TCS Daily

On Spending and Keynesian Displacement

By Erik Voorhees - November 13, 2009 12:00 AM

Squeezed forth by the global financial crisis, certain detestable economic myths are bubbling through every legislative orifice. As the hand of retribution grips down on the world's monetary system, a gooey slime of absurd premonitions have oozed out of a dormant consciousness and now run dripping down the sides of the grotesque political apparatus known as the United States Federal Government.

Among this unpleasant, problematic residue, something called the "Keynesian Multiplier," a term more appropriate for intergalactic weaponry, has convinced a vast swath of society that not only will an unrelenting expenditure of wealth increase everyone's prosperity, but it is in fact the best way to pull the world out of a debt-ridden depression. Virtually every political leader, save perhaps Czech's prescient Vaclav Klaus, is enamored with spending. Why do politicians give credence to Keynesianism? Because it provides an intellectual veneer under which to usurp power, grant favors, and spend the wealth of the peasantry (benevolently preventing peasants the burden thereof).

The Keynes allegory suggests that heightened spending creates "demand," which then allows companies to produce goods and make money, thereby enabling subsequent spending. The corollary is of course that without such spending, demand will plummet in a vicious cycle, leading presumably to a revisitation of the stone age economy.

What is overlooked (or more likely intentionally ignored for political purposes) is that spending necessarily involves an important opportunity cost - when you spend today, you can't spend tomorrow. Whatever is purchased now not only comes at the expense of the money in your pocket, but more importantly at the expense of the future purchase otherwise made. It is not so much money that one surrenders to acquire the new television as it is next month's potential patio furniture. There is thus an unseen - to gratefully utilize Bastiat's term - cost in every expense: that of the future product which is never purchased because the means by which to purchase it have been depleted in the present. The future purchase is sacrificed in favor of the present purchase, so while the television producer is pleased with his increased sales today, the patio furniture factory will unknowingly have one less sale in the subsequent month.

This unavoidable mechanism of economics is why the concept of a "Keynesian Multiplier" is so absurd (unless one realizes the multiplier is likely less than 1). For by increasing demand in the present, one is necessarily decreasing demand in the future. The Keynesian Multiplier doesn't provide a net gain in wealth and demand, it provides a transfer of wealth and demand from the future to the present. And when a wide array of future demand is transferred to the present, for example by the Federal Government, one should not be surprised to see macro indicators, such as GDP, increase. Such figures indicate present activity but do not account for the forgone activity in the future. The positive GDP figure appears on the front page of the paper, the public cheers, the politicians wave, bow, and then feign surprise at corporate earnings in subsequent quarters. Could any example be more perfect than the Cash for Clunkers program?

The Keynesian witch-doctors will retort that when a man spends now, it allows the next guy to spend, and then the next, and so on until finally someone down the line is able to buy from the first man. Well, ask yourself, has any wealth been created by this circular transaction? To the extent that some of those products are consumed after the trade, one is likely to find a net loss in wealth after all the trades have completed. This is because production did not occur, and when each man in the chain bought something from the next man, he sacrificed his ability to produce with that wealth. Unless enough of the men traded their wealth for some asset which allowed productivity to increase, a net loss will have occurred. For this reason, individuals can't just spend money to make money. Intelligent investment must be accomplished, and this is not usually an easy or expedient challenge. One might suggest that when the government spends a trillion dollars, a great deal of that is unlikely to fall into the "intelligent investment" category... it would fall into the "consumption" category. While GDP figures will have increased, wealth will not have been created. If the government had any skill in investing, what need would there be for taxes?

Sacrificing future consumption in favor of present consumption should be at the discretion of individuals considering their own finances. Such sacrifices should not be forced upon the public through government spending diktats, euphemistically referred to as "stimulus." One should not require unnatural prescience to take such a "stimulating" policy to its logical conclusion. By transferring future consumption to the present, the government can appear as the benevolent shepherd guiding its flock, but this illusory growth is of course temporary, for future spending will have been sacrificed. Further, the capital savings required for real investment will have been consumed; businesses will find it more difficult to acquire resources as those resources will already have been depleted.

Just as one man cannot spend his way out of debt, neither can two men, nor five. A small community could not spend its way out of debt, nor could a village, nor five. How many individuals must be added to the shopping spree before their collective wealth starts rising? How many times must a man trade money for goods with his neighbor before they both retire wealthy? Clearly, something more than a transaction is required for wealth to grow. That thing is production, a process tortuously suffocated in an environment of debt.

Keynesianism is a farce (akin, almost ironically, to alchemy) - yet its preeminence remains firmly endorsed by an organization desperately seeking any excuse to control the lives of its subjects, and its gaping fissures remain unexamined by a public inculcated in the very schools funded by the same organization.

