I recently encountered a series of youtube videos which claimed to find errors in the logic and algebra underpinning Keynesian economics.
Excuse me for being sceptical, but I think its strange that it has taken 75 yrs to find these flaws. Surely if they existed, it would be well known by now? Below is a link to one of these videos. Has the author found a previously unknown flaw? Or is this well-known? Or has the author, in fact, got it completely wrong?
Pt. 2: Fiscal Multiplier Destroyed: Keynes' Deception http://www.youtube.com/watch?v=encPMexUm8w
If you are interested, here is the full list of videos:
The Maynard Keyneshttp://www.youtube.com/watch?v=pA67E8jMq84&NR=1
Pt. 1: Fiscal Multiplier Debunked and Destroyed http://www.youtube.com/watch?v=4Vnus-Kw5Is&NR=1
Pt. 3: Fiscal Multiplier Destroyed: The Other Multiplier http://www.youtube.com/watch?v=sZDIZ1U7gEk
Pt. 4: Fiscal Multiplier Destroyed: The Chain Reaction http://www.youtube.com/watch?v=y1AVThNZuR4
Pt. 5: Consumption Function & Keynesian Cross Destroyed http://www.youtube.com/watch?v=2bmsYNnS2MA
Pt. 6: Government Spending Multiplier Destroyed http://www.youtube.com/watch?v=hHa-HE7Olq0
Pt 7: Tax Cut Multiplier Destroyed http://www.youtube.com/watch?v=1oUMjJKQkkQ
Pt 8: Balanced Budget Multiplier Swindle - Keynesian Asymmetries http://www.youtube.com/watch?v=VZL_1L9r-T4
Pt 9: Keynesian Logic - Apples, Oranges, Asses http://www.youtube.com/watch?v=XErrpJHaExA
Pt 10: Keynesian Asymmetry and "Other Multiplier" Revisited http://www.youtube.com/watch?v=684WIoQP6XQ
Well Jargon, it appears that you didn't really want a full explanation from start to finish, any more that the three Keynesian stooges who also didn't read my blog. Folks don't have to read it, but should actually read it before commenting on it.
“Some ideas are so stupid that only intellectuals believe them.” - George Orwell
A dictum of Lord Keynes: In the long run we are all dead. I do not question the truth of this statement; I even consider it as the only correct declaration of the neo-British Cambridge school. - Ludwig von Mises
From reading Keyne's Multiplier Chapter here:
It does seem that you're right. It does seem that Keynes has written that Y = C+I and Y=k*I, meaning that C+I == k*I, meaning that there is no multiplier. Is that really it though?
The Anarch is to the Anarchist what the Monarch is to the Monarchist.
Keynsianism is a quite simple missconception.
The essential point is, that it distinguishes between consumption and investment. The true point hereto is, that business cycles are never caused by consumption behavior, but always by investment. It is sinkind investment causing recessions, and rising investment causing economic booms.
However, whether you purchase a car in order to use it as a cab (=investment), or to drive if just for private use (=consumption), obviously does not make any difference for the car seller. Either way he gets the money that you spend, has additional income so to say. As the multiplier model suggests, that only the propensity to consume will keep the money moving, while the money that you save will not, Keynes obviously has a problem with the equation saving = investment.
Keynes thought is, though it is never told that explicitly, that during recession savings do not make to investment. This is sound idea! In fact it comes very close to the nature of recessions.
Just image such a scenario. People are still saving a decent part of what they have, but hardly anyone would like to invest as long as the prospects look gloomy. So what happens? There is a lot capital not moving anywhere. This is basically a traffic jam on the capital market. Money is moving in, but not moving out. The velocity on money is declining, which has very much the same effect as a reduction in monetary supply.
Now what if the government runs into debt? All the capital not happy with risky and unattraktive investments in the private sector, could now be invested into relatively safe government bonds. The traffic jam could be slowly disolved.
Alternative ways would be lowering interest rates, thus making look private investments more attractive. Or to raise monetary supply, to replace the money stuck in the jam.
