Does an Increase in Demand Cause Economic Growth? How Keynesians Reverse the Roles of Demand and Supply
According to John Maynard Keynes:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
Whenever there are signs that the economy is likely to fall into an economic slump, most economic experts claim the central bank and the government must embark on loose monetary and fiscal policies to counter the possible recession. In this sense, most experts are following the ideas of John Maynard Keynes.
Keynes held that one could not have complete trust in a market economy, which is inherently unstable, and if left on its own, the market economy would self-destruct. Hence, governments and central banks must manage the economy.
Successful management in the Keynesian framework is done by influencing the overall spending in an economy, since spending generates income. Spending by one individual becomes income for another individual, so the more that is spent, the better it is going to be.
Consumption and Production
In the Keynesian framework, consumer outlays are the greatest part of spending. Hence, they are regarded as the motor of the economy, as consumption sets economic growth into motion.
One must make a distinction between productive and nonproductive consumption, however. While productive consumption is an agent of economic growth, nonproductive consumption leads to economic impoverishment.
For example, a baker exchanges ten loaves of bread for ten potatoes. The potatoes sustain the baker while he is engaged in the baking of bread. Likewise, the bread sustains the potato farmer whilst he is engaged in the pro
Article from Mises Wire