How to refute demand side Keynesian economics?

[Cleaner44]

Just a quick lesson in Neocon economics:
I have $10,000 in capital, but I don't want to invest it in a grocery store, because there is no demand. The Neocon govt taxes me $5,000 to give to the military industrial complex to create massive profits for the stockholders. Meanwhile the Neocon govt buys $10,000 worth of military equipment so the govt must borrow money to pay the bill. The Federal Reserve helps the Neocons out by creating money out of thin air and demands $1000 of interest. Now I can invest my remaining $5,000 in a grocery store... and it then cascades down to the employees that are taxed to support the military industrial complex. So the economy was grown by $5000 and everyone makes money except the taxpayers.

 

[murrayrothbard]

In this case the investment is probably not the most efficient use of resources.

Well in this case you definitely say that it is a malinvestment due to the fact that investing in the store would be unprofitable given the current state of consumer demand. If the demand is insufficient to generate a market rate of return for the investment it necessarily indicates that consumers have more urgent wants and that the $10000 is desired in some other line of production.

 

[runderwo]

Broken window fallacy.

 

[Bold As Love]

Well in this case you definitely say that it is a malinvestment due to the fact that investing in the store would be unprofitable given the current state of consumer demand. If the demand is insufficient to generate a market rate of return for the investment it necessarily indicates that consumers have more urgent wants and that the $10000 is desired in some other line of production.

Yes, very well said.

 

[Gurran]

How to refute keynesian demand side economics? The person gives this example. I have 10,000 dollars in capital, but I don't want to invest it in a grocery store, because there is no demand. The govt taxes me 2,000 dollars to give to the poor to create demand for groceries. Now I can invest 8,000 dollars in a grocery store... and it then cascades down into economic growth, where when I wasn't taxed the 2,000 dollars, there would've been a stagnant economy.

The most obvious refutation is the government has no business stealing his savings.

First off, just think about what this is saying - if he gives money to the poor, they will in turn, spend it on his grocery store...and he will some how profit off this? If I give you a dollar and you buy a candy bar, I have not profited. I just gave you a free candy bar.

Also, the demand will not maintain itself. In order for there to economic growth, you need an actual increase in productivity. The government has created a bubble in the economy, and all bubbles burst. As soon as his 2000$ to the poor dries up, his grocery store will no longer be needed. To keep up this grocery store bubble, the govt would have to continue taxing. He will never profit

We've already determined he personally will not profit off this, so the only other positive is that other grocery store entrepreneurs will profit. But, all it is acting as is a wealth transfer to the other business owners. If I give you a dollar, and you spend it on a candy bar from another grocery store, all I've done is give buy you a candy bar from the other owner.

But there is a reason these other owners did not have the 10,000$ to begin with. For whatever reason, you were more effecient/productive/inventive, and it result in an acumulation of wealth.

Being poor means being less productive, unless of course its horribly scewed by government intervention, which it almost always is. The Fed and the minimum wage are the two big culprits in our country.

Made short: You have simply given your money to less productive members of society, which can only shrink the economy.

Keynesian economics is just a more complicated and sneaky way of going about socialism/corporatism.

 

[Bossobass]

Just keep your lousy 10 grand and end the War on Drugs. You just freed up 40 Billion dollars to put into the economy. You also just dried up billions of black market dollars that will send the thugs packing and free the neighborhood to once again be inhabited by citizens who are tired of dodging bullets on their way to the welfare handout office (because there are no jobs there because the drug thugs chased away any sort of normal economy years ago).

Those who still choose to use drugs will now pay a much lower market price that includes tax dollars that can help the local government to clean up the mess the black market drug culture has made of the neighborhood.

Businesses return and provide jobs. The neighborhood begins to take on a new personality and, guess what? The people all need to eat, so you now have demand for your proposed business and you don't have to worry about being robbed twice a day anymore.

While you're at it, you can eliminate the Department of Education so that...well, you can paint the scenario from there, anywhere your dreams, talents and ambitions may take you.

Bosso

 

[Cowlesy]

Just keep your lousy 10 grand and end the War on Drugs. You just freed up 40 Billion dollars to put into the economy. You also just dried up billions of black market dollars that will send the thugs packing and free the neighborhood to once again be inhabited by citizens who are tired of dodging bullets on their way to the welfare handout office (because there are no jobs there because the drug thugs chased away any sort of normal economy years ago).

Those who still choose to use drugs will now pay a much lower market price that includes tax dollars that can help the local government to clean up the mess the black market drug culture has made of the neighborhood.

Businesses return and provide jobs. The neighborhood begins to take on a new personality and, guess what? The people all need to eat, so you now have demand for your proposed business and you don't have to worry about being robbed twice a day anymore.

While your at it, you can eliminate the Department of Education so that...well, you can paint the scenario from there, anywhere your dreams, talents and ambitions may take you.

Bosso

Another great Bosso post!!

 

[Jobarra]

Weird, why not the possibility of opening the grocery store and paying the poor to work there? Why does the money have to be given to the poor? If they're hungry, they'll work. You'll also make a steady profit from your grocery store as they buy your goods to feed themselves.

