The Broken Legacy of Keynesian Economics

This week marks the 40th anniversary of President Richard Nixon’s infamous imposition of price and wage controls which officially removed all economic ties to gold from the U.S. dollar. In his speech to the American people, Nixon said, “We are all Keynesians now.” Four decades after we all supposedly embraced Keynesian economics, it appears that the fruits of this relationship have been more bitter than sweet.

It would be easy to cite statistics to see why Nixon may have spoken too soon. Keynesianism – which includes government spending, public works projects, deficit spending, and easy credit — has unleashed on the American economy a 98% decrease in the purchasing power of the dollar, a national debt nearly equal to 100% of GDP, children born with six-figure debt burdensmalinvestment, bailouts, and unemployment, just to name some. All one needs to do is apply the logic of Keynesian economics to see its tragic errors.

Which brings me to the London riots. There are many disagreements on why they are occurring, including education cutsmulticulturalism, and the general mentality of those accustomed to a welfare state. However, what seems to be missing is how great these riots are going to be for the English economy. According to Keynesian economists, the property destruction unleashed by the rioters will create jobs for the construction worker, the carpenters, the painter, and a new alarm company. A new economic boom should sweep London thanks to these innovative rioters, right?

If you think something is fishy about this logic, it is because this reasoning ignores Frederic Bastiat’s “broken window fallacy.” The supposed “benefits” that occur from a hoodlum breaking a window that triggers a chain of spending ignores the unseen aspects of the property destruction: the businesses and workers who would have benefited had the store owner not spent money repairing a window, but rather had been free to spend (or save) money as he saw fit in the market. Keynesian economists ignore or dismiss this fallacy, and yet when we see rioters literally breaking windows, why isn’t this a cause for celebration?

Hyperbole? Perhaps, but when the broken window fallacy is applied on a national or grand scale, Keynesians are the first ones to argue for the supposed economic benefits of property destruction. Over the weekend, New York Times columnist and Nobel Prize winning economist Paul Krugman actually told Fareed Zakaria on his CNN show that a space alien invasion would get us out of the recession in 18 months since governments would be forced to spend money – that is, take money from you and I — on armaments and public works projects. 

Krugman, the modern intellectual leader for Keynesian economics, has also argued that terrorist attacks and earthquakes would be booms for the economy. We just need another large-scale war to get us out of this economic downturn, Krugman says, just like how World War II got us out the Depression. If one broken window does wonders, just imagine thousands of them.

But did World War II actually get the U.S. out of the Depression? According to Robert Higgs, government spending was not the reason for the recovery, and it wasn’t until 1946 — when the U.S. government slashed spending by more than 50% — that the American economy rebounded. Harvard economist Robert Barro argues that increased military spending during WWII actually depressed other parts of the economy. Joseph Stiglitz notes that conflict brings uncertainty and volatity to markets. 

And besides, it doesn’t take too much insight to see that the horrific destruction of capital and property unleashed by war cannot possibly be good for anyone involved. Why not just build some tanks, dump them in the ocean, and repeat? Or blow up the Hoover dam, re-build it, then repeat?

Real economic growth only comes from the accumulation of capital, investment, trade, and innovation in the free market. You don’t need to break windows (i.e. taxes, inflation, or deficit spend) to build infrastructure, create jobs, or grow the economy.

It should be fairly obvious that property destruction or confiscation does not provide an economic boom or create prosperity. When we look around and see what decades of Keynesianism has created, we may see large Dow Jones numbers and military muscle, but we mistake the opportunity costs of this illusory wealth. We do not see what would have been spent or created by individuals serving their fellow man in the marketplace had this wealth not been taken from them, products and services that people actually want since they are a product of the voluntary actions of the free market.

It seems that broken windows is all that Keynesianism has left us. 

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