Essay on Keynesianism, Part the First

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Running the risk of over-simplifying only a teeny bit, I propose that the key difference between the Keynesian/man-in-the-street view of the economic problem and a non-Keynesian view of the economic problem is the following: Keynesians/men-(and-women)-in-the-street sense that the dominant economic problem is super-abundance (and its attendant problem, excess capacity), while non-Keynesians understand that the dominant economic problem is, and will always be, the ubiquity of scarcity.

How else to explain the prevalence – as predictable as beer at a frat party – of claims that this tsunami or that hurricane or those terrorist attacks, for all of the human agony that these calamities cause, will strengthen the economy? Or looking at matters from the reverse, how else to explain the widespread fear that increasing trade with foreigners will cause permanent, or at least long-lasting, “loss of jobs” in the domestic economy?

If your sense of the chief economic problem is something close to mine, you sense that that problem overwhelmingly involves figuring out how to satisfy more human desires than currently are being satisfied. You sense also that the ‘failure’ to satisfy more human desires is a result of the scarcity of resources, along with limitations on the technologies, and on the legal and cultural institutions, that determine how scarce resources are transformed into valuable goods and services. The chief problem, in short, is one of scarcity.

If, on the other hand, your sense of the chief economic problem is something close to what J.M. Keynes, God rest his soul, believed it to be, you sense that that problem is one of super-abundance – a problem rooted in the curse of oceans of resources kept idle by lack of consumer demand. There’s just too much stuff, and too much capacity and labor available to make stuff, to ensure that all resources available for employment are actually employed. Labor being a productive resource – and one whose employment we (rightly) care about especially deeply – is among those resources which are generally, or at least very often, super-abundant.

Keynesianism, as I (and others) have said many times, is man-in-the-street “economics” – that is, it’s the economics that people (even smart people) stumble into before they are tutored in analytical economics and learn some economic history. (This is not to say that everyone who is tutored in analytical economics and exposed to economic history turns into a non-Keynesian. Far from it, alas.)

Every semester in my Principles of Microeconomics course when I explain that Adam Smith celebrated an increasing division of labor in part because it promotes mechanization, invariably a number of students shake their heads and wonder why Smith celebrated increased mechanization: “It destroys jobs,” these 18-year-olds, with only a few minutes of economics as yet under their belts, lament.

Untrained in economics, these young men and women simply assume that the increased volume of valuable outputs possible now to produce in industries X, Y, and Z by workers released by mechanization from industries A, B, and C will never be produced. A lack of imagination combines with an as-yet undeveloped ability to think like an economist – and a yet-to-be encountered exposure to economic history – to cause these students to see only idle workers. The problem isn’t scarcity, as these students see matters; it’s insufficient demand. Workers who can produce stuff but who are in a situation in which no one wants whatever it is these workers can produce.

The naïve concern is that consumers, for whatever reason, just don’t want enough stuff, or entrepreneurs are insufficiently bold and imaginative to figure out new stuff to produce that will spark consumers’ interests.

This primal, widespread, pedestrian concern was, of course, elevated by J.M. Keynes and his followers into an “economic” theory. Keynes, Alvin Hansen, John Hicks, Paul Samuelson and others did indeed construct internally consistent theories (even “models” offering magnitudes measurable in principle) in which superabundance of stuff is an “equilibrium” – not a rare and fleeting situation, but a frequent and potentially long-lasting situation. A situation so likely (and so likely to last long) that active, ever-vigilant government policy is required to counteract it.

Super-abundance of productive resources (especially labor) became the dominant threat perceived by Keynesian economists in the same way that super-abundance of productive resources (especially labor) has long been the dominant threat perceived by cab drivers, poetry professors, hydraulic engineers, 18-year-old college freshmen, and nearly everyone else unexposed to economics.

But this poetry-professor-&-hydraulic-engineer view of the economic problem is so very much at odds with the fact that people the world over – even the wealthiest of people in the wealthiest of countries – still grasp for more stuff. Still want more toys and more experiences and more entertainment and more creature comforts and more of much other stuff and sensations. And it’s at odds, too, with the fact that entrepreneurs (greedy bastards that they are) seek to get rich by supplying all this more stuff and sensations.

It’s at odds, in short, with foundational economics.

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