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1、Do We Need More of Keynes Now? Now that governments and central banks are subjecting their economies t0 aggressive monetary and fiscal-stimulus policies， many people say that the ideas of Keynes are back in fashion. We heard that Keynesian remedies can save world economies from plunging int0 a sever
2、e economic slump. In the United States， for instance， Republicans and Democrats are competing against each other t0 subject the American economy t0 various stimulus packages. On this the Financial Times recently wrote， The lapses int0 Keynesianism take different forms. For Republicans， it is a time
3、t0 propose new tax cuts for small businesses， including a waiver of the capital gains tax， which many believe would help stimulate economic activity. For Democrats， the preferences are for an extension of unemployment insurance， food stamps and assistance t0 struggling homeowners.Despite trillions o
4、f dollars that central banks worldwide have pumped， s0me prominent commentat0rs still maintain that it is not enough. For example， Martin Wolf writes， Yet， in current conditions， monetary policy will be insufficient. This is a Keynesian situation that requires Keynesian remedies. Budget deficits wil
5、l end up at levels previously considered unimaginable. So be it.It is extraordinary t0 suggest that Keyness ideas are now coming back t0 save the world. Keynesian ideas have never left the rooms of government and central-bank decision makers. The essence of the thinking of the most influential econo
6、mists was and still is Keynesian. So various stimulus packages that are now introduced are a continuation of the same Keynesian policies we have been subjected t0 for many decades. The present economic crisis is the outcome of the large dose of Keynesianism we have been given over many decades.In a
7、nutshell， John Maynard Keynes held that one cannot have complete trust in a market economy， which is inherently unstable. If left free， the market economy could lead t0 self-destruction. Hence there is the need for governments and central banks t0 manage the economy.Successful management in the Keyn
8、esian framework is done by influencing the overall spending in an economy. It is spending that generates income. Spending by one individual becomes income for another individual， according t0 Keynes. The more that is spent， the better it is going t0 be. What drives the economy then is spending.Consu
9、mption and ProductionIn the Keynesian framework， the largest chunk of spending is on account of consumer outlays. Therefore consumer outlays are regarded as the mot0r of the economy consumption sets in motion real economic growth.But is consumption the mot0r of the economy? We suggest that one must
10、make a distinction between productive and nonproductive consumption. While productive consumption is an agent of economic growth， nonproductive consumption leads t0 economic impoverishment.Productive ConsumptionA baker exchanges his ten saved loaves of bread for ten potat0es. The potat0es are now su
11、staining or funding the baker while he is engaged in the baking of bread. Likewise the bread sustains the potat0 farmer while he is engaged in the production of potat0es. The respective production of the baker and of the potat0 farmer enables them t0 secure goods for consumption.What makes the consu
12、mption productive in this example is the fact that both the baker and the potat0 farmer consume in order t0 be able t0 produce. The consumption of both the baker and the potat0 farmer maintains their lives and well-being. This is the only reas0n for production.The introduction of money doesnt change
13、 what was said s0 far. For instance the baker can exchange his ten loaves of bread for $10 he then uses money t0 secure ten potat0es. Likewise the potat0 farmer can now exchange his ten dollars for ten loaves of bread. Observe that， apart from fulfilling the role of the medium of exchange， money has
14、 contributed abs0lutely nothing t0 the production of bread and potat0es.Nonproductive ConsumptionSo far we have seen that t0 secure potat0es， the baker had t0 exchange bread for money and then employed money t0 secure potat0es. Something was exchanged for money， which in turn was exchanged for s0met
15、hing else or s0mething for s0mething is exchanged with the help of money.Trouble erupts when money is created “out of thin air.” Such money gives rise t0 consumption， which is not backed by any production. It leads t0 an exchange of nothing for s0mething.For instance， a counterfeiter has printed a p
16、erfect $20 note. Since he secured this money by means other than the production of s0me useful goods or services， the counterfeiter has therefore obtained the $20 by exchanging nothing for it.The counterfeiter uses the $20 t0 buy ten loaves of bread. What we have here is the diversion of real fundin
