Howdy, gang! I hope you enjoyed last week’s introduction to classical economics by way of Adam Smith because this week we’re going to focus on the person who took Smith’s approach and added several huge wrinkles…which is what we’re pretty much stuck with today. His name is John Maynard Keynes (pronounced as: “Canes”) and he was born nearly 100 years after Adam Smith died, which allowed him to study classical economics long after it began inserting itself into the “American way.”

We had a long stretch of history where Smith’s ideas decided how the economy was handled by our elected officials. Heck, we didn’t even have a national income tax until the 16th Amendment was ratified by the states in 1913! How in the world do we exist and thrive as a nation without a concrete federal income tax policy that (essentially) punishes how successful we are? Anyways, before I get off on a tangent…Keynes took what he knew and added what he thought was rational in an effort to increase efficiencies and decrease inefficiencies found in the economy. His efforts led to what we now call Keynesian Economics…or simply, Keynesianism.

As simply as I can describe it, Keynesianism proposes that the markets sometimes need to be tempered by government intervention. Keynes advocated the use of countercyclical fiscal policies, such as when the government pumps money into the economy when times are tough, but reduces spending when times are swell. His philosophy intrigued politicians (for obvious reasons) and it wasn’t too long before experimentation began.

In my humble opinion, there are two rather big “hiccups” regarding Keynesianism. Since this economic philosophy essentially depends on government stimulus policies, it’s pretty obvious that the government needs money in order to spend money. As depressing as the 16th Amendment is, there’s only a certain amount of funds that the government can raise through taxation until individuals (by virtue of rational behavior) decide to reduce their workload…thus reducing how much they earn…thus reducing how much the government is able to take. What could possibly be the solution to the obstacle of having access to only a finite amount of money? I’m glad you asked!

The solution our government came up with was to get rid of the “gold standard” (the policy of possessing an amount of gold equal to the amount of currency in circulation; the gold standard was essentially abandoned by FDR in the 1930’s, but became officially abandoned by Nixon in 1971) and just print as much money as they need to fulfill their fiscal policy dreams! Since oil is currently traded in US Dollars throughout the world, this decision hasn’t completely crippled our currency; it’s just added an exorbitant amount of inflation, which has devalued our money by a rather large percentage over the past four decades or so. If world markets decide to replace the “greenback” as the currency for oil then…Houston, we might have a real problem!

The second problem I have with Keynesianism is the inherent addiction involved with government intervention. Once policies are implemented, it usually takes additional policies to correct the problems unintentionally created by the original policies. Thus begins the cycle of being seemingly forced into further fiscal (and monetary) policies. Economic bubbles begin to form and people end up hurt. The “housing bubble” of 2008 taught most of us reading this blog a rather poignant and painful lesson. Unfortunately, we haven’t learned from history, which means we’re bound to repeat the same types of mistakes. As a side note, Americans have accumulated more student loan debt than credit card debt and car loan debt…combined! Since our government thought it would be a great idea to essentially nationalize the student loan industry, this should be rather interesting to watch unfold. White knuckle interesting!

So, what’s the best economic model and which one should we exclusively adopt as a nation? Personally, I’m much more of a “Classical Economics” kind of guy, but there’s no way to go back to the purity of unfettered markets without sustaining a huge economic implosion. Keynesianism has too many thick roots embedded in our economy and our government that it really would be impossible to simply abandon the policy. At best, we could decrease our level of fiscal policy dependence and definitely reduce our expenditures on unfunded liabilities and social experiments. We haven’t had a “free market economy” for a long, long, long time…and I don’t believe we’ll ever have one.

The purpose of this week’s blog wasn’t to find a solution or try and decide which economic model is superior, but rather to inform you about the dueling schools of thought as well as acknowledge the economic system we’ve currently found ourselves embedded in. With the alarming popularity that Bernie Sanders seems to have acquired recently, we may be on our way to more of a socialistic or Marxist economic system, thus putting classical AND Keynesian economics in the rearview mirror! Knowledge is power and power is a useful tool to have on your side. It also happens to be a tool that fewer and fewer people have access to these days. Hopefully, you feel a little bit more powerful today.

Be good. Do good. Know good.

Kleiny
Columbus, Indiana

(TWITTER): @KnowGoodThings