bestowed.


In my humble and simple opinion, JMK is dead. He is dead because, speaking as an American, our manufacturing has gone overseas.

The idea was that purchasing would lead to manufacturing that would lead to hiring which would lead to more manufacturing, and so on.

The problem now is that our purchasing stimulates jobs overseas, not here. So it is a zero - sum gain. It is a one time splurge. At the end, no more folks are employed than at the beginning - save some in retail and transportation.

Also, when people got jobs, they were supposed to then pay taxes and go off of welfare. This was to create the surplus that would pay off the debt incurred by the stimulus. Again, if no one is paying more in taxes . . .

Increasing debt decreases discretionary spending. Future taxes will have to go straight to interest payments on the debt. Some of that will go overseas (what is the percent of overseas holding of our debt now??). But as more of your taxes go to debt, you can spend less and less on stimuli in the future. We're digging a hole.

FJ??? Lexcen??? Thoughts???

Lexcen said...

FJ, the modern economy is in fact a service economy with most goods manufactured in third world countries where labour is cheap. That is a problem for both Australia and America.
CJ, Keynes saw recession as a failure of the private sector to spend. The government would step in and compensate for the lack of spending by the private sector to boost the economy.
My point about Keynes isn't whether he's right or wrong but whether government policy these days understands the concept of the multiplier effect or not.

Anonymous said...

I sure hope they understand the concept of "productive" labour.

Culturist John said...


Is productive labor where you buy off your constituencies? I think they get it.