If you studied macroeconomics in a school or university in a Western democratic country,
it is likely that you would’ve been taught Keynsian economics, named after British economist
John Meynard Keynes.
In fact this may be the only type of economic model you have ever been exposed to if all
you read is the corporate press.
Now before you think ‘oh no, you’re going to show me a lot of boring graphs’ or ‘I’ve
never studied economics’ fear not.
I will keep this video as high level and understandable as I can.
The purpose of this video is to illustrate why the Keynsian model of economics, which
societies now rely on to run their economics, is the root cause of a lot of the problems
being experienced around the world, such as high government debt, low wages and reduced
productivity, which decreases welfare for everyone.
In this video, I’ll explain what the Keynsian theory of economics is, what problems it has
led to in economies and why it should be rejected in favour of an alternative model.
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Macroeconomics is the study of the economy at large.
Most governments around the world usually base their economic decisions on maximising
a number called gross domestic product or GDP.
GDP is meant to represent the total market value of the goods and services produced by
a country’s economy during a period of time.
There are a number of ways of calculating GDP however one common way is the expenditure
approach which defines GDP as the sum of the following:
GDP = private consumption + gross private investment + government investment + government
spending + (exports – imports).
This basically represents that there are three types of users of goods and services in an
economy: households, businesses, and the government.
As you can see from this calculation, private consumption and investment, government spending
and exports to other countries all increase GDP for an economy.
Meanwhile imports reduce GDP.
Keynes suggested that in order to increase GDP, government expenditure should be increased
and taxes should be lowered to stimulate private consumption and investment.
Sounds pretty simple right?
However what Keynes was arguing for was quite novel at the time.
Prior to Keynes, economics was based on the classical model, which argued that the economy
would always self-regulate to the natural level of GDP, which is the level of real GDP
that is obtained when the economy's resources are fully employed.
This self-regulation occurs as interest rates, wages, and prices adjust so that supply ends
up matching demand.
Keynes’ theory rejected the idea that the economy self-regulates through the natural
changing of prices.
His views came about during the Great Depression in the 1930s which he believed proved that
classical economics wasn’t working.
Instead, he believed that when there was an economic decline the doom and gloom prevented
the self-regulation of the economy and that for this reason, governments should step in
with extra spending by borrowing to reach the optimal GDP.
So why is Keynes’ theory a problem?
Well at the core of it is the idea that governments are better at regulating the economy than
market forces between individuals and businesses.
The adoption of Keynes’ theory has empowered governments to spend their way out of financial
crises, go into significant debt and print trillions of dollars in pursuit of this and
distort market forces leading to inefficient allocation of resources.
The reason few have complained about this until recently is due to the incredible growth
we’ve seen over the last century.
Many attribute this growth to Keynsian economics working.
However others argue that this growth occurred, in spite of Keynsian economics.
That is, due to increases in productivity as a result of enhanced technology and social
liberation movements, growth would have been so much higher if the government hadn’t
gotten in the way of market forces.
It is difficult to prove who’s right - after all there is no Universe B to test how society
would’ve fared under a different economic model.
If we look to history however, the world saw incredible growth for centuries before governments
got involved in economics.
The industrialisation of societies in the 1700s and 1800s improved the wellbeing of
millions around the world.
It should also be remembered that Franklin D. Roosevelt tried public spending to restart
the U.S. economy during the Great Depression, but never got the United States out of recession
until World War II.
Many argue that it was the government spending on World War II that got countries out of
recession, however there was also significant technological and social change which muddied
the waters, not to mention the destruction of life and property.
Now with the world facing high inflation and governments owing trillions of dollars in
debt it’s time to ask - is there a better way?
In my view, Keynsian economics and the focus by governments on increasing GDP as an end
goal for economies has failed societies miserably, creating financial system collapses time and
time again in the less than 100 years in which this has been in place.
The Austrian School of economics, founded in 1871 with the publication of Carl Menger’s
Principles of Economics, argues that the only way to analyse economics is to look at a person
and their subjective choices.
Austrian economists reject the use of measures such as CPI and GDP to measure the health
of an economy finding them arbitrary and unsuitable for drawing any conclusions.
I’ve previously talked on this channel about the failings of consumer price index (CPI)
to measure inflation.
Austrian economists argue that societies should return to focussing on the decisions made
by individuals and businesses, rather than allowing governments to interfere with those
decisions as this will maximise welfare due to people being inherently self interested
in reaching the best outcomes.
There is no optimal society level measure - rather each person has optimal and changing
preferences.
If you’d like to find out more about Austrian economics, I’ve included a link below to
a comprehensive article on the subject by Econlib The Library of Economics and Liberty.
I hope you’ve found this video useful.
Let me know in the comments below whether you agree that a new economic model is needed
to fix the problems caused by Keynsian economics and what you think the solution should be.
Thanks for watching and until next time.