A Keynesian Path Would Be the Wrong Path for the U.S. Economy - AIER
By: Nicolas Cachanosky (AIER)
Another loony libertarian trope popped up on my news feed. Friedrich Hayek argued that the marketplace regulates itself. That self regulating characteristic suggests the most efficient functioning of the marketplace is achieved by eliminating interference in the marketplace. But Hayek and his Libertarian supporters fail to understand the purpose of the marketplace.
The weather regulates itself. Yet, we find it necessary to build infrastructure to manage the effects of weather. Droughts, floods, blizzards, and major storms are all the result of the weather regulating itself. We manage the weather without controlling the weather. The arguments posed by Hayek and his ilk suggest that since we cannot obtain sufficient knowledge to control the weather then we should just accept whatever weather comes our way without interfering. Allowing the weather the maximum freedom to regulate itself, without interference, allows the most efficient functioning of weather.
Weather regulates itself through natural processes whose primary purpose is to transfer heat in the earth system. Heat is the controlling influence for weather. Creating snow, rain, and wind is not the purpose for weather; those are byproducts of weather. Too much or too little of those byproducts of snow, rain, and wind cause problems that must be managed to lessen impacts on people. Failure to transfer heat within the earth system causes a cascade of localized events that can be devastating for people. It is necessary to manage the impacts caused by the byproducts of weather without controlling the weather.
The marketplace regulates itself through artificial processes whose primary purpose is to satisfy wants and needs. Wants and needs are the controlling influence for the marketplace. Creating wealth and money is not the purpose for the marketplace; those are byproducts of the marketplace. Too much or too little of those byproducts of wealth and money cause problems that must be managed to lessen impacts on people. Failure to satisfy wants and needs within the marketplace causes a cascade of localized events that can be devastating for people. It is necessary to manage the impacts caused by the byproducts of the marketplace without controlling the marketplace.
Friedrich Hayek and his Libertarian supporters focus attention on the byproducts of wealth and money in the marketplace. But, as with weather, those byproducts are not the purpose of self regulation in the marketplace. While it is certainly possible to manipulate supply to the marketplace and create more byproducts, that is not the purpose of the marketplace. As with weather, too much or too little of those byproducts can cause a cascade of devastating impacts on people while failing to fulfill the purpose of the marketplace to satisfy wants and needs.
Maynard Keynes advocated managing the market byproducts of wealth and money to allow the marketplace to fulfill the purpose of satisfying wants and needs. Demand side economics really is directed toward the controlling influence of self regulation in the marketplace which is consumer wants and needs. Manipulating supply to the marketplace for the purpose of creating wealth and money is an artificial interference in the marketplace that ignores the purpose of the marketplace. As with weather, the byproducts of that artificial manipulation and interference cause problems that can be devastating and those byproducts must be managed to lessen impact on people.
S E E D E D C O N T E N T
To get through the current crisis, Jared Bernstein argues, we must look to Keynes. It is an old argument, reapplied to our current context. The old argument is straightforward: the free market cannot fix itself. It follows, then, that we should not expect the economy to automatically recover once the pandemic outbreak is over. A more effective approach, Bernstein and others following in the tradition of Keynes maintain, would see the market managed by the savvy hand of the state.
Yet, how precisely the state should manage the economy is unclear. And the idea that capitalism is "not to be overthrown but to be 'wisely managed'" is a dangerous one.
As Friedrich A. Hayek explained in a famous 1945 essay on The Use of Knowledge in Society, governments are unable to acquire the requisite knowledge to allocate resources effectively. The knowledge required is decentralized-of a particular time and place. Indeed, it is often tacit, meaning it cannot even be articulated by those possessing it.
In a market economy, Hayek argued, this knowledge gets embedded in prices through the process of bidding and asking on particular goods and services in particular places at particular times. It is not possible to convey that knowledge in the absence of market prices. Hence, a government cannot manage the economy wisely because it lacks the requisite knowledge.
