Keynes’ Idea

The economic theory behind the nearly $800 billion stimulus package may be cloaked in precise mathematics but is ultimately based on John Maynard Keynes’s speculative conjecture about human nature. Keynes claimed that people cope with uncertainty by assuming the future will be like the present. This predisposition exacerbates economic downturns and should be countered by a sharp fiscal stimulus that reignites the “animal spirits” of consumers and investors.

via Amar Bhide Says the Stimulus Bill Relies on Untested Keynesian Economic Theory – WSJ.com.

The quoted article is chock full of great insights, but the reference to Keyne’s is where I want to focus now. I’ve never seen Keynesian economics explained in terms of this core concept.

The Austrian economists claim that what happens in the economy is the result of economic calculations, particularly those of the entrepreneur. I believe this is true, but observation suggest that most people are not particularly good at economic calculation. That’s why there are so few entrepreneurs and why so many entrepreneurs fail.

Keynes’ speculation is just one of several ways that people can get their economic calculations wrong. Behavioral science is teaching us more ways, more faulty heuristics, almost every day. I have little trouble accepting Keynes’s core assumption.

But Keynes had a second assumption, that being that the government could trick people into having a better outlook by temporarily providing greater employment, i.e. a stimulus package. This second assumption is the source of much debate, as you must certainly know by now.

To me, the interesting question concerns the impact of the stimulus package on economic calculations. It would seem that a change (most any change) in government policy disrupts prior economic calculation and makes good economic calculation more complex and uncertain. It should result in less good economic calculation and more poor calculation. That can’t be good for any of us, since we are all the beneficiaries of good economic calculation and the victims of poor calculations.

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