How Keynesian Economists Understand the Wealth Creation Process

The followers of economist John Maynard Keynes teach that national prosperity comes from spending: consumer spending and government spending (plus business spending on investment, and net exports).

Saving, in their view, reduces the Gross National Product, because it reduces consumption spending. They believe that people who are not spending because they are saving are hurting the economy which needs constant spending to maintain full employment.

Business investment, to a Keynesian, is good because it is a form of spending. But they teach that it is no better for the economy than any other kind of spending: people buying movie tickets, or the Defense Department buying uniforms.

The wealth creation process is not considered important to a Keynesian. If the economy is not doing well (many unemployed), it can be remedied easily by increased government spending, taken, not from taxes, but from creation of new money, or borrowing. Government borrowing to finance their deficits is considered good by the Keynesians because it takes savings and turns them into spending. This is why they consider increases in the national debt to be good for the economy.

Government enterprises that lose money and require subsidies are of no concern to a Keynesian. As long as money is being spent so that employment is maintained, it is a mere bookkeeping problem whether the money comes from the purchasers of the government goods and services, or from the taxpayers. Since to Keynesians the goal of economic policy is to maintain full employment, a backward government enterprise which loses money but employs many people is probably better at maintaining full employment than an efficient one.

In short, to a Keynesian, savers are the cause of much of what ails our economy, and investors are not much better: motivated by what Keynes called “animal spirits”, investors like Fred Smith or Bill Gates are not public benefactors, but private citizens whose pursuit of private greed has brought them wealth which may safely be taxed away to maintain full employment.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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