Are Keynesian policies a more viable method to deal with the economic crisis?

For Keynesian policies to be a more viable method to deal with the economic crisis, it would have to stop associating within society in the short-run, and rather focus on the individuals that make up society in the long-run. While, the term ‘society’ is inefficient to be used in the context of economics, due to its nature of collectivising economic market participants. In this article unemployment will be explored, and how it is affected by monetary policy. It is true that with any government policy there is a level of uncertainty surrounding it, whether or not the economy is in crisis. During such an uncertain ruling on a tax policy or even property right laws, such as under regime or policy uncertainty.[] However, both uncertainty and government policies can have influence on the possibility of job seekers finding a job or a firm keeping on employees. The lesson to be learned from this paper is that economic crisis, may sometimes be caused by market failure or government intervention, however the difference between the two is that market failure can correct itself, whereas government intervention only prolongs the crisis.

Economics is a social science that studies the production, distribution, and consumption of goods and services. While, the economic way of thinking shows us how economies function through individual behaviour and interaction in the marketplace. As once early economists devoted themselves to the study of problems of economics, today economics as a profession surely draws upon the role of government interventionism. “[The professional economist] is an expert in the field of economic legislation, which today invariably aims at hindering the operation of the unhampered market economy.” (Mises, 1949, p.865) While, this supercilious attitude relegates economics to a level of commonplace. That is why, “[economics] is haunted by more fallacies than any other study known to man.” (Hazlitt, 1946, p.3) Precisely because of the pleading of special interests. One can only prevent or protect themselves against economic crisis, by becoming knowledgeable about sound economics and the causes of economic crisis.

‘The economic crisis’, must not just be limited to the famous 2007-2008 global financial crisis, as there have been many before and continue to be many after this major economic crisis. This is due to the monetary policy (currency devaluation/appreciation) causing such a boom and bust cycle, in the Austrian perspective. Economic crisis does, however, have a huge impact upon unemployment and savings, while this paper will work to explain how wage fixing by unions and artificially set interest rates cause inflation.

Keynesian economics/policy has its name taken from the British economist John Maynard Keynes and his theories. The most famous work published in 1936 by Keynes was his book called: The General Theory of Employment, Interest and Money. While, his latter book published in 1930: A Treatise on Money can be regarded as or more important to his economic theory. The General Theory made quite an impression, which unknowingly went on to transform the way people approached economics, moving away from a laissez-faire approach for a more direct hands on approach. As a result of this book, Keynes is regarded by some as the founder of modern macroeconomics – the study and intervention of the economy as a collective whole.

A textbook definition of macroeconomics says that “[it] is the study of the economy as a whole, including growth in incomes, changes in prices, and the rate of unemployment.” (Mankiw, 2010) Extending over global, regional and national economies. Economists advise on policies for the government regarding important economic indicators. However, in trying to over regulate or just regulating small parts of the economy, follow with unseen consequences. Rather one ought to help explain but must not try to regulate the causes that affect both households or businesses in the market economy. In contrast to microeconomics that tells us how individuals whether through households or businesses make decisions in the market economy. Macroeconomics is basically a collection of all the microeconomics foundations, in particular a collection of individual actors known to choose after weighing their expected additional costs and benefits.

A Keynesian viewpoint would be that government spending provides economic stimulus, however can contradict itself when government revenue exceeds government spending, causing malinvestment. (Higgs, 2009) It follows as the government is the largest net borrower then governments themselves are the ones who stand to gain from making borrowing cheaper. “[In preferring] easy money not only because it lowers the visible cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption [goods]” (Higgs, 2009). To prevent malinvestment and misguided policy decisions, one must consider the costs of not accounting for market price distortions, as such misdirected resources and periods of inflation and deflation. “[However, Keynesians] do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation.” (Higgs, 2009)

Therefore, central banks effectively attempt to increase the spending of market participants, to increase economic activity and inflation. Resorting to credit expansion through quantitative easing policy, is tempting to inflate away debt and raise seigniorage revenues. (Bassetto & Messer, 2013) Despite, the worst case scenario being hyperinflation, see figure one, consistent with the quantity theory of money it shows credit expansion maxes out asset prices, therefore, halting credit expansion, and bond interest elevates as government debt defaults. To prevent miscalculation investors compute for inflation increases in prices using the real interest rate, “[the] return to saving and the cost of borrowing after adjustment for inflation.” (Mankiw, 2010)

Figure one Money and Prices During Four Hyperinflations


Source: (Mankiw, 2015).

“The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.” (Mises, 1949, p.860) While, Keynes is credited for the terminology shaping modern macroeconomics, it does not necessarily mean Keynes presented the best method to deal with economic crisis, neither exclude the possibility that such an argument could be the route cause of the economic crisis itself. Rather, it entails that whether correct or incorrect his theories would be turned into policies, despite much consideration of the former. As they were accepted – the bad economist it is said would unfortunately present their argument better than the good economist can.

Economic models illustrate the relationship of two variables, namely how the input of outside exogenous variables affects the output of endogenous variables within. Every factor not controlled would be exogenous, (determined outside of the model and held constant). An example of an exogenous variable is the supply of money in the Austrian model. (Garrison, 1978) “The endogenous variables are the price [and] the quantity [exchanged].” (Mankiw, 2010) “Changes in the endogenous variables were brought about only by actual changes in the preferences of laborers and capitalists, by shifts in the supply and demand for present goods reflecting changes in time (or liquidity) preferences.” (Garrison, 1978)

The Keynesian Cross is “[a] simple model of income determination, based on the ideas in Keynes’s General Theory, which shows how changes in spending can have a multiplied effect on aggregate income.” (Mankiw, 2010) This however only measures a closed economy and wrongly assumes spending provides economic stimulus and spending decreases economic stimulus. “It takes fiscal policy and planned investment as exogenous and then shows that there is one level of national income at which actual expenditure equals planned expenditure.” (Mankiw, 2010) Alternatively, as government spending and taxation both increase, the government purchases multiplier and the tax multiplier both cancel each other out, as long as one is not larger than the other. As government purchases exceed taxes there is a government deficit that increases income, or where taxes exceed government purchases there is a government surplus that decreases income, in this model. This excuses in the Keynesian doctrine that budget deficits are good as spending is more productive than saving.

