Crisis of government, not capitalism

The current economic crisis is caused by massive government interventions which are intended to override capitalism and supplement it with a more economically stable, better and fairer system.

These policies cause unintended negative consequences: the boom/bust cycle characterised in the upswing by seemingly endless capital gains, speculation, and debt; and in the downswing by shortage of credit, bankruptcy, unemployment and depression.

The dominant theory

The dominant economic theory that informs the response of western governments is that of John Maynard Keynes, who wrote in the 1930s.

Keynes assumed a tendency to economic recessions is inherent in the capitalist system. Government can and should fix the problem by stimulating economic activity by public spending; otherwise there’ll be permanent high unemployment.

Keynes’s theory in a nutshell says “a fall in aggregate demand [i.e. spending] means that businesses can’t sell as much, which means that factories can’t make as much, which means that people are laid off, which means that aggregate demand falls even further, which would cause permanent depression”.

The hallmarks of Keynesian ideas are talk of “injecting” money, “priming the pump”, “stimulus packages”, the economy “overheating”, wage rises causing inflation, setting the “policy levers”, and a supposed trade-off between unemployment and inflation.

Problems with Keynesian theory

Keynesian theory says that booms happen because “aggregate demand” is up, and busts happen because “aggregate demand” is down.

But when we ask why the aggregate demand is up or down, the answer comes: because during the boom the public are “confident”, while during the bust they have negative expectations.

So the first problem is, this is not an economic explanation: it’s a psychological explanation. And second, there is no evidence for the psychological phenomenon that is supposed to explain the boom or bust but the existence of the boom or bust itself. The argument is completely circular: Keynes’s theory fails to explain what it sets out to explain.

Also if the original problem we’re trying to fix is an economic slump - not enough wealth being produced - then it should be obvious that you can’t make wealth simply by spending money based on printing pieces of paper.

What we are witnessing during the government-stimulated boom is not wealth creation, it’s wealth re-distribution. It simply consumes capital, taking wealth from A and giving it to B. It is a glorified version of digging holes and filling them in again.

Keynes’s theory and its ethic of re-distribution has spread a “magic pudding” mentality through the whole society, encouraging people to look to profit from re-distribution instead of productive activity.