17、g ten loaves of bread from a potat0 farmer t0wards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread he pays two dollars per loaf. Previously the price st0od at one dollar per loaf. Als0 note that since the counterfeiter doesnt produce anythi
18、ng useful he is engaged in nonproductive consumption.The potat0 farmer is now denied the bread that he must have t0 sustain himself while he is producing potat0es. Obviously this will impair the production of potat0es. As a result， fewer potat0es will become available， which in turn will undermine t
19、he consumption of the baker， thereby impairing his ability t0 produce.We can see that， while productive consumption sustains wealth generat0rs and promotes the expansion of real wealth， nonproductive consumption only leads t0 economic impoverishment.Printing money by the central bank produces exactl
20、y the same damaging effect as the counterfeit money does. Likewise the creation of money through fractional-reserve banking produces the same damaging effect. The expansion of money sets the platform for nonproductive consumption an agent of economic destruction.In the Keynesian framework， during a
21、recession when consumers tend t0 lower their outlays， it is the duty of the government t0 step in and boost its expenditure. For instance， the government could employ various unemployed individuals t0 dig holes in the ground.The money that the government pays these workers will boost their consumpti
22、on， and this in turn will lift the overall income in the economy. According t0 this framework， it doesnt really matter whether holes in the ground contribute t0 individuals well-being; what matters is that people are getting paid and then using the money t0 boost consumption.Government doesnt earn m
23、oney as such. It is not a wealth generat0r. So how then does it pay various individuals who are employed in non-wealth-generating projects? It secures the money through taxation， by asking the central bank t0 print money， or by borrowing. If we ignore overseas borrowings， it basically amounts t0 the
24、 diversion of wealth from wealth generat0rs t0 government activities. This is the same outcome achieved by printing money： it sets in motion nonproductive consumption.According t0 Mises， there is need t0 emphasize the truism that a government can spend or invest only what it takes away from its citi
25、zens and that its additional spending and investment curtails the citizens spending and investment t0 the full extent of its quantity.From this we can conclude that since government is not a wealth generat0r it therefore cannot grow the economy. Contrary t0 popular belief， the more government spends
26、， the worse it is for the health of the economy and thus for economic growth.Rescue packages aimed at saving the economies of the world are jus3 t laying the foundation for more misery in the months ahead. Many commentat0rs and economic experts who advocate strong government stimulus measures never
27、bother t0 ask how those measures are going t0 be funded and by funding we mean real stuff： where are all the bread and the potat0es going t0 come from? It doesnt occur t0 the Keynesian sympathizers that it is the fiscal and monetary policies of the past several decades that have given rise t0 nonpro
28、ductive consumption. The outcome of all this is the vast amount of bubble activities. How can more of the same Keynesian policies policies that have inflicted massive damage on wealth producers revive the economy?What is now required is not more Keynesian policies but rather allowing wealth producer
29、s t0 move fast and start generating real wealth. What is required is plenty of productive consumption. More government spending and the massive pushing of money by central banks only strengthens nonproductive consumption， thereby delaying prospects for a meaningful economic recovery.Now that governm
30、ents and central banks are subjecting their economies t0 aggressive monetary and fiscal-stimulus policies， many people say that the ideas of Keynes are back in fashion. We heard that Keynesian remedies can save world economies from plunging int0 a severe economic slump. In the United States， for ins
31、tance， Republicans and Democrats are competing against each other t0 subject the American economy t0 various stimulus packages. On this the Financial Times recently wrote， The lapses int0 Keynesianism take different forms. For Republicans， it is a time t0 propose new tax cuts for small businesses， i
32、ncluding a waiver of the capital gains tax， which many believe would help stimulate economic activity. For Democrats， the preferences are for an extension of unemployment insurance， food stamps and assistance t0 struggling homeowners.Despite trillions of dollars that central banks worldwide have pum
33、ped， s0me prominent commentat0rs still maintain that it is not enough. For example， Martin Wolf writes， Yet， in current conditions， monetary policy will be insufficient. This is a Keynesian situation that requires Keynesian remedies. Budget deficits will end up at levels previously considered unimag
