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Worldcrunch

Why The Economic Crisis Should Kill Keynesian Conventional Thinking

Op-Ed: A countervailing conservative French economist blames the West’s imploding economy on long-accepted Keynesian policies of boosting consumption via public spending.

Article illustrative image Partner logo March against the cuts in London on April 2, 2011 (gwydionwilliams)

PARIS – It would have been only logical that the recent financial crisis and the consequences we are witnessing today should have radically challenged the prevailing ideas on economics. But it is fascinating to see to what extent people can stick to erroneous beliefs. The strange and enduring success of anti-Capitalist ideas after the spectacular collapse of communist and socialist societies illustrates this tendency all too well!

The ideas inspired by Keynesian theories are dangerously dominant. Despite the fact that they give no coherent explanation of the appearance of crises, everybody defined their “policies to end the crisis” according to Keynes’ ideas. The main point is simple: if there is an economic crisis, if economic growth is weak and unemployment rate high, the right thing to do is to increase the global demand, which implies in particular to increase public spending. Every government favors this method, since it enables them to justify any demagogic spending, any waste of money.

Nevertheless, in all areas of human activity, wisdom means understanding the causes of a phenomenon before implementing measures to solve it. In our case, the economic and financial crisis was absolutely not the consequence of a lack of demand, but, on the contrary, of an excess of monetary credit and an excess of spending (for example, on real estate.)

A strange incoherance

Moreover, the very idea of increasing ex nihilo the global demand is an absurd idea: if a government spends more, it must find a way to finance it. Public spending always corresponds to a transfer of demand (at the expense of the taxpayers if it is financed by taxes, at the expense of the economy if it is financed by loans) and never to a net growth of demand. We should not be surprised if such a policy doesn’t bear fruits. The American example shows it: the public deficit of more than 13% of the GDP did not prevent low economic growth and a high unemployment rate, while seriously disturbing the financial markets.

Keynesian thinking habits lead to a strange incoherence. Indeed, on the one hand, we recommend re-boosting consumption – which implies reducing savings – and on the other hand, we pretend to stimulate the economic activity and the investment by policies of monetary growth and low interest rates. But it is that kind of policy that caused the financial crisis in the first place. It is the creation of the illusion of having important financing means thanks to a purely artificial monetary credit, as we strive to reduce savings. We should do exactly the opposite: cut out all obstacles, in particular taxation obstacles, that eliminate the incentive to save; and prevent any monetary growth, which can only provide illusions and instability. That’s why it is dangerous to ask the European Central Bank to act to reduce inflation and to encourage growth, since it is quite unable, like any central bank, to do so with success. The best thing that we could ask would be to stop any monetary growth.

It is high time that we completely change the configuration of economic policy. It has consisted until now in creating massive public deficits and strong monetary growth. We should, on the contrary, drastically reduce public spending and tax burden in order to encourage mass production, prevent any increase in money supply and incite people to save money within the framework of a major tax reform. The first revolution that must take place is an intellectual revolution.

Read the original story in French

Photo - gwydionwilliams

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