So what is wrong about Keynsianism? First off all, it is always explained the wrong way. Its skope can not be to spend more, it is rather about publishing government bonds and thereby helping out investors.
Secondly, there is no additional money just because the government spends more. The government only spends money that it takes from private investors.
Thirdly, the "multiplier" does not work the way it is generally told. There is no difference between consumption and investment with regard to the money continuing to circulate, so that we would need to add the propensity to invest to the propensity to consume. We could thus calculate the muliplier by m = 1 / ( 1 - c - i ), which would result in 1 / 0 = indefinite!!
Fourth: this example shows quite well the basic missunderstanding. An indefinite multiplier is true, in the long run, for additional monetary supply (including the negative side effects). That is the origin of the Keynsian multiplier. He simply confused it with the effects of monetarism.
Fifth: the only scenario, where deficit spending could actually help, is a situation where the capital market is stuck in the way described above. But even then, the "traffic jam" is self healing, in the way that the additional, uninvested savings will soon rush into new investment opportunities and thus counter the recession with additional growth. This will not happen if the capital has been "nationalised" in the meanwhile.
Such extreme blockades in the capital market are rare. The banking crisis or the great depression are the only examples I could think of. Both were caused by ill fated monetary policies. All the rest of deficit spending, and Austria for instance did not have a budget surplus through the last 40(!) years, is just running into debt.
If your comment was addressed to me, you also didn't read my blog.
If you're still interested, I have a new video up on YouTube.
Fiscal Multiplier Process Debunked
It debunks the 1 + b + b2 + b3 + ... = 1/(1-b) Keynesian cover story, about portions of a government-spent dollar disappearing from the economy, resulting in the "multiplier process" stopping at a specific value = 1/(1-b).
My latest video debunks the fiscal "multiplier" 4 ways, in 3 minutes, plus how to handle the way Keynesians try to complicate tax:
Let's see now,
? = 2 + 2
We know that 2 = 1+ 1
And using Keynesian “multiplier” methodology:
2 = 1 + 1
2 - 1 = 1
and factor out 2, on the left:
2(1- 0.5) = 1
and create a Keynesian “multiplier”:
2 = (1/(1- 0.5)) 1
Now let’s add 2 to both sides, as Keynesians do, moving addition to 1st place in the math order of operations, Three Stooges Math:
2 + 2= (1/(1- 0.5)) 1 + 2
4 = (1/(1- 0.5)) 3
4 = 6
So 2 + 2 = 4 = 6
Yes. Something from nothing. I can see why Wheylous, Chris S, and nirgrahamUK like the fiscal "multiplier". What great benefits this would have for any economy stupid enough to use it. And why Friedmanite thinks I don't have a problem with Keynesianism, even though the Keynesian fiscal "multiplier" uses Three Stooges Math. And why Rodolphe Topffer thinks I didn't respond to the Keynesians' questions. The Keynesian "multiplier" math is pretty tough.
"Some Ideas are so stupid, that only intellectuals believe them." - George Orwell
It takes a special kind of idiot to believe in the multiplier.
Freedom of markets is positively correlated with the degree of evolution in any society...
Yes Jon Irenicus, they are called Keynesians.
One of the symptoms is that they say
9 + 1= 10
9 + 1 + 1 = 20
or as Chris S put it
75 + 25 = 100
75 + 25 + 10 = 140
Three Stooges Math is their economic mainstay :D
Well, first I receive a dozen emails Re: Fiscal Multipliers Debunked? from email@example.com, and they turn out to be from several months ago.
Now I get an email notification of the following post Re: Fiscal Multipliers Debunked? as follows:
"By Jonathan M. F. Catalán in Economics Questions
Hint: The multiplier equation doesn't come from the national income identity."
Only I can find no such post.
What can this mysterious communication mean?
Where is the mysterious Jonathan M.F. Catalan?
Is the mises.org email not only buggy, but also haunted by phantoms?
It appears that both Jonathan M. F. Catalán and his cryptic message have vanished like the promised multiplied income and employment of the Keynesian fiscal "multiplier".