34、inable. So be it.It is extraordinary t0 suggest that Keyness ideas are now coming back t0 save the world. Keynesian ideas have never left the rooms of government and central-bank decision makers. The essence of the thinking of the most influential economists was and still is Keynesian. So various st
35、imulus packages that are now introduced are a continuation of the same Keynesian policies we have been subjected t0 for many decades. The present economic crisis is the outcome of the large dose of Keynesianism we have been given over many decades.In a nutshell， John Maynard Keynes held that one can
36、not have complete trust in a market economy， which is inherently unstable. If left free， the market economy could lead t0 self-destruction. Hence there is the need for governments and central banks t0 manage the economy.Successful management in the Keynesian framework is done by influencing the over
37、all spending in an economy. It is spending that generates income. Spending by one individual becomes income for another individual， according t0 Keynes. The more that is spent， the better it is going t0 be. What drives the economy then is spending.Consumption and ProductionIn the Keynesian framework
38、， the largest chunk of spending is on account of consumer outlays. Therefore consumer outlays are regarded as the mot0r of the economy consumption sets in motion real economic growth.But is consumption the mot0r of the economy? We suggest that one must make a distinction between productive and nonpr
39、oductive consumption. While productive consumption is an agent of economic growth， nonproductive consumption leads t0 economic impoverishment.Productive ConsumptionA baker exchanges his ten saved loaves of bread for ten potat0es. The potat0es are now sustaining or funding the baker while he is engag
40、ed in the baking of bread. Likewise the bread sustains the potat0 farmer while he is engaged in the production of potat0es. The respective production of the baker and of the potat0 farmer enables them t0 secure goods for consumption.What makes the consumption productive in this example is the fact t
41、hat both the baker and the potat0 farmer consume in order t0 be able t0 produce. The consumption of both the baker and the potat0 farmer maintains their lives and well-being. This is the only reas0n for production.The introduction of money doesnt change what was said s0 far. For instance the baker c
42、an exchange his ten loaves of bread for $10 he then uses money t0 secure ten potat0es. Likewise the potat0 farmer can now exchange his ten dollars for ten loaves of bread. Observe that， apart from fulfilling the role of the medium of exchange， money has contributed abs0lutely nothing t0 the producti
43、on of bread and potat0es.Nonproductive ConsumptionSo far we have seen that t0 secure potat0es， the baker had t0 exchange bread for money and then employed money t0 secure potat0es. Something was exchanged for money， which in turn was exchanged for s0mething else or s0mething for s0mething is exchang
44、ed with the help of money.Trouble erupts when money is created “out of thin air.” Such money gives rise t0 consumption， which is not backed by any production. It leads t0 an exchange of nothing for s0mething.For instance， a counterfeiter has printed a perfect $20 note. Since he secured this money by
45、 means other than the production of s0me useful goods or services， the counterfeiter has therefore obtained the $20 by exchanging nothing for it.The counterfeiter uses the $20 t0 buy ten loaves of bread. What we have here is the diversion of real funding ten loaves of bread from a potat0 farmer t0wa
46、rds the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread he pays two dollars per loaf. Previously the price st0od at one dollar per loaf. Als0 note that since the counterfeiter doesnt produce anything useful he is engaged in nonproductive consum
47、ption.The potat0 farmer is now denied the bread that he must have t0 sustain himself while he is producing potat0es. Obviously this will impair the production of potat0es. As a result， fewer potat0es will become available， which in turn will undermine the consumption of the baker， thereby impairing
48、his ability t0 produce.We can see that， while productive consumption sustains wealth generat0rs and promotes the expansion of real wealth， nonproductive consumption only leads t0 economic impoverishment.Printing money by the central bank produces exactly the same damaging effect as the counterfeit m
49、oney does. Likewise the creation of money through fractional-reserve banking produces the same damaging effect. The expansion of money sets the platform for nonproductive consumption an agent of economic destruction.In the Keynesian framework， during a recession when consumers tend t0 lower their outlays， it is the duty of the government t0 step in and boost its expenditure. For in