A second problem, which Hayek identified in The Road to Serfdom, arises as the government attempts to manage the economy without the requisite knowledge. Without the knowledge of individual preferences, in particular, the government will tend to substitute the preferences of its leaders for those of the individuals in society. Individuals will do their best to achieve their own ends given the constraints imposed by government officials. And, since the ends of individuals do not perfectly align with those of government officials managing the economy, they will tend to undermine the plans of government officials.
What will a government do when its plan inevitably fails? It could abandon its plan, letting individuals pursue their own ends without the added constraints. But the fear, according to Hayek, is that the government will insist on its plan. Such an insistence would result in even greater efforts to subvert the plans of individuals for the plan of their leaders. And, when this revised plan fails, the government will have to decide whether to abandon its plan or double down once more. Continued insistence on the plan results in more and more encroachments on individual liberty. The end result is serfdom.
Rather than following in the tradition of Keynes, as Bernstein recommends, those in the post-pandemic economy would be better served by following in the tradition of Hayek. The Hayekian free market approach does not amount to do-nothingism, as opponents often suggest. Hayek acknowledged an important, though limited, role for the state to assist those most in need. But providing assistance to the widow of a COVID-19 fatality or a temporary loan to small businesses struggling due to no fault of their own is very different from efforts to "wisely manage" the economy.
Moreover, there is some evidence that a turn toward Hayek, as opposed to Keynes, would improve our ability to grapple with the next crisis. A recent study by Christian Bjrnskov looks at 212 crises across 175 countries from 1993 to 2010. He finds that, following a crisis, countries with higher levels of economic freedom-that is, with institutions closer to those proposed by Hayek than Keynes-suffered smaller economic contractions and faster recoveries.
Keynesian ideas have dominated the political worldview for decades. But we would be better off following Hayek.
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The purpose of the marketplace is to satisfy demand. Wealth and money are byproducts of the marketplace that must be managed to allow the marketplace to fulfill its purpose of satisfying demand.
When wants and needs are unsatisfied then the marketplace has failed to fulfill its purpose. The Keynesian approach to economics isn't about controlling the marketplace. Keynesian economics is about satisfying consumer demand and that does require managing wealth and money to avoid harmful effects of artificial manipulation of the marketplace.
Friedrich Hayek advocated for the freedom to artificially manipulate the marketplace to create byproducts of wealth and money. But that isn't the purpose of the marketplace.
Different strokes for different folks I only entered the marketplace for profit and that is by far the biggest reason I remain. Right now we are seeing heavily regulated businesses going bankrupt because of the heavy hand of government. Businesses that are not deemed essential are in real danger right now because government restrictions are driving them into the ground.
Businesses that do not contribute to satisfying consumer wants and needs serve no purpose in the marketplace. Such businesses are engaged in artificially interfering with the marketplace and, ultimately, create an obstacle for self regulation of the marketplace.
I agree to some degree but I suspect where we will disagree is on who and how the “marketplace” is “managed.”
Governments are notoriously bad at this. A truly free marketplace is much better imo. Business succeeds or fails based on how well they meet demand. This is far reaching from how well the services they provide sell, to how well they manage their own staff and business.
I deal with government inefficiency and over regulation nearly every day. Letting them manage even more is not the answer in my book. Let them deal with the big stuff like deregulating monopolies when required but hands off for the rest of us. We already have too much growth stifling government regulation imo.
Governments don’t make anything. They only exist because the private sector does.
Much of the argument depends on how expansively 'marketplace' is defined. Is a factory floor in the marketplace? Is a bank account or a stock portfolio in the marketplace? Are all economic transactions conducted in a marketplace? Is any sort of economic regulation the same as regulating the marketplace?
Regulating business practices may. indeed, have a monetary impact. But are those business practices intended to satisfy wants and needs in the marketplace - or - are those business practices intended to manipulate the marketplace to accumulate/concentrate wealth and money?
Does profit really indicate how well consumer demand is being satisfied? Or does profit indicate how well a business has manipulated the marketplace to accumulate/concentrate wealth and money?
The only economic requirement for a business is that it meet obligations. There isn't an economic requirement that a business generate profit; the only requirement is for the business to pay its bills. We know some businesses are managed to accumulate/concentrate wealth and money while the business is unable to meet its obligations.
