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Keynesian Economics: Theft Creates Wealth

Keynesians believe that you can create economic growth by spending government money.  The goal of government spending is to increase aggregate demand.  If just increasing demand was the way to increase economic growth, then stealing would also create economic growth.  Now you make object that government spending is not like theft.  The recipient of the government money did not break any laws when receiving government money, but from an economic point of view the recipient did not provide any economic value for the goods or services they received from the government money and the same is true of the thief.  The thief may have expended effort to obtain the money to buy various goods and services, but they did not exchange anything of economic value.  Thus, neither the thief nor the recipient of government money provide any economic value for the items they receive because of their theft/welfare.  As a result, theft should provide the same economic benefits as government stimulus programs.  Since increasing aggregate demand is the goal, thieves perform this function admirably.  Most thieves do not save their money and they do not invest, they spend their money – this is part of what makes them thieves.  This ensures that the stolen wealth is immediately converted into demand (spent), which is good according to Keynesians.  Money that is saved or invested does not immediately increase aggregate demand, which is the cause of economic slowdowns according to Keynesians.

Economic growth or wealth is not created by spending, but by increasing the technological level of the country.  If spending (consumption) created wealth, then a farmer could get rich by eating their seed corn.  This is complete non-sense.  Only by creating inventions or by investing in other people’s inventions can a country increase its per capita wealth.

There are three ways that the government can take money from productive people and give it to non-producers to spend.  The most straight forward is to (immediately) tax it from producers.  In this case, it is clear that the government is taking money (productive effort) from productive people and giving it to non-producers of the wealth.  This is exactly what a thief does.  We know that this is not a 100% efficient process, since there is the cost of collecting (stealing) the wealth of the productive people and giving it to non-producers.  This requires numerous government bureaucrats and effort on the part of honest taxpayers.  However, this is not the only loss in the transfer of wealth.  The government has substituted its judgment or worse the judgment of non-producers for producers in how to allocate wealth (productive energy).  This means we are substituting the judgment of people who have not proven the ability to create wealth for wealth producers.  We know that most of the recipients will not invest in creating new technologies or diffusing new technologies, as result we know that this money will not result in an increase in economic growth.  Note that government statistics will not show the whole result of this decrease of economic output, since government statistics of economic output measure consumption, not production.  The Gross Domestic Product is calculated as GDP = private consumption + gross investment + government spending + (exports − imports).  At first this formula would appear to balance out government spending and gross investment, but the government can only measure spending, even for gross investment.  As a result, when government steals from producers this does not show up as a decrease in gross investment if the producers do not believe that the present climate is not conducive to investment.  This is like the government forcing a farmer to eat or give away their seed corn, it does not show up as a net reduction in planting (investment) until later, but it does show up as private consumption.[1]  As a result, government stimulus numbers inflate the GDP incorrectly during a stimulus program and under estimate the GDP in times of private sector growth.

The government may borrow or use inflation to fund its stimulus programs.  When the government borrows money or causes inflation the overall result is the same, but the mechanism is different.  If the government borrows in order to pay for its stimulus program, then this reduces the amount of investment capital available and reduces private sector investment by crowding out investment dollars.  It also increases the cost of labor, goods, and services by creating artificial demand.  In addition, it results in higher tax rates than would otherwise be necessary in order to pay back the money borrowed reducing long term growth.  Inflation is just a way of taxing (stealing) from everyone’s paycheck, savings, and investment.[2]  The net result is to transfer money from productive people to unproductive people.  Since inflation does not immediately show up in the Consumer Price Index, it artificially inflates the GDP during stimulus programs at the expense of future economic growth.  Inflation does not immediately show up in the CPI because the government measures the CPI at distinct intervals and because the CPI does not distinguish between changes in demand and inflation (an increase in the amount of money).  Much like the way the government measures GDP, the CPI understates the inflation during times of economic contraction and overestimates the CPI in time of economic growth.  Increased demand for products and services during a time of economic growth shows up as inflation in the CPI numbers, while decreases in demand during recessionary periods shows up as deflation or low inflation in the CPI numbers.

Now some people may complain that the people being taxed are not (necessarily) producers.  For instance, the banks that were bailed out by TARP or the carry trades[3] created by the Federal Reserve, or other corporations (GM, Chrysler, GE, etc.) bailed out by the government.  However, the government cannot fund itself except by taking money (wealth, productive effort) from producers ultimately.  Taxing government leaches results in a circular system that is negative sum game that would collapse very quickly, but for producers.  Taxing non-productive entities does not change the basic analysis above.

Now other people may complain that Keynes actual theory was for the government to store reserves during times of economic prosperity and then spend the reserves during economic downturns.  While this may be preferable to a spendthrift government, such as the U.S. presently, it does not change the overall analysis.  It just means that during times of economic prosperity, government is overcharging, has a higher tax rate than necessary.  This results in underinvestment in technological, which means a lower rate of economic growth rate in the future.  In economic downturns, Keynes still advocated spending on things that created immediate demand, not on investing in inventions.  Such as paying people to dig holes and then filling them up.  Thus, this also lowers long term economic growth.  Finally, Keynes did not take into account the large overhead (entropy) necessary to take this money away from productive citizens.

Stimulus programs overinflate the GDP while the stimulus money is being spent, by ignoring the decrease in investment capital.  This decrease in investment capital results in lower long term economic growth, since it means there is less money (wealth) to invest in new technologies in the future.

Not surprisingly, this also results in higher unemployment rates.  There was a recent study by Timothy Conley from the University of Western Ontario, Canada Economics Department and Bill Dupor of Ohio State University which showed that the U.S.’s recent stimulus program killed two private sector jobs for every job saved or created.  This is just one of many examples that shows Keynesian economic theory is truly VODOO ECONOMICS


[1] For those engineers and people with a mathematical background saving is like a capacitor (integrator), draining the capacitor increases the short term current, but reducing the current in the future.

[2] Even if the money is borrowed from foreign investors, it reduces the amount of investment capital.  It also reduces the willingness of foreign investors to invest inU.S. companies.

[3] A carry trade is when the Federal Reserve allows banks to borrow money at a lower interest rate than they can loan it out  at (risk free).  The most egregious example is when political powerful banks (corporations) can borrow from the Federal Reserve at a lower rate than short term Treasury Bills are yielding.  This takes absolutely no intelligence to make huge amounts of money, as long as the Federal Reserve will loan out money.  This is how the TARP banks have been able to pay back their TARP loans.  However, it is just a fraud and the cost of this fraud is being paid for by the American taxpayer/worker.


May 27, 2011 - Posted by | -Economics, Featured Videos | , , , , , , , , , , ,

1 Comment »

  1. An innovative but true analogy. If Keynesian money flow based economics worked of course hiring a bunch of thieves to steal and spend would be wealth producing. The analogy works well as a way to point out Keynesian absurdity. Many say even Keynes himself did not really believe in his original theories before he died, unfortunately his disciples never gave up the faith. The truth is in capitalism the expansion of wealth is based on free trade of value for value and creation of things people desire from things the desire less. Your other points are also well taken and ones I have tried to explain to the uninformed in the past. Good Post.

    Comment by Luke | May 2, 2012 | Reply

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