Sunday, June 26, 2011

A Simple Look at Keynesianism vs Free Markets

John Maynard Keynes (1886–1946) was the British economist who literally wrote the book on modern macroeconomics (Keynes, The General Theory of Employment, Interest and Money, 1936/2009). His theory, which presently dominates US economic policy, holds that “private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector”(1). In other words, Keynesians believe that during recessions, an increase in government spending is necessary to offset a drop in consumption, thereby saving jobs and circumventing a deeper downturn.

The headline appeal of Keynes’s theory lies in its promise of moderation—in the notion that the contraction can be mitigated through government intervention. Its political appeal lies in the belief that injecting money into the system will indeed goose the economy, at least through the next election cycle. Aside from the risk of inflating asset bubbles (as the flood of liquidity finds a home)—stimulus programs tend to take political root, leaving the government with yet greater influence over the allocation of resources.

The antithesis of Keynesian economics is free-market capitalism, championed through the years by the likes of Scotland’s Adam Smith (1723–1790), Austria’s Frederich A. Hayek (1899–1992) and America’s Milton Friedman (1912–2006): “Within an ideal free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers”. “Price is the result of buying and selling decisions en masse as described by the theory of supply and demand” (2).

Truly each of us has a bent; mine is toward capitalism. Therefore, as I effort to convince you of the efficacy of a free market relative to the alternative, my objective is doomed to no small degree by my lack of objectivity. I’ll therefore narrow my argument down to a simple question (and forget economics for the moment): Would you prefer to live in a world where a paternalistic government determines who wins, who loses, who pays, who survives the inevitable recession (in support of the greater good, as it determines, or a politically influential organization), and in effect perpetuates the existence of poorly managed institutions? Or would you prefer a world where a free market determines the winners and losers, where individuals and institutions succeed or fail based on the value they deliver to one another, and on their ability to prudently manage their affairs? I'll take the latter.


1. Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in Action. Upper Saddle River: Pearson Prentice Hall.

2. Rothbard, Murray. The Concise Encyclopedia of Economics


  1. I believe personal incentive is the key, and that excludes government interaction.

  2. OK, I concede the point: John Maynard Keynes was a genius. He was a brilliant economist and an even more brilliant mathematician--he wrote, at the time, THE book on probability theory. We both know, however, that he failed to see the virtues of an economy free of unnecessary government intervention. He clearly missed the virtues of an economy based on free markets.

    Unfortunately, Many people prefer the "paternalistic" government that determines who wins, who looses, and who pays. Populism has reared its ugly head once again. I, like you, prefer that markets determine the winners and the losers, but no one can out promise those "geniuses" who promote the collectivist over the individual.