Some claim the purpose of a business is to generate profit. But the purpose of the marketplace is to satisfy wants and needs; profit is a byproduct of the marketplace. Adding middlemen to the economy can generate profit but also adds inefficiency to the marketplace. So, the question becomes is the government regulation adding inefficiency - or - does government regulate private sector inefficiency?
There really are a quite a few businessmen who are accumulating/concentrating wealth and money from the activity of adding inefficiency to the marketplace.
All the middlemen exists because there is a marketplace for the services they provide. Often funds are borrowed because they are used to make a business more efficient and sometimes just to cover the costs incurred while meeting the demands of their customers. Some business owners are looking for a faster rate of growth so they are willing to live the risk of being leveraged. A business has to grow or it will die because the competition is not standing still. Just yesterday I was dealing with a local bank that we have a large line of credit with. We try not to make capital expansions with borrowed funds to keep the risk low. I try to reinvest the majority of the profit back into the business so it can continue to live and grow. But we sometimes win large contracts that required a large expense for the materials used in the construction of the job. We bought some new machines this year and the cost of those machines required most of the accumulated funds the business had. It was necessary to expand our line of credit with the bank to help pay for materials used in the construction of a large job.
Over the years we have had trouble because of shady business practices where the owner is building his wealth while the business is failing. They can continue to exist as long as they can pay their loans on time and can continue to grow by winning more jobs even though they are losing money. It's a real bummer when you know they are taking a job at a loss but eventually they run into a recession and can't meet the demands of their debt and go bankrupt. The businesses that carry a lot of debt are high risk and times like this are when they go under. That's when we can pick up good people and sometimes buy their buildings and equipment at a significant savings.
"There really are a quite a few businessmen who are accumulating/concentrating wealth and money from the activity of adding inefficiency to the marketplace." I don't see that because if things can be done more efficient a competitor will do it and win the work.
I could go down point for point but your wording and therefore your viewpoint is clearly much more socialist than mine so I don’t see much point in that.
Why is my business more successful that many of my competitors? It has virtually nothing to do with the government and nearly nothing to do with “manipulating” the marketplace as you say. Manipulate is not a word I would use.
Its as simple as we work harder and smarter than many of our competitors. Past and present. People want to use our services because we are good at what we do and we stand behind our work. There’s three or four reasons right there that have absolutely nothing to do with government regulations or what you call marketplace manipulation.
You do those few things well, you’ll likely be successful. No government needed to accomplish any of that .......
There isn't an economic requirement to generate profit; the only requirement is to meet obligations.
That doesn't mean profit is unimportant and doesn't suggest that profit should be eliminated. But the fact that profit is not an economic requirement indicates that the marketplace does not exist to generate profit or to accumulate/concentrate wealth and money.
The purpose of the marketplace is to satisfy consumer demand; that's why the marketplace exists. That's also why Keynesian demand-side economics works well to protect the marketplace. It's true that the Keynesian approach doesn't do much to protect profits or to protect accumulated/concentrated wealth and money. But profits, wealth, and money aren't why the marketplace exists.
The biggest problem with the Keynesian approach is that it can be abused by ideas like 'free trade' that threatens the resiliency and security of the economy of the United States. Establishing an open and mostly unregulated global marketplace is a perversion of demand-side economics. The global marketplace is fulfilling the purpose of satisfying consumer demand but undermines the security of the United States. That's why government intervention in the marketplace becomes a necessity to protect the security of the United States.
Hardly socialist. Socialism is a form of supply-side economics premised upon the idea that the purpose of the marketplace is to accumulate/concentrate wealth and money. Owning the means of production only alters distribution of the accumulated/concentrated wealth and money. Socialism essentially eliminates the marketplace by controlling supply to alter distribution of accumulated wealth and money.
Socialism functions in the same manner as other types of supply-side economics. The purpose of any type of supply-side economics is to accumulate/concentrate wealth and money. But the marketplace does not exist to accumulate/concentrate wealth and money; that's not the purpose of the marketplace.
