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Keynes = Not So Keen


The economics theory that drives some center-left thinking comes from John Maynard Keynes. His is called the "Keynesian Formula," which goes like this:

C + I + G + X - M = Y(GDP)
Decrypted, it translates as:
Consumption + Investment + Government Spending + Exports - Imports = Gross Domestic Product
Under his theory, government spending counts as productivity. Keynesian Economics helped to spawn the notion of deficit spending.

To give a bit more background to his thinking, he believed in the notion of "full employment," which asserts that an economy is at its best when everyone is working. Keynes' premise arose from the Depression era, and putting people to work would, he argued, spur income and economic activity, even if it took borrowing from the future to "create jobs" for the unemployed.

Cute theory and kinda tidy, but it misses something rather important: borrowed money is never cheap. I can borrow money from the future, but at the cost of interest. Deficit spending is not a zero-sum game; it's a chase of creditor to debtor, and payback can be a bitch. (Micro-economically, ask anyone with big credit card debt. Macro-economically, ask our kids in 20 years - they'll tell you.)

Further, it presupposes that the government will spend money in a way that is productively equivalent to spending and investment driven by the private sector. But not all money is equal. (I discussed this recently in another post.)

Restated: an artist in his basement can chew up money all day long creating art, but if nobody wants it, the velocity of money around him decreases and it is therefore not productive money.

On the other hand, a guy who cranks out art that people love and want will increase the velocity of money around him, and that money is greatly productive and self-sustaining.

The free market would urge the guy with no demand for his art into a profession more productive. His lack of productivity would necessarily have to come to an end in order for him to survive.

Government spending, which has nothing to do with market desire, could subsidize his lack of gainful productivity. The only talent he needs is to appeal to the right government patron, which severely handicaps any inclusion of government spending in a calculation of gross domestic product - especially since government workers aren't known for picking champions of the economy.

Keynes was smoking the bong, for the two reasons I've stated:

  • Interest on deficit spending weakens any productivity that deficit spending might create. It's an economic sugar high, and the inevitable crash comes when the debt comes due.
  • Government investment is notorious for propping up low quality enterprise long after the free market would have forced its closure.
Someday soon I'll write a post about how the notion of forcing "full employment" is ridiculous and ruins an economy.



by Brett Rogers, 10/7/2009 12:53:13 AM


I watched one of the Fox Business shows on Saturday a couple weeks back and one of the so called panel members was a Keynesian believer. He had the others shaking their heads and almost at a loss of words with how backwards his arguments were.

As for the equation, Keynes needed to change the sign preceding government spending.



Posted by Pale Rider, 10/7/2009 3:42:32 PM

lol - fixed.

Consumption + Investment + Exports - Imports - Government Spending = Gross Domestic Product
Yes, PR. I love your revision :)



Posted by Brett Rogers (, 10/8/2009 8:49:14 AM

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