How Keynesian Ideas Weaken Economic Fundamentals

Whenever there are signs that the economy is likely to fall into an economic slump most experts advise that the central bank and the government should embark on loose monetary and fiscal policies to counter the possible economic recession. In this sense, most experts are following the ideas of the English economist John Maynard Keynes.

Briefly, John Maynard Keynes held that one could not have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy.

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Successful management in the Keynesian framework is achieved by influencing overall spending in an economy. It is spending that generates income. Spending by one individual becomes income for another individual according to Keynes. Hence, the more that is spent the better thing are going to be. What drives the economy, then, is spending.

In the Keynesian framework the largest part of spending is consumer outlays. Thus consumer outlays are regarded as the motor of the economy—consumption sets in motion real economic growth.

But one must make a distinction between productive and nonproductive consumption. Although productive consumption is an agent of economic growth, nonproductive consumption leads to economic impoverishment.

Productive Consumption

For instance, a baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now sustaining the baker while he is engaged in the baking of bread. Likewise, the bread sustains the potato farmer while he is engaged in the production of potatoes. Here the respective production of the baker and the potato farmer enables them to secure goods for consumption.

What makes the consumption productive here is the fact that both the baker and the potato farmer consume in order to be able to produce consumer goods. The consumption of both the baker and the potato farmer sustains their lives and well-being, which is the only reason for production.

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