“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.”” (Hazlitt, 1946, p.4) Social planners (policymakers) might also care about equity – the fairness of the distribution of wellbeing among the various buyers and sellers. Though, when taxpayer funds are awarded to analysing such things as the question of why has economics fallen out of fashion with younger women, this action precisely undermines the significance to economics as a field of study.[] As an economist should know, if there presents itself a decline in those wanting to study economics at present, it represents one’s time preference, valuing either to work now and rather to study in the future.

Keynes, in his Treatise, had created a dynamic approach that converted economics into a study of the flow of incomes and expenditures. “Keynes further asserted that free markets have no self-balancing mechanisms that lead to full employment.” (Jahan, Mahmud, & Papageorgiou, 2014, p.1) Full employment is a straightforward task, simply army drafting can create full employment. Keynesian public policies justify government intervention to achieve artificial full employment and price stability. To boost spending on new businesses that can hire additional workers, assumes unemployment is the main issue and uses short-run economic stimulus to counter for the lack in private savings. Why not boost employments further, and employ as many people in the most tedious work possible. Only, in the long-run you have spent society’s real savings that would have otherwise provided for future employment and there is no market for their final goods and services. Additionally, if central banks blunder in their operations, the government passes on the expense to the taxpayers.

Rather than interfering, in an unhampered economy unemployment is always voluntary, as job seekers coordinate and make adjustments to the choice of occupation or the amount of wage rate they and their employer are willing to accept. The price system draws people into occupations where factors of production produce goods and services that satisfy consumer needs best. Employment happens between market participants because there is an infinite amount of work to be done. Ludwig von Mises termed ‘catallactic unemployment’ to explain this process as a market phenomenon just like any other market phenomenon. However, the wage structure determined by trade unions distorts these relative wages, and confuse what are good employments and not so good employments.

Prices and wages that struggle to adjust to rapid inflation or refuse to sell lower than the inflated price, are fixed by textbook ceilings/floors, however, creating unsold surpluses and that ultimately benefit labour unions job security from pushing up real wage rates. Limited to an aggregate production function with only one input – aggregate labour and Keynesian thinking assumes only one price, that is, ‘the price level’ a weighted average of all money prices average out relative prices and changes in such prices. With no concern over long-run capital stocks and counted as given in GDP whether they are profitable or misdirect resources. Representing assets where only exchange has occurred and no new employment has been added. Nor do aggregates count for unsold inventories, underground business, or personal production for direct consumption.

In the short-run, statistics prove the case for creating additional stimulus, as people and businesses can afford to boost spending and hire additional workers to fill newly built factories, then yes this does reduce unemployment. However, the real case for unemployment is quite the opposite – there is a lack of savings to fulfill current expectations. It should not be justified in order to fulfill for this lack of savings, that credit expansion is necessary. This aggravates the issue – when confused for real loanable funds. It is true that businesses do expand production, and we are often reminded of the enjoyable at the moment benefits, including more current employments. However, the pool of real savings in which the economy relies on for reducing unemployment is decreased as people decide to spend rather than save. These savings would had otherwise contributed as a benefit to the economy, to continue to save to provide for future employment.

This short-term increase in revenue does not last and these new employments can only be kept as long as there is continued inflation. The more credit expansion is confused for real loanable funds, distorts what is available to support current production and consumption levels. As there is not enough time available to equal the production of goods to the increasing supply of credit. The lower purchasing power and inflated asset prices are the result of the booms squandering malinvestments. While, busts even though are inevitable, should not be prolonged to delay market correction on grounds of devaluing currency and hurting savings. Ultimately, benefiting government’s large debt to repudiate and sell at low rates.

If governments lower the gross market rate of interest to help unemployment, they distort prices and deviate from the originary rate of interest. That is, in a free market, market price signals communicate and reveal the subjective valuations of all market participants, each time preference toward present goods over future goods. Naturally, preference for future goods, increases savings and lowers interest rates, signalling investors to borrow. Artificial low rates force people to consume now at the expense of saving or investing in the future. Therefore, it is quite hypercritical when interest is said to be exploitation. As, the market provides employments not governments. And, if we didn’t have interest the economies productions would not seek to produce at a loss and provide no incentives to save.

“[There] are [however] powerful objections to any plausible policy […] which largely assumes that markets handle the task of allocating financial assets [and providing financial stability] better than central bankers or regulators can” (Carmichael and Esho in Bell, 2004).[] Having learnt that market price signals represent scarcity and important information, such as market interest rates, and are relied on to direct factors of production and provide incentives to save. It follows that social life, and therefore specialization can help each to understand the unhindered coordination of the marketplace at work – that solve for market failure better than Keynesian policies by their very nature. The lesson here is not to place an individual decision into a collective decision would cause malinvestment and distort market price signals as proven – such policies prolong the boom, and delay market correction. Considering, that there isn’t a single person who contributes more than a small amount of know-how to the complete making of a pencil, due to the countless human beings who had a hand in its creation. (Read, 1964, p.141)

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