Let us hope the average citizen becomes more aware of this charade. It is production and savings, not consumption and debt, that must nurture a despondent nation stricken with the dregs of statism.

Erik Voorhees is a member of The Free State Project. You can read more of his works at his blog,


Tansparent to any thinking person
Well said. Like most deceptions, this idea of spending yourself into prosperity is the skin of a truth, stuffed with a lie. But the skin is so thin, and so transparent, that it is truly astonishing to see so many people accept it. Even so-called educated people. (Shame on our education system.)

Yes, government can force a temporary spike in productivity by spending our tax money for us. I don’t know how many times I’ve heard the example of weapons manufacturing in WWII presented as a glorious example of government spending providing needed economic stimulus. Yes, the government can, through the power of tax collection and government spending, force productivity. Of course, they could just as easily make a law that requires us to spend our money. Or, they could involuntarily draft us into a Work Corps, and drive unemployment to zero overnight. Or, they could just enslave us, and put us in labor camps. There are lots of ways to force productivity.

But is that really what we want? The price is unacceptable to any freedom loving person. In a free market, private citizens spend their hard-earned money as best they see fit. Sometimes, they are cautious. Sometimes caution is wise. And wise economists, and wise politicians, see these fluctuations, these market corrections, as a good thing. But when the economy is slow, and people are not spending as much or as fast a Washington would like, the politicians take it upon themselves to force people to spend more, by spending the taxes on tomorrow’s income today. This is truly foolish. Instead of being spent wisely and carefully by those who earned it, the money is spent by reckless fools, and in such astronomical numbers that wise judgments are impossible. Can anybody, even The Anointed One, spend 700 Billion dollars wisely? In the hands of millions of hardworking citizens, this money is counted, rationed, and carefully invested. New shoes, car repairs, medical bills, grocery bill, utilities, and house repairs - all compete for limited resources, and wise decisions are made. Put that same money in the hands of politicians, and corruption and stupidity immediately follow. Does anybody really believe this money will be more wisely spent by Obama, Pelosi, etc, than by the people who earned it? It may be spent FASTER, that much I can believe. And if all you care about is an instantaneous boost in spending, you’ve got your wish. But you will pay for it many times over in the years to come.

This ought to be so obvious that everybody sees it. And I’m convinced almost every thinking person does. I suspect there are those out there who really DO believe that you can spend your way to prosperity. But I’ve got to believe it is a small minority. The majority know exactly what is going on. That’s why the Democrats are trying to ram-rod all this through, before the cries of “CRISIS! CRISIS! WE MUST DO SOMETHING NOW!” die down, and the inevitable consequences of stupid policies grip the public conscience. (“But hell, by then, we’ll be out of office, living high on the hog, having raped the treasury for decades to come!”) And, unfortunately, I am beginning to think that there are a lot of people out there who do not fit the description of “thinking person”.

Off topic: Just in case Roy is still around.
"Substantial water reserves have been found beneath the Moon’s surface, Nasa announced yesterday, paving the way for a permanent lunar base. "

Here, here!

Keynes survives the evidence kicking his theories' b**t because he provides the state and the leftist elites cover when they take advantage of economic downturns to fleece the peasantry. Enough said.

On Roy's behalf ...
... I would say that the federal government should have the power to either tax the water or throw a blanket over it lest some undiscovered species on the moon be threatened by NASA's reckless experimentations.

Landscape of Fantasy
"Why do politicians give credence to Keynesianism? Because it provides an intellectual veneer under which to usurp power, grant favors, and spend the wealth of the peasantry (benevolently preventing peasants the burden thereof)."

All that is certainly true enough, thank you, but there's yet another, more direct reason: Left-Liberal (let's be specific, here) politicians (and their ideological supporters) give credence to Keynesianism because it's commensurate with their entire ideological mindset which is predicated on how they WISH the world worked as opposed to how it actually works. Keynesianism is just another example of said mindset -- they support it because they WISH its prescriptions represented a valid economic approach. It's a key feature in their entire landscape of fantasy.

Perhaps he finally cashed his last Social Security check?
I hope not.

In that regard, he's exactly like Karl Marx...
...only not so thoroughly discredited to the point where the tyrants of the world can still use him to justify their actions.

re: Roy M.I.A
It could be that Roy doesn't lurk around here anymore because of the severe humiliations he's had to suffer.
Perhaps he feels really bad because some time ago he told, I think it was to Marjon and Missypooh, that they should be killed at the hands of the state.
He seems to have a similar replacement though with ForestBaker, at least in terms of his wacky ideas about gold.

Keynes would be right if...
...taxation took money stuffed under a mattress and put it back into the economy. But that is not what taxation does--instead, it merely moves money from free market investment into government chosen investment. And we all know how government investment is chosen--to pay off political cronies and interest groups. Bad, bad, bad.


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