Criticisms of Keynesian Economics

Common defense to criticisms of Keynesian economics invariably comes to an argument that it is merely a short-run theory: it is an analysis focusing on short-run fluctuations rather than long-run growth issues. The policy recommendations proposed by Keynesianism are to stabilize economic operation, not to promote economic growth. Specifically, they aim to keep GDP as close as possible to its potential.

However, Keynesian economics fails even as a short-run theory, because its underlying logic is flawed.

The Key Arguments Explained

1. Keynesians mistakenly approach macroeconomics from the perspective of demand.
2. Keynesians advocate for the concept that consumption is a stimulus to economic growth. But it is a reversal of ends and means, as well as a confusion of cause and effect.
3. A decline in the propensity to consume is not always adverse. Nor is it the reason for insufficient effective demand.
4. Keynesians omit pseudo-GDP.
5. Interest rates are both the cost and the return of investments. Low interest rates, meaning low production costs, also imply low investment returns. There is no simple justification to assert that low interest rates drive economic growth.
6. Keynesians claim that only trade surplus, when exports exceed imports, contributes to GDP and increases wealth. However, free trade creates wealth and is mutually beneficial, which is exactly why we need it. Under free trade, whether it is a trade surplus or a trade deficit is a natural result, never a problem.
7. Keynesianism fails to discern the difference between GDP production and GDP accounting, \(GDP=C+I+G+NX.\)
8. Keynesians attempt to smooth out economic cycles, which they do not appreciate.
9. Keynesians cannot grasp that partial equilibrium is merely a theoretical abstraction and doesnot exist in reality.
10. Kaynesians advocate against ordinary monopolies that arise from market competition, while they do not oppose the government’s administrative monopoly over coinage.