If it’s been proven to fail…why do governments do it?

Keynesianism is, to be blunt, bull.  Not only this, but it is based on false assumptions about both the nature of economics and human action.  It states that employment changes based on the intensity of demand, which depends on the amount of investment, which depends on the interest rate at which loans are offered.  This logic leads to the central fallacy of Keynesianism – one can create employment by quickly lowering interest rates and encouraging investment.  Does this sound familiar?

This central principle of Keynesianism has several flaws.  For one thing, the investment it encourages is artificial, and thus includes many risky business decisions that would not normally be made.  In other words, it encourages massive malinvestment, not more investment, because the amount of resources in the economy was not changed via government action, they were simply shifted.  Mises sums this up well in Human Action:

It is customary to describe the boom as overinvestment. However, additional investment is only possible to the extent that there is an additional supply of capital goods available. As, apart from forced saving, the boom itself does not result in a restriction but rather in an increase in consumption, it does not procure more capital goods for new investment. The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment.  [Human Action, p. 560

Not only does Keynesianism encourage malinvestment, it also damages and often destroys the currency involved.  Under Presidents Bush and Obama and Federal Reserve Chairmen Greenspan and Bernanke, massively increasing the money supply in this way has disasterous effects.  Weimar Germany tried exactly this policy in the 1920’s and it had, not surprisingly, dire consequences.  Robert Blumen over at the Mises Institute wrote about exactly this in 2004:

Weimar Germany’s monetary collapse is perhaps the most infamous episode of inflation gone mad. In 1923 Germany, prices rose on an hourly basis. Wage earners were losing purchasing power because the prices of goods were rising faster than their incomes could be adjusted. Melchior Palyi, a college instructor who saw his pay go from 10,000 marks per month to 10 million marks paid twice per day in less than two years’ time tells the story of how another professor asked him on the way out of their offices, “‘Are you taking the streetcar?’ he asked. ‘Yes,’ I said. ‘Let’s hurry. The fare will be raised by 6 pm. We may not be able to pay it.'”

This phenomenon should be no surprise.  However, governments seem to want to believe in Keynesianism.  They just cannot let go of it.  Why is this?  Why are governments zealotous in their homage to Keynes and his flawed doctrine?  John Maynard Keynes himself saw the reason why:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens… There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

We absolutely must continue to try to alert our fellow citizens to the ultimate result of the policies of our government.  Thomas Jefferson got it right when he said, “Educate and inform the whole mass of the people… They are the only sure reliance for the preservation of our liberty.”

We have a hefty task at hand, but so did the people who founded our country.

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