prices: Keynesian Economics Exposed

Don Boudreax hones in on the fallacy at the core of Keynesian economicsHere’s the popular version:

Keynesian economists .. fail to understand what the great Austrian economist F.A. Hayek understood, namely, that markets allocate resources by relative prices. For example, suppose consumers’ taste for fish intensifies while their taste for beef weakens. Consumers will then spend more money buying fish and less buying beef.

The resulting higher price of fish relative to the price of beef will signal to entrepreneurs, investors and resource owners to produce more fish and to produce less beef. This change in production patterns is precisely what should happen.

Specialized beef producers, though, aren’t so keen on this little piece of economic change. Some workers in the beef industry will lose their jobs.

Would it be a sound economic diagnosis to attribute these job losses to a reduction in total consumer demand? Of course not. Would it be sound economic policy for government to save those jobs by entering the beef market and buying more beef? Of course not, for to do so would divert scarce resources from other uses more valuable to consumers.

Politicians, ever eager to justify meddling further into the economy, jump on this Keynesian bandwagon. The result is that the normal corrective adjustments in the market are thwarted and government’s power over the private economy grows dangerously.

This entry was posted in Keynes. Bookmark the permalink.

2 Responses to prices: Keynesian Economics Exposed

  1. The above post is riddled with errors.

    1. Re the opening sentence, the idea that Keynes didn’t understand that “markets allocate resources by relative prices” is bunk. Every school child understands this one.

    2. Re the 2nd last para (the idea that Keynes couldn’t see the difference between decline in demand for particular products and a decline in aggregate demand is also nonsensical. This difference is intuitively obvious to most school children.

    2. The idea that Keynes was opposed to letting declining industries go bust is nonsense.

  2. Vikram Teva Raj says:

    The whole point of Keynes as I read him is that the majority of humans are not and will never be mavericks accustomed to function on the edge of the information wave (not even considering the free rider issue). So you trade off some efficiency to give them time and the capacity to react sensibly, trade off some inequality to give this slightly slower reaction more oomph. The information problem is at the heart of why Keynes is relevant.

Comments are closed.