Free-Hand Thinking

Untethered Thoughts from the Mind of a Liberty Loving, God Fearing American

The Government’s Marriage with Keynesian

Posted by Bobby on March 26, 2009

The current recession in America has caused more and more laymen to begin paying attention to the economy. News outlets have presented wall to wall coverage of economic conditions featuring full page stories and segments to any up-tick or down-tick in economic news and markets. A lot of economists and new personalities that interview them throw the term “Keynesian” around with hints of both positive and negative connotations, but do people really know what this means?

I contest Keynesian methods are the wrong methods to use in any economy, but the average laymen probably does not understand what is implied when Keynesian Economics is used. To understand Keynesian Economics, one must first have a basic understanding of economics in general–which I also contest that a majority of Americans do not have either. Let’s look at a basic blueprint for economics.

Many people would be shocked to know that economics is the study of how to solve a basic problem. It is not the study of the economy. If that were the case, economics would differ from geographical region to geographical region. Economics actually has a mission to solve much like any other science does. The basic economic problem is this:

In economics, the problem posed by the fact that human wants are infinite but resources are scarce. Resources therefore have to be allocated [in a way that offers the most consumer satisfaction possible with the resources available].

The last part was taken from my Macroeconomics textbook I have from college. Now, there are two factors, based on that problem statement, to economics: supply (resources) and demand (human wants). This is where backbone to these “laws” we hear thrown around known as supply and demand. I’ll spare you the details of how one effects the other, and we’ll just step right into the predominant theory used by our government today: Keynesian.

Keynesian economics is a demand side economic theory. Basically states that the best way to produce the most consumer satisfaction is to curb demand. Make the people want less! This is the theory behind Obama’s energy plan:

This investment will place Smart Meters in homes to make our energy bills lower, make outages less likely and make it easier to use clean energy.

These meters “report electricity consumption on an hourly basis. This enables PG&E to set pricing that varies by season and time of the day, rewarding customers who shift energy use to off-peak periods.” Essentially, these meters promote changing consumer behavior. This theory stretches to the financial industry when the FED buys back Treasury bonds in an attempt “to encourage more economic activity by lowering interest rates, including those on home loans”. The government is using these methods to lower the demand for energy (whose supply is currently low) and strengthen the demand for consumer spending (whose supply is currently high).

What Washington fails to realize is the demand is too elastic to control. Telling someone to want something less actually makes them want it more (got any teenagers?). Not only that, but the two positions mentioned above are counter-productive. If a person were to go out and get a loan for a house or a car, aren’t they going to energy to power said new purchase? Even if the car is electric and uses no gas, it will still need the electricity from the house to operate.

People might think that fixing and tampering with demand is the only choice we have because, like the basic problem says: resources are scarce. What you have to understand is that resources are scarce in different ways. Certain resources are only scarce for a certain amount of time before they are renewed, like food and cotton for clothing. Televisions are scarce because the factories of the world can only produce so many at a time. Energy is scarce because there are only so many power plants and oil wells available to produce the energy. Rather than worry about adjusting human behavior, why don’t we adjust what we can adjust? The supply. This is known a supply side economics.

Supply side economics accepts human nature for what it is: greedy. I know, its a horrible word, but it is true. People want houses, cars, clothes, food, electronics, and the energy needed to power them all. Instead of trying to subvert or trick human behavior, it actually embraces it! If there is an energy shortage, we should create more energy to met the demand, aka. building new coal and nuclear power plants and drill here, drill now! If the demand for financial assistance is low, we lower the money supply so that interest rates can reach a responsible and non-inflationary level. If people don’t want to borrow money, they aren’t going to borrow money. Similarly, if someone wants to turn the thermostat to 80 degrees, they are going to turn the thermostat to 80 degrees.

Many in Washington talk down supply side economics because you are unable to regulate it. This is simply untrue. The elimination of monopolies was a supply side regulation. Having only one firm in complete control of the supply could enable that person to charge whatever they want. Competition, many firms competing for one consumer sector, allows prices to remain at a fair market level because if one firm overcharges, the consumer can move onto one of the firms that charges less.

Of course, like most things, the government has to stick its nose in where it doesn’t belong and subvert what would otherwise be seen as economic progress–at least though the eyes of those that understand economics. The problem today is that the firms that charge more (GM) than its competitors which charge less (Toyota) for the same product are being bailed out. Thus, the firm that charges too much has no incentive to lower its prices and remain competitive, but this is a topic for another day.

The facts are these: the power brokers in Washington have latched onto an economic philosophy that attempts to subvert and change humans from what they want to what the government believes they should want. As I understand it, this is known as tyranny.

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