Friday, July 22, 2011

The Crushing Irony of Keynesian Economics

During the Great Depression John Maynard Keynes reprised a discredited theory that government spending stimulates the economy. Frederic Bastiat, in 1850, had provided the jiu jitsu response to this old theory by asking, "When you spend, where does the money come from?" That is, if the government is giving away food, shelter, and clothing, from whence do they get the resources? The answer is often, "From taking the food, clothing, and shelter of others."

Bastiat's idea that Napoleon could not make France more wealthy by burning Paris or by breaking all the windows in France or by paying workers to dig holes and cover them up without withdrawing resources from the economy is known as "crowding out." Government activity crowds out private activity. There is an irony to crowding out that exposes just how foolish Keynes' recycling of Napoleon's idea is.

If the government decides to boost the economy by paying workers to grow potatoes and make potato chips, then private potato chip makers are crowded out. However, if the government decides to dig holes and fill them in, no private "hole-digger-filler-iners" are crowded out, because the market does not perform useless tasks.

So the more useless the government's spending is, the less it crowds out private spending. Hence, Keynes is wrong in any case. But Keynes' government spending would do the most damage to the private economy if the government did something useful.

Fortunately, government mostly concentrates on useless production, such as giving cocaine to monkeys, constructing bridges to nowhere, and building tunnels for turtles to walk under the highway.

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