T and A Man/ Ryre, you've both written a lot and have raised good points, but I'll focus on the following overarching points and leave the minutiae of things like Keynes v Friedman aside for now.
1. Wealth Production and the Use of Aggregates
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It is tautology to say the wealth of a country is how much product they bring to market. The cornerstone of Keynes is to maxmise the amount of product brought to market, and this maximisation can be smoothed due to the catastrophy that the private sector ALWAYS brings to market viaboom/bust.
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Production is wealth. Demand drives production. Always has, always will. Aggregate demand as a driver is tautology.
Tell me what is wealth if not for aggegrate production levels?
Wealth is a pretty vague term, but I'll roughly define it as the abundance of goods and services that improves the quality of life in one way or another.
Demand is the ability
and desire to purchase items which have been produced. One without the other is meaningless. Producers must anticipate that there is adequate desire for a product, and must have the ability to produce it such that those who desire are able to purchase it at a price which also leaves the producer with a return for his efforts.
Aggregate demand in Keynesian parlance is the sum total of receipts from goods and services sold. It is the actual consumption of goods and services which have already been produced, hence it comes at the
end of the chain of events and does not 'drive' anything. The driver of wealth creation is the anticipation and recognition of unmet demands, followed by the steps taken to physically produce. Production, not consumption is the factor limiting economic growth.
The issue with aggregates is that it only tells you how much was spent, and little about the nature of the spending. It is the latter that is of more importance with respect to things like wealth production, and why I keep banging on about 'economic structures.' Considering the following Krugman comment:
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As far as creating aggregate demand is concerned, spending is spending - public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.
Spending on bombs is obviously destructive, but in a sense all consumption is 'destructive' in the sense that it reduces the stock of goods and services available. Of course viewing this way is ridiculous - the goods were created to be consumed. But consumption can't go on indefinitely without replenishment. This means that at times there is going to be less demand for the final consumption goods as those funds are diverted to the production process. Viewing that strictly from an 'aggregate demand' and GDP standpoint will cause one to come to the conclusion that the economy is shrinking when it is merely adjusting itself to produce more goods in the future.
2. Maximising Output in Recessions: Inadequate Aggregate Demand as the Root Cause
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Idle labour, inert labour, creates no production. Making this labour acticve adds to productive output. When they are unemployed, and the clearance is zero, using this idle labour doesn't take away from anyone.
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This misses what I understand to be Keynes' central insight: that an otherwise healthy economy (largely healthy, every economy has problems) can fall into recession through inadequate demand. Then it needs temporary measures to stimulate demand, after which it can return to health.
Think about the Great Depression. In 1930 the economy had about the same number of workers, railroads, factories, fields as in 1928. But in 1930, with the same stuff, the economy was producing radically less output. People were out of work; people needed the things--shoes, food, etc.--that workers could have produced; factories and fields were available to produce those goods. And yet the economy was drastically under-performing.
I mentioned before that 'demand' is really the ability and desire to purchase a given product or service at a given price. In blaming inadequate aggregate demand as the problem in recessions, Keynesians assume that the only thing wrong is the inability to pay a certain price. They don't consider the actual problem, which is that price is wrong.
Idle labor and capital would quickly be put to work again when their prices come down to a level in line with producers ability to pay. Recessions essentially happen when producers incur too great a cost to produce a product, which then can't be recouped at profit. This does not mean the goods can't be sold, it just means that producers have to take a hit in selling.
Keynesian pump-priming seeks to prevent producers taking a hit, and thus going through potential bankruptcies, layoffs etc, by supporting the ability for consumers to buy goods at profit clearing levels. However, these levels are not in line with the individual preferences of consumers as a whole. For example, the housing bubble died because the general populace had the inability to continue to pay for $300,000 McMansions. Printing or borrowing money to goad the populace into continuing to pay for $300,000 McMansions does not change the underlying fact that the average household did not have the wherewithal to support that kind of outlay. It merely added even more debt upon an already excessive amount.
Again, the evidence that the price level was too high was the shift of individual preferences away from consuming. This is not a 'healthy economy' which suddenly broke down. It was the mistake of producers who invested on the idea that the public wanted $300k houses. Having brought all of those unsalable goods to market, the only way to bring things back in to line is a falling price, and liquidation of failed enterprises.
Artificially keeping prices, and in turn 'aggregate demand' elevated only creates artificial scarcity as nobody can afford the goods in question (which is why there was a crisis in the first place). In the Great Depression farmers were made to destroy crops just to keep their prices from falling. The objective result there was an artificial scarcity in order to preserve artificial solvency of producers. Policymakers thought it better to have people starve rather than farmers go out of business because they mistakenly produced their crops too expensively.
In the pre Keynesian recessions and panics of the 1800s, the price level was allowed to do its work by going lower in response to the inability of the economy to support higher prices. The lower prices then made capital and labor more attractive, which then led to their consumption, production and rapid recovery. This is seen clearly in the data, for more have a look at Friedman and Schwartz
A Monetary History of the United States . What's telling is that they even express confusion at the concept that the economy back then generally bounced back quickly from panics in the manner I've just described, specifically pointing out how it clashes with their 'modern' (read: Keynesian Deflation Sprial) understanding of things.
