Keynesian Economics

The first thing to note about Keynesianism is that it's a general theory. Like Einstein's general theory, Keynes' general theory usually holds true, but does not always. Keynes himself noted this in his books. There are literally thousands of data points that my opponent can point to where the theory didn't work, but the theory was never designed to explain all of economics. The most obvious exception to Keynes' theory is in the long run, as my opponent rightly points out. Keynes admitted this, claiming that the short run was all his theory dealt with. When questioned why he did not write a long-run general theory (which I believe he was quite capable of doing), he famously replied "In the long run, we're all dead. " Shortly afterwards, Keynes did indeed die. What I need to emphasize though, is that just because the theory does not always hold true, does not mean that the theory is wrong. It still explains how an economy generally operates - in the US, using Keynes' advice led to a period of growth lasting almost 20 years [1]. The second thing to note about Keynesianism is the central message: when things are being bought and sold, things are easier to buy and sell. The measure of buying and selling in an economy is the "aggregate demand. " When this increases, it means people are buying more. Why is that good? It means that firms have more money, and are thus able to expand and diversify, as well as increase wages. Firm expansion and diversification drives them to competition, which is even better for consumers as goods become more available and more tailored to their individual needs. Keynes also saw a drawback to following this policy - increased prices. This was because when money moves around faster, more people are able to bid for the same goods and services, making them relatively more valuable. This is a phenomenon known as "inflation. "The third thing to note about Keynesianism is that it isn't anti-saving. Keynes knew about something called the "business cycle" - a continuous cycle of booms and busts in the economy. This is because the economy is not perfect, and as a result will often operate without "full" (optimal) employment [2]. In other words, when the economy is doing badly, you can expect to see lots of perfectly capable people begging for welfare money. Keynes believed that this was because businesses were saving (the so-called "Paradox of Thrift"), hoping to clutch on to their savings until the recession ended. By saving, however, they reduced production to reduce costs, worsening the recession further. To remedy this problem, Keynes proposed spending when times were bad. Keynes hoped that this money-injection into the economy would be spent, increasing employment. When the economy got into full swing and inflation became a problem, Keynes advocated saving to curb the problem. Yes, he did. Keynes loved saving in a time of prosperity. Saving would reduce employment, thereby reducing inflation. In this way, Keynes offered that a government could control the business cycle and reduce the severity of its effects. As it so happens, governments can. The fourth thing to note about Keynesianism is that it's proven. Pretty much the only good economist to come out of New Zealand was a man named A. W. H. Phillips. Phillips investigated the relationship between umemployment and wage behavior and discovered that they were consistantly inversely related [1]. This is the only conclusion consistant with Keynes' central prediction - buying and selling makes buying and selling easy. The Phillips curve remains virtually unchallenged in economics in the short run. In the long run it may not always work, but Keynes never said it would. Keynesianism is a short run system, with predictions that generally consistantly hold true. The Phillips study has been duplicated with thousands of datasets, and works for every short run. Now let me turn to my old pal John Q Taypayer, whose financial advisor leaves him $16,000 out of pocket every year. Angry at his advisor, he goes on Judge Judy and sues Keynes for bad advice. He asks of Keynes: "Why oh why did you advise me so poorly? " Keynes replies calmly: "My advice was absolutely perfect. If you had listened to my earlier advice to save when you had excess money, you would now be able to spend it. " To this Mr Taxpayer retorts: "Yes, but now that I foolishly didn't follow your advice, your advice was to put me into debt. Surely that makes me worse off! " Keynes responds, "Yes, but I told you to spend your money on the workers in your factories, getting them to produce goods that you can take to the market and sell tomorrow. But that's not all. When you spend even $1 on producing those widgets, your workers will spend some of that money. So your spending of $1 adds not just $1 to aggregate demand, but also whatever your workers spend. When those workers spend, the money passes to other workers, who pass on to others, who pass on to still others, and so on. The economy as a whole benefits along with you. " Judy looks down from her seat and asks skeptically: "One last question, Mr Keynes. What is the name of this principle? " Keynes responds: "The multiplier effect. " Obviously Keynes wins, just in time to launch into a rap battle with Hayek in the studio next door. Hold on - don't multipliers increase money? Wrong! The Keynesian multiplier only affects aggregate demand [3]. It means that your buck does more for the economy as a whole than just what you buy with it. You can in fact work out how much each dollar of spending really contributes to the economy. You can even work it out in dollar terms - although this is deeply misleading, because it implies the money has magically increased, when really it has just done the equivalent of more money with the same. That's what Nancy Pelosi did - she isn't wrong, you've just misunderstood her conclusion. How does it do this? As the master himself explained in the last paragraph, one person earning means that person can spend, which means another person can earn and spend, and so on. In this way $1 of spending quickly becomes $1.70 of spending when taken throughout the whole economy - not because 70c have magically appeared, but because a portion of that $1 will be respent by whoever gets it. Next my opponent objects that we're giving power to those big heavy-handed bureaucrats in their secure crystal palaces and ivory towers (no, not Disney, I mean the government! ) - and indeed, Keynes was frequently called a socialist in his time, something he strongly yet politely denied. But what if a Stalin comes along and abuses this immense power? Well, that's a scary thought whatever economic theory you subscribe to. So since government spending is so bad, I guess governments should just tax and save, right? Leave us with less and less money, dry us out until we have no money left and lose all incentive for production. Sounds really bad actually. The other option is that they could just not tax - but without money, it isn't really a government at all, is it? How could they ever enforce their laws if they can't pay the police? So, either we trust our government, or we force our governments to screw us over, or we abolish governments. I wonder which one my opponent prefers? In conclusion, I have shown Keynesianism works. I look forward to reading my opponent's closing statements. Web Sources1 - . http://www.econlib.org...2 - . http://en.wikipedia.org...3 - . http://en.wikipedia.org...(economics) #Keynesian_multiplier