It is appropriate to think of Keynesian economics as superficial economics*, because this school of thought generally considers what’s seen and ignores what’s unseen. To put it another way, Keynesianism focuses on the readily-observable situation and the immediate/direct effects of a policy while paying little or no attention to why the current situation came about and the indirect (not immediately obvious) consequences of a policy. This leads to nonsensical conclusions, such as that the economy can sometimes be helped by the destruction of wealth (the idea being that after assets are destroyed people can be ‘gainfully’ employed rebuilding them).
To further explain, when a shop window is broken the typical Keynesian would account for the additional work and income of the glazier hired to fix the window but would make no effort to understand how the shopkeeper would have allocated his scarce resources if his window had remained intact. And in a case where resources are ‘idle’, the Keynesian would focus exclusively on the direct effect of using increased government spending or central bank money-printing to put these resources to work. He would pay scant attention to why the resources were idle in the first place and would ignore the longer-term effects of creating artificial demand for some resources and forcing the private sector to fund projects that it would otherwise choose not to fund**.
Due to its shallow nature, Keynesian economics is not useful when attempting to understand the real-world drivers of production and consumption. However, it can be put to good use when attempting to understand and predict the actions of policy-makers.
Aside from the fact that almost all politicians are economically illiterate, if your overriding goal is to win the next election then what you want are policy-related effects that are short-term, obvious and direct. What you want is to be able to point to a bunch of guys in hard hats hammering away on a government-funded project, and say: “Without the bill I sponsored, these guys would not have jobs”. The longer-term economic negatives aren’t relevant because not one voter in a thousand will see the link between these negatives and the “stimulus” bill.
There will come a day when Keynesian economics has been totally discredited again***, but until that day there will be many opportunities to make money by betting on policy-makers acting stupidly.
*In a blog post in May-2015 I suggested that Keynesian Economics should be renamed ASS (Ad-hoc, Superficial and Shortsighted) Economics.
**The “idle resources” fallacy that underlies the justifications for various government stimulus programs was debunked by William Hutt in a book published way back in 1939 and was more briefly — but still thoroughly — debunked by Robert Murphy in a January-2009 article.
***Keynesian economics was discredited during the 1970s but subsequently managed to claw its way back to a position of great influence. It is resilient because it seemingly gives politicians the scientific justification for doing what they already want to do, which is make themselves appear benevolent — and thus garner the support of more than 50% of the voters — by spending the money of some people to provide short-term benefits to other people.Subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas; or the free eLetter for an introduction to our work. You can also keep up to date with plenty of actionable public content at NFTRH.com. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.