The Second Coming Of Keynes

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how to kill keynes

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In scientific notation, the Keynesian Formula consists of the following make-up:

C + I + G + X – M = Y(GDP)

which means:

Consumption + Investment + Government Spending + Exports – Imports = Gross Domestic Product

This is standard stuff. Start here.

Spending is the heart of Keynesian economics – aggregate spending. Consumption © is a series of society-wide individual allocation decisions. Investment (I) is a series of society-wide individual allocation decisions. Exports (X) are a series of society-wide individual allocation decisions. It is the same for imports.

Government spending is an allocation decision of a different kind. "See this gun? See where it is pointed? Hand over your wallet."

The student can see that total spending is based on all the letters of the formula. C, I, X, and M all begin with the original owners of resources. But G does not begin with the original owners. G begins with the new owner after multiple transactions with the gun.

G does not create. G confiscates. G cannot spend anything that it did not extract from consumers or investors.

C, I, X, and M are based on production. They are creative forces. G is based on confiscation. It is not a creative force. Everything spent by G comes at the expense of C, I, X, or M. When G spends, it does so at the expense of the others.

A bright student is smart enough to figure out what most people do when constantly threatened with robbers with guns, even if the robbers carry badges. They will not put all of their money in their wallets. They will hide some of their currency. They will not spend it. People who carry badges and guns call this currency hoarding. This is a Very Bad Thing, we are assured.

"When you see G, think 'gun.'" This mental image undermines the authority of the formula.

A grifter is a con man who uses fake promises as a way to scam victims. If more students knew what a grifter is, you could say: "When you see G, think 'gun,' 'grifter,' and 'graft.'"

The student thinks, "This can't be all there is to Keynesian economics." But it is. He thinks, "Someone would have pointed this out in 1936 if this were all there is to it." Hardly anyone did. The few who did were not believed after 1948, the year Paul Samuelson's economics textbook was published.

How could this be the case? Because of what George Orwell observed in 1946, the same year that Keynes died. "To see what is in front of one's nose needs a constant struggle."

Be the child at the parade, crying out: "The emperor has no clothes." Start with the simplest explanation – visual – at the heart of Keynes' colossal error. Don't let go.

Start with the gun, the wallet, the IOU, and the printing press. The formula is merely window dressing for economists.