Wednesday, April 13, 2016

How Keynesian Economics Has Distorted Economic Thinking (Somewhat wonkish)

For the better part of a century, most economists have believed that recessions are caused by overall demand failure—total purchasing power dropping below the number of total goods on the market.

Part of the reason for the predominance of this thinking is that the man who popularized it, John Maynard Keynes, mischaracterized “classical” arguments in order to better refute them. Unfortunately, few are aware of the success these distortions have had on economic theory.

Keynes began his criticisms of the classical school by insisting that it offered no explanation for “involuntary unemployment”—or forced unemployment—and hence recessions:
Classical theory…is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemployment, which in the above sense involuntary, cannot occur… [emphasis added]
He then added to his criticism by accusing his opponents of fallaciously arguing that “supply creates demand,” which Keynes would repudiate: