Friday, July 5, 2013

The fatal flaw in Keynesian economics


Bill Bonner has written a very penetrating article about the fatal flaw at the heart of Keynesian economics - the tendency to view the economy as a 'machine' that can be 'fixed'.  Here's an excerpt.

Unlike a machine, an economy was neither designed by anyone nor built in a factory. There are no plans… no owner’s manual… no guide to troubleshooting problems… and no website where owners go to talk about the problems they’ve had and the tricks they’ve used to fix them.

Not made by man… it cannot be repaired by man. But let’s look at why this is so.

First, an economy is a “complex adaptive system.” It has lots of moving parts, in other words, and each of these parts has information and desires of its own.

The farmer in Mississippi may know that his bottom 40 acres are too wet to plow. The Department of Agriculture has no idea. The plumber in Milwaukee may know that his business is slowing down. But how would Krugman know?

What machine has intelligent parts… each responding to its own information base, more or less independently?

Second… and perhaps more importantly… the parts have desires of their own. You build a machine to accomplish the desires of the designer. An economy, on the other hand, is merely a way for the constituent parts to achieve their own ends.

Imagine an automobile that goes where the steering wheel wants to go! Imagine a motor that runs faster when the carburetor feels frisky… and slows down when the valves get tired.

You can see that this is like no machine ever created. The parts want to go in different directions… at different speeds… for different reasons. The economy is much more like a flock of birds than a Boeing 747.

There's more at the link.  Highly recommended reading.

Peter

4 comments:

Anonymous said...

You're really stupid, bro. Just because you and any other free marketer is too willfully ignorant to understand a complex organic system, doesn't mean humans in general aren't. And that's why Economics is a higher education subject, like biology. We get that it's complex. So y'all should probably shut the fuck up about things they don't understand because this whole article reads like the time Aristotle said "hey women have less teeth than men". Your ignorance to basic science is something I don't know how to deal with, but relax. Keynsian economics is currently the most succesful economic platform in history, and as soon as we murder everyone who refuses to recognise the objective fact that Clinton caused bigger growth v inflation than Reagan DESPITE the Reagan-induced recession, we'll get back to not destroying the world in a way that will make outsiders laugh at us.

Peter said...

@Anonymous at 11:47 PM: First, your cowardice in insulting others while hiding behind a veil of anonymity speaks volumes for your character - or, rather, your lack thereof.

Secondly, I have post-graduate qualifications in economics, as do many of my readers - and many of us, as do many economists out there in the real world, disagree profoundly with Keynesian economics and with the economic policies of our current political overlords. We believe that such policies will inevitably come home to roost, and that we'll all suffer the consequences. We're suffering them already, in terms of inflation and the degradation of our national currency on international markets.

Facts remain facts, whether or not you happen to like or agree with them. Good manners are useful in the process - a lesson you clearly haven't yet learned.

Anonymous said...

I'm sure it does.

It's possibly you have your postgrad. I housed with a biology student who utterly rejected all forms of evolution.

You are he.

Retired Mustang said...

There is a fundamental flaw with Keynesian economics that we find in many approaches to other, non-economic, issues. That is the idea of control as a valid thing.

Let's assume that Keynesian economics is basically correct (I don't think it is, but that's a different issue). That does not mean that the ability to control an economy and the accompanying human behavior is desirable. Unfortunately, many people accept the notion that "if we can, we should" is true. This points to what I see as a (non-economic) advantage of a free market. It respects the right of the individual to make his or her own choices without attempts at manipulation or control by those in power. However, if I view control of people and their behavior as desirable, Keynesian economics becomes much more reasonable because of its compatibility with my world view.