Wednesday, February 04, 2009

Welcome to Rudd’s Neo-Keynesian World

[N]o recession has been brought to an end through increased levels of public spending, but many recessions have been ended by a return to sound finance and fiscal discipline.

Recessions occur because goods and services are produced that cannot be sold for prices that cover their costs. There are reams of possible reasons why and how such mistaken production decisions occur. But when all is said and done, the causes of recession are structural. They are the consequence of structural imbalances that result from errors in production decisions, not the fall in output and demand that necessarily follows.

This cannot be emphasised enough. Modern macroeconomics is built around the notion of the level of demand, while prior to Keynes recessions were understood in terms of the structure of demand. The difference could not be more profound. To policy-makers today, the basic issue in analysing recessions is whether there is enough demand in total. To economists prior to Keynes, the central issue was to explain why markets had become unbalanced.

In modern economic theory, rising and falling levels of spending are for all practical purposes what matters. That is why increasing public spending and adding to deficits are seen as an intrinsic part of the solution, not as the additional problem such spending actually is.

Missing in modern economic debates is an understanding of the importance of structure, that the parts of the economy must fit together. What’s missing is an understanding that if the entire economic apparatus goes out of alignment, recession is the result and recession will persist until all of the parts once again begin to mesh.”
Via: The Australian Conservative

The entire Keynesian solution is wide of the mark in the context of the present crises, not once but many times, it has been discredited. To expand one’s knowledge about why government bailouts will make the problem worse see also:

To understand why Keynes was so wrong
What's Wrong with Keynesian Economics?

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