It amazes me that Keynesian economics still has a home in mainstream economic and media thought. The idea of "aggregate demand" was debunked 100 years before Keynes even brought it back up. In fact, the Classical Economists of the 19th century would use it as a litmus test to detect ignorant economists.
The idea in its basic form is something like this:
The economy is struggling, easy monetary policy and fiscal stimulus (government spending) increases something called "aggregate demand," spending increases then business activity increases, products are demanded, businesses hire and the economy improves. Let's focus on the fiscal stimuli in this thread. This argument has no starting point, it is similar to an idea of 0+0=infinity. For if this idea works, then why doesn't government just spend 100% of all income and we'd all be rich? In fact, why not just give every American $1,000,000,000 and so we would all be billionaires?
It's a fallacious idea simply because government has nothing to spend. Everything they get must come from somewhere. So the starting point is not government spending -> increase aggregate demand. It must start from: government taking X, government spending X -> increase aggregate demand. If goverment spends as a "stimulus" where does this money come from? It comes from the private sector. So basically, it is a stimulus to take money from the private sector and have government spend it? How can this be stimulus? At best it is a reallocation of resources, instead of individuals allocating resources the government allocates resources.
First off, there is no such thing as agg demand being separate than "agg production." Consumption always equals production. So the only argument that can be made is that the money that government spends is actually spent instead of saved/invested, and this is somehow better than leaving it up to individuals to decide the appropriate ratio of spend/save/invest. It is absolute hogwash and it comes down to the point of: the economy is about resource allocation. There is an appropriate level of investment/saving vs spending, not only do the government stimulus people think that a central planning authority better determines how much is spent vs saved/invest, but that the actual spending itself is better determined by a central authority than by individuals.
If this was the case, wouldn't North Korea currently be the starring shining light on economic progress? Wouldn't it be the economic power of the world, since of course 100% of the resources are allocated by a central authority?
Here is Milton Friedman on the subject. The original question is slightly different than the point covered here, but the answer by Friedman is relevant:
http://www.youtube.com/watch?v=Hrg1CArkuNc
The idea in its basic form is something like this:
The economy is struggling, easy monetary policy and fiscal stimulus (government spending) increases something called "aggregate demand," spending increases then business activity increases, products are demanded, businesses hire and the economy improves. Let's focus on the fiscal stimuli in this thread. This argument has no starting point, it is similar to an idea of 0+0=infinity. For if this idea works, then why doesn't government just spend 100% of all income and we'd all be rich? In fact, why not just give every American $1,000,000,000 and so we would all be billionaires?
It's a fallacious idea simply because government has nothing to spend. Everything they get must come from somewhere. So the starting point is not government spending -> increase aggregate demand. It must start from: government taking X, government spending X -> increase aggregate demand. If goverment spends as a "stimulus" where does this money come from? It comes from the private sector. So basically, it is a stimulus to take money from the private sector and have government spend it? How can this be stimulus? At best it is a reallocation of resources, instead of individuals allocating resources the government allocates resources.
First off, there is no such thing as agg demand being separate than "agg production." Consumption always equals production. So the only argument that can be made is that the money that government spends is actually spent instead of saved/invested, and this is somehow better than leaving it up to individuals to decide the appropriate ratio of spend/save/invest. It is absolute hogwash and it comes down to the point of: the economy is about resource allocation. There is an appropriate level of investment/saving vs spending, not only do the government stimulus people think that a central planning authority better determines how much is spent vs saved/invest, but that the actual spending itself is better determined by a central authority than by individuals.
If this was the case, wouldn't North Korea currently be the starring shining light on economic progress? Wouldn't it be the economic power of the world, since of course 100% of the resources are allocated by a central authority?
Here is Milton Friedman on the subject. The original question is slightly different than the point covered here, but the answer by Friedman is relevant:
http://www.youtube.com/watch?v=Hrg1CArkuNc