Keynesians are right in the sense that idleness is a problem. They prolong the idleness though by shielding producers and owners of capital from the market. They no longer are forced to liquidate assets when prices are kept artificially high. But at the same time, having JUST gone through crisis, they know full well that the high price they need to clear goods are not going to be met. So they stay relatively idle and focus on cost cutting. If prices fall, and capital and other factors of production are liquidated, ostensibly the purchaser is doing so because he thinks he can turn a profit, ie, produce and hire profitably at that lower price level.
If this is allowed to happen economy wide, the production machine can begin again. The only difference is the name on the title deeds have changed, and that 'aggregate demand' is going to be lower. Focusing on AD means you are going to fight tooth an nail to prevent that from happening, and this prevent the very restructuring that the economy needs to take off again. The idea that falling prices automatically leads to death spirals and a complete halt in commerce requires one to believe that human beings will never want to consume anything ever again, and thus there will be no use for investing in producing goods.
3. 1950-1980 Was the Golden Age of America and then Reagan Ruined Everything
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We had the greatest period of marginal increase of productivity, the greatest rate of scientific advancement, the highest wages for the middle class, and the lowest rates of unemployment, during the Keynesian era of 1946-1971.
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I don't think this is true. Yes, America's economic history was a story of boom and bust every 20 years or so...up until WWII. After that, Keynesian economics mitigated the business cycle and America experienced its longest sustained period of growth and rising incomes, 1950's through 1970's. Name a major economic crisis in those years? Yes, there was the OPEC slump, but that was caused by external factors--a sudden increase in oil prices.
In relative terms, the 19th century, specifically the period from 1865 through WWI had higher rates of real growth and probably did more to 'push the ball forward.' The post WWII period obviously was a better time to be alive in absolute terms, but in relative terms didn't have the same explosive growth that the 19th century did.
Viewing the post WWII period in a vacuum neglects the fact that it got there on the back of the US being the only major power left standing after the war, with its land left unblemished for the most part. It came through the war in this manner as a result of being the dominant force on the globe, which became on the back of the post Civil War economic conditions. For added perspective, consider that the Civil War was the deadliest war in the countries history, fought on its own turf, and wiped out a sizable portion of the very segment of the population most capable of production. Yet less than 50 years later it went from that to the eminent global power and was able to flex the muscle to prove it.
Having this platform laid for them, the Keynesians after WWII increased borrowing and money printing to engage in pump priming as an attempt to mitigate recessions, to maintain and expand the welfare state, as well as Vietnam. All of this culminated in a global run on the US dollar, and the need to get off the gold standard in 1971. T and A Man correctly labeled it a 'default,' and as such I find it odd that it can be said that polices which ended in the US government defaulting on an obligation to the world as evidence of 'no crisis.'
One of the main themes in my other posts was the nature of Kenyesianism to promote the short term and pretend like there are no connections to the longer term events down the line. The imbalances that led to smaller mini crises and recessions during the 1950s and 1960s were allowed to persist, which culminated in the larger problems of 1970s inflation. The neat compartmentalization of the 50s and 60s and the ills of the 70s allows the Keynesian to pretend that the two were not linked. As I keep repeating, the short term it 'works,' but only by changing the nature of the problem rather than eliminating it. The 'problem' of garden variety recessions was alleviated, but only at the expense of creating a larger debt and printing problem which was dealt with via the 1971 default.
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What is telling is that no financial crisis between 1946-1971 was every as bad as those that have happened after keynesian policy was abandoned.
2008, 2000, 1990, 1982 (unless you want to count that as a keynesian hangover) were all worse.
Continually sweeping problems under the rug rather than eliminating them is hardly an impressive record.
1982, 1987, 1990, 2000 and 2008 were all worse, and progressively so, exactly because of the mentality that in the immediate term, crises could be mitigated and smoothed over by easing policy. As discussed before, this only serves to maintain an artificially higher price level and thus the imbalances that went with it. As long as debt can continue to expand, the game 'works.' But the next crisis is that much larger, owing to the fact all of the prior gremlins haven't been dealt with. It's no surprise that the crises dates have all been larger than the last. The only reason the 1950-1970s period is tame in comparison is because that was the starting point, from a 'clean slate' created by the end of the War. In some ways you can argue we've been living in a continuous 60+ year bubble, which is never allowed to fully pop because of constant mitigation and smoothing. Every time the market tries to revert to the mean, the interventionists step in to prevent it. The economy pays for this in other ways, the most prominent being the consistent erosion of real wages, which has been a trend in place since the end of the gold standard, leading to the gutting of the middle class.
In the end there it is not possible to mitigate business cycles or smooth recessions because they are ultimately a consequence of shifting consumer preferences. Prices and production have to be permitted to shift along with this change in preference.