 

[hawks4ronpaul]

How to refute keynesian demand side economics? The person gives this example. I have 10,000 dollars in capital, but I don't want to invest it in a grocery store, because there is no demand. The govt taxes me 2,000 dollars to give to the poor to create demand for groceries. Now I can invest 8,000 dollars in a grocery store... and it then cascades down into economic growth, where when I wasn't taxed the 2,000 dollars, there would've been a stagnant economy.

Since the government stole 20% and big stores might net only 1-5% of gross revenue (if they do not lose money), the example proves nicely how Keynesianism is very effective at destroying wealth (see malinvestment).

http://hawks4ronpaul.blogspot.com/

 

[itsnobody]

your example doesn't work in reality unfortunately

Taxing people $2000 won't necessarily cause people to open up grocery stores just like that

 

[Matt]

How to refute keynesian demand side economics? The person gives this example. I have 10,000 dollars in capital, but I don't want to invest it in a grocery store, because there is no demand. The govt taxes me 2,000 dollars to give to the poor to create demand for groceries. Now I can invest 8,000 dollars in a grocery store... and it then cascades down into economic growth, where when I wasn't taxed the 2,000 dollars, there would've been a stagnant economy.

It's fine to say things like "create demand for groceries" and "cascades down into economic growth" but exactly how and where is additional wealth created? I doubt your friend has any answer to that. Try this on him.

Giving the poor $2000 to buy groceries would create demand for a maximum of $2000 worth of groceries (assuming the government gives all of the money to them and they spend all of it on groceries). Remember we're operating under the assumption that there is no demand for groceries other than that created by giving the poor people $2000. So you invest your $8000 in a grocery store. You get $2000 (or less) back. There is no net gain except now you have part of your money tied up in the store. What was the point of giving it to the government first anyway? Why not just get rich by giving poor people $2000 to buy $2000 of groceries in your store.

It's the same principle as Bastiat's broken window fallacy. http://www.econlib.org/library/Bastiat/basEss1.html

 

[bah]

Okay, what happens if there is a whole big economic depression... and there's no more investment, like in the 1930's? Keynesian's would advocate government spending to prime the economy.

 

[Goldwater Conservative]

Sweet Zombie Jesus, what is it with Keynesians and their belief in creating economic well-being out of thin air? Have any of them read Bastiat?

 

[ionlyknowy]

When there is NO demand for grocery stores, and you then create the demand artificially, this can create mal-investment.

The best and most efficient use of your $10,000 would be in another market.
Having the Govt. decide what the best and most efficient use of your money is not a good idea, because of the inefficiency that is the Govt.

Typical policy for demand side is a reduction in interest rates, government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.

Typical policy for supply side is simultaneously adjusting income tax rates, and capital gains tax.
Supply side wants you to take your tax break and create supply of something.

So, lower the income tax, creating demand (more money to spend). Capital gains tax gives incentive to supply something with the new money.

So in a stagnant economy it seems that you need to first create the demand before you can expect to create the supply.

What we have today is a mostly stagnant economy in theory, that is getting alot of it's demand from credit. No one is saving their money, and credit card debt is growing.

By offering customers more and more credit you create more and more demand. But there comes a point where even with credit, you hit a limit to where people can no longer borrow anymore, and then the economy is finally demand saturated.

When you get to this point, demand side economics is a must. If you can no longer have anymore demand, then increasing the supply side will not help at all.

The goal of an economy should be a mixture of supply side and demand side. And promoting investment while reducing reliance on credit.

 

[bah]

He also mentions that the free market tends to be supply side..., which increases the divide between the rich and the poor.

Demand side policies put a check against the tendency for the free market to make the rich richer and the poor poorer, is what he says.

and:
"making the poor richer would also make the rich richer, but making the rich richer wouldn't necessarily make the poor richer."

 

[ionlyknowy]

Really, an economy is only as good as it's growing population... if we ever start to decline in population then our economy will follow.

 

[hawks4ronpaul]

Okay, what happens if there is a whole big economic depression... and there's no more investment, like in the 1930's? Keynesian's would advocate government spending to prime the economy.

Same answer.

http://hawks4ronpaul.blogspot.com/

 

[PMatt]

John Maynard Keynes basically based his economic policy off of this quote, "In the long run, we're all dead." So in essence, he said that the market needs to be corrected, mainly through more government spending.

 

[ionlyknowy]

John Maynard Keynes basically based his economic policy off of this quote, "In the long run, we're all dead." So in essence, he said that the market needs to be corrected, mainly through more government spending.

the only thing is that the govt. expenditure may not be the best and most efficient use of these funds for the economy.

This is what we call economic waste. They may build another branch of Fox news for example... (ok not realistic but you get the picture)

I think Keynesian is right for the most part. But I think that you must promote the supply side as well. If you get to a point where you need to do demand side, then you really need to counter with supply side to balance. IMO

 

[niall]

How to refute keynesian demand side economics? The person gives this example. I have 10,000 dollars in capital, but I don't want to invest it in a grocery store, because there is no demand. The govt taxes me 2,000 dollars to give to the poor to create demand for groceries. Now I can invest 8,000 dollars in a grocery store... and it then cascades down into economic growth, where when I wasn't taxed the 2,000 dollars, there would've been a stagnant economy.

As is clear from this example, Keynesian economics is largely self-refuting.