Tuesday, November 15, 2011

Keynes makes a little sense

I was thinking about it the other day and the rationale for Keynesian stimulus spending hit me.  I don't necessarily agree, but I understand the problem he was trying to solve.

The problem goes like this: say you have 3 people, 2 who are working, 1 who isn't.  Real wealth is what the total economy produces.  In our imaginary economy the actual wealth is the output of the 2 people, the third contributes nothing to the economy.  He is under utilized.  Say we could put this guy to work, whatever he produces is a net gain for the economy.  It doesn't matter what he produces because he wasn't producing anything before.

That's it.  Keynes saw a situation where the capacity of the economy wasn't being utilized and he attempted to create remedies for that situation.  Now I don't know enough to criticize all the remedies, but there is one obvious caveat.  This logic is only valid when one person is involuntarily out of work.  If he is not, then diverting his work to some other task, is a net loss for the economy.

Another thing to consider is that in our imaginary economy all we see is the symptom.  A person is out of work who could be producing something of value.  What we don't know is why.


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