Steven Horwitz, the Charles A. Dana Professor of Economics at St. Lawrence University, has five questions for a Keynesian:
1. Why did Keynes think savings was bad if when people save through financial intermediaries they give control over resources to the banking system, which in turn will lend that out to firms to create capital and new jobs?
2. How does government spending create jobs and wealth if the resources that government spends must ultimately come from the private sector, through taxes or reduced borrowing due to government borrowing more (or inflation), and the private sector would have spent it either on consumption directly or on investment through savings anyway?
3. If one of the problems of the housing boom is that we put too many resources into housing and finance, how will a Keynesian government spending package know where that spending should have gone instead?
4. Keynes frequently wrote about the importance of the uncertainty of the future and the way that made things difficult for private investors and for the connection between savings and investment. Why doesn’t that same uncertainty prevent governments from knowing exactly how much and where they should be spending in a recession, especially because markets have prices and profits as signals to help entrepreneurs navigate that uncertainty while government bureaucrats do not have similar signals?
5. Given the enormous role that government interventions played in causing the current recession, from the expansionary policies of the Fed to GSEs like Fannie and Freddie, to misguided regulations in housing and banking, why should anyone believe that the same government actors will know how to solve it?
For the answers to these and other questions, be sure to read Professor Horwitz’s interview with Free Market Mojo.