Keynesian demand-side economics places greater emphasis on the marketplace satisfying consumer wants and needs rather than accumulating/concentrating wealth and money. Those advocating for accumulation/concentration of wealth and money are obviously opposed to Keynesian demand-side economics.
A business that prioritizes satisfying consumer wants and needs are typically more resilient and sustainable than businesses that prioritize accumulation/concentration of wealth and money. A business that excels at satisfying consumer demand typically has more flexibility with price competition, typically enjoys greater consumer loyalty, and typically attracts business based upon reputation rather than marketing.
Your last paragraph shows your confusion about my business at least. A successful business can both satisfy customer demands and accumulate wealth. It’s no different really than anyone who works for a living. We work to make money, so we can buy what we want or need. Shelter, food, health, welfare, entertainment, etc. I just do it by running a business that employees people who need to do the same thing.
If we do it well, we can accumulate wealth in our current system. This is evidenced by my business. We started in our garage over 40 years ago and have grown to be one of the bigger businesses of our type in our area. Accumulating wealth along the way as well as offering jobs for others to do the same thing.
I have no doubt, had our system been more socialistic we would not be where we are today. The incentives are to accumulate wealth and we worked our assed off to do that. We undoubtedly would not have done that had their not been at least that possibility of wealth generation for ownership.
Why would I work 60-70 hours a week and make the same as my employees who are working 40 or less hours per week.
Perhaps you think you would. I wouldn’t
It's kind of ironic to see this article at this point in time. One of the key principles of Keynesian Economics is that governments should increase spending and lower taxes when faced with a recession. I've never been an advocate of using such harsh measures, but if there were ever a time when it comes to mind is now. Liberals used to want to prescribe it in the best of times. I think if John Keynes were alive he'd be shocked.
The marketplace regulates itself, as does the weather. But neither the weather or the marketplace govern themselves.
Maynard Keynes would be shocked that modern economists treat supply and demand as independent and separate activities in the economy. Keynes recognized that the controlling influence in the marketplace was consumer demand and that the purpose of an economy is to satisfy consumer wants and needs.
Manipulating the marketplace to create wealth and money interferes with the marketplace regulating itself. Profiteering is just as (or more) harmful as any government interference. It's the same sort of distinction as the distinction between liberty and freedom.
It's not my intention to derail the seed but assuming that a way forward requires a choice from past economic theories is a bit too limiting.
Before voluntarily shutting down our economy - we were already in a transition to greater automation that should have taken many years - providing time for the economy , at least to an extent, to fix itself.
Shutting down the economy, as was done, exposed the economic equivalent of production "bottlenecks".
The main bottleneck was "people".
If most physical work had been automated the impact of requiring the population to shelter in place would have been greatly reduced. Look for businesses to increasingly look for ways to replace human employees.
(But automation always leads to more new and better paying jobs.) Well that was true in the past, but the new and better paying jobs will also require rather advanced skills and education. And they will be fewer, not more. The dream that everyone will just learn to code smart phone apps for a living is not realistic.
So we will have a society where there are fewer and fewer jobs that will pay enough for someone to live on. Still, there will be many tasks to be done that would benefit society - but not pay enough. (Read to people in a nursing home, play clarinet in community orchestra concerts etc.)
We can figure out an economy where production requires few people; but for a market economy to work, the consumer needs income so that they can - well uh - consume.
GDP = Consumption + Investment + Government spending + Net Exports
I respectfully suggest that a text for Macroeconomics will look quite different 10 years from now.
That's not actually true. Self-service has had a larger impact on labor than automation. What has been called automation really has been a means to leverage consumer labor. Consumers are being required to expend labor to satisfy their wants and needs.
Does it matter if imported goods are produced by automation or by human labor? Increased demand has revealed that the United States no longer has an adequate industrial infrastructure to satisfy wants and needs. What we have observed during the last several recessions is that stimulating the economy resulted in increased imports and trade deficits.
Self service shifts the physical work onto consumers. Some assembly required.
The mantra of automation is that more can be done with less. In the case of manufacturing, automation replaces a workforce with a handful of tech managers. While it's true automation created new and better paying jobs, true automation in manufacturing has destroyed more jobs than has been created.
