Turning to Keynes in this Crisis Will Only Make Things Worse
In the New York Times on September 8, 2020, Paul Krugman wrote that
The CARES Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down.
For Krugman and many economic commentators, it is the duty of the government to support the economy whenever it falls into an economic slump. Following in the footsteps of John Maynard Keynes, most economists hold that one cannot have complete trust in a market economy, which is seen as inherently unstable. If left free the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy. Successful management in the Keynesian framework is done by influencing overall spending.
It is spending that generates income. Spending by one individual becomes income for another individual according to the Keynesian framework of thinking. Hence the more that is spent, the better things will be. What drives the economy then is spending. If during a recession, consumers fail to spend then it is the role of the government to step in and boost overall spending in order to grow the economy.
In the Keynesian framework of thinking, the output that an economy can generate with a given pool of resources (i.e., labor, tools and machinery, and technology) without causing inflation is labeled as potential output. Hence the greater the pool of resources, all other things being equal, the more output can be generated.
If for whatever reason the demand for the produced goods is not strong enough, there will be an economic slump, because inadequate demand for goods leads to only a partial use of existent labor and capital goods. In this framework, then, it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump.
Funding and Economic Growth
What is missing in the Keynesian story is the matter of funding. For instance, a baker produces ten loaves of bread and exchanges them for a pair of shoes with a shoemaker. In this example, the baker funds the purchase of shoes by producing the ten loaves of bread.
Note that the bread maintains the shoemaker’s life and well-being. Likewise, the shoemaker has funded the purchase of bread by means of shoes that maintain the baker’s life and well-being.
Now, let us say the baker has decided to build another oven to be able to increase the production of bread. In order to implement his plan, the baker hires the services of the oven maker. He pays the oven maker with some of the bread he is producing. The building of the oven is supported by the production
Article from Mises Wire