The loss of jobs creates competition for the few remaining jobs which works against the idea that automation creates better paying jobs. If everyone educated themselves to be computer programmers then there wouldn't be a shortage of computer programmers; computer programmers would be a dime a dozen.
We must recognize that the purpose of the economy is to satisfy wants and needs. The purpose of the economy is not to create wealth, money, or increase the GDP. Automation is being used as an artificial interference in the marketplace to increase wealth and money, so the marketplace isn't regulating itself. The marketplace is being artificially manipulated in a way that causes devastating impacts.
Profiteering is as harmful (or more harmful) than government interventions.
Rather than address everything in your reply - we are actually in general agreement on a substantial amount- lets just start here.
If the purpose of the economy is to satisfy wants and needs, how are those wants and needs definitively communicated from the consumer to the producer? As you well know, the standard answer is "money". (Sure focus groups, surveys etc but it is not until purchases are made that actual demand is realized.)
Demand of course is not just desire but desire backed by the ability to purchase.
I suggest that corporations have not been so capital starved for years that they could not meet demand. They are not even unwilling to give the consumer products and services that are desirable. But of course they try to produce to the point that maximizes their total revenue. Some times that's to the consumers benefit sometimes not. So I really don't see a Supply side problem.
I also don't see any problem with consumer desire. It's the income that is the problem.
You can review various sources for income trends - say from 1970 or so. Be sure you look for median income adjusted for inflation. Even better if the data is presented in quintiles. Compare that data to productivity. Productivity has gone gang busters while median income - especially for say the lower 50% of workers has risen only slightly or in some cases remained flat.
Respectively, most of that productivity increase is from computerization of one type or another. Even the "self service" you mention, is made possible by computerization. Only part of the work is transferred to the consumer. Processing payment, making change, identifying bananas from the product sticker and calculating the weight - all process that have been automated by computerization.
So while
I don't really disagree - but this is a permanent situation and any new economic theory must take it into consideration and recognize that somehow consumers must have income beyond just the barest survival.
Aren't restaurant menus fascinating? A patron makes selections from the menu (indicating a want) and the meal is prepared as the patron requested. The patron's want is satisfied before money enters into the activity.
The same activity can occur in a home kitchen. Someone can request a particular food (indicating a want) and the food is prepared to satisfy that request. That's the same sort of activity as occurs in a restaurant but money isn't involved. So, satisfying wants and needs doesn't always require money.
Modern corporations engage in activities to accumulate/concentrate wealth and money without doing anything to satisfy wants and needs in the marketplace. These types of activities take place outside the marketplace. Stock manipulation doesn't address consumer demand. Price manipulation doesn't address consumer demand. Financial manipulation doesn't address consumer demand.
The purpose of the marketplace is not to accumulate/concentrate wealth and money. The marketplace does not exist to generate profit. And modern business and financial practices indicate that the marketplace has become less important for large corporations.
Yes, there is plenty of demand in the United States. But there are many ways to satisfy consumer wants and needs. Wants and needs can be satisfied by producing for oneself, by scavenging, by bartering, by begging, or by stealing. Buying is only one method of satisfying wants and needs. And, it can be argued, buying is the only means of satisfying demand that requires money.
When buying isn't possible then alternative means of satisfying wants and needs become more viable. We've seen that with the increase in activities like garage sales, flea markets, food banks, dumpster diving, a black market, the gig economy, and crime.
Consumer demand is the controlling influence for the marketplace. Consumer demand does not go away if there isn't production for the marketplace. Creating the rust belt didn't eliminate consumer demand. And that demand can be satisfied by several means.
Yes, automation has facilitated self service. Automation is a tool that allows a business to include bartering consumer labor into the transaction. Self service really has eliminated jobs.
Automated online ordering includes planning manufacturing, inventory control, planning logistics, financial accounting, and other tasks. Online ordering is a data entry activity that exerts control over the internal operation of a business. The consumer is doing work on behalf of the business as part of the transaction. The problem is that businesses have adopted those practices for the purpose of accumulating/concentrating wealth and money rather than to better satisfy consumer wants and needs. Automation is being pursued to increase profit; not to lower prices.