Here's your explanation, from the Bastiat link given earlier: "2. The Demobilization 1.22 A nation is in the same case as a man. When a man wishes to give himself a satisfaction, he has to see whether it is worth what it costs. For a nation, security is the greatest of blessings. If, to acquire it, a hundred thousand men must be mobilized, and a hundred million francs spent, I have nothing to say. It is an enjoyment bought at the price of a sacrifice. 1.23 Let there be no misunderstanding, then, about the point I wish to make in what I have to say on this subject. 1.24 A legislator proposes to discharge a hundred thousand men, which will relieve the taxpayers of a hundred million francs in taxes. 1.25 Suppose we confine ourselves to replying to him: "These one hundred thousand men and these one hundred million francs are indispensable to our national security. It is a sacrifice; but without this sacrifice France would be torn by internal factions or invaded from without." I have no objection here to this argument, which may be true or false as the case may be, but which theoretically does not constitute any economic heresy. The heresy begins when the sacrifice itself is represented as an advantage, because it brings profit to someone. 1.26 Now, if I am not mistaken, no sooner will the author of the proposal have descended from the platform, than an orator will rush up and say: 1.27 "Discharge a hundred thousand men! What are you thinking of? What will become of them? What will they live on? On their earnings? But do you not know that there is unemployment everywhere? That all occupations are oversupplied? Do you wish to throw them on the market to increase the competition and to depress wage rates? Just at the moment when it is difficult to earn a meager living, is it not fortunate that the state is giving bread to a hundred thousand individuals? Consider further that the army consumes wine, clothes, and weapons, that it thus spreads business to the factories and the garrison towns, and that it is nothing less than a godsend to its innumerable suppliers. Do you not tremble at the idea of bringing this immense industrial activity to an end?" 1.28 This speech, we see, concludes in favor of maintaining a hundred thousand soldiers, not because of the nation's need for the services rendered by the army, but for economic reasons. It is these considerations alone that I propose to refute. 1.29 A hundred thousand men, costing the taxpayers a hundred million francs, live as well and provide as good a living for their suppliers as a hundred million francs will allow: that is what is seen. 1.30 But a hundred million francs, coming from the pockets of the taxpayers, ceases to provide a living for these taxpayers and their suppliers, to the extent of a hundred million francs: that is what is not seen. Calculate, figure, and tell me where there is any profit for the mass of the people. 1.31 I will, for my part, tell you where the loss is, and to simplify things, instead of speaking of a hundred thousand men and a hundred million francs, let us talk about one man and a thousand francs. 1.32 Here we are in the village of A. The recruiters make the rounds and muster one man. The tax collectors make their rounds also and raise a thousand francs. The man and the sum are transported to Metz, the one destined to keep the other alive for a year without doing anything. If you look only at Metz, yes, you are right a hundred times; the procedure is very advantageous. But if you turn your eyes to the village of A, you will judge otherwise, for, unless you are blind, you will see that this village has lost a laborer and the thousand francs that would remunerate his labor, and the business which, through the spending of these thousand francs, he would spread about him. 1.33 At first glance it seems as if the loss is compensated. What took place at the village now takes place at Metz, and that is all there is to it. But here is where the loss is. In the village a man dug and labored: he was a worker; at Metz he goes through "Right dress!" and "Left dress!": he is a soldier. The money involved and its circulation are the same in both cases: but in one there were three hundred days of productive labor; in the other there are three hundreds days of unproductive labor, on the supposition, of course, that a part of the army is not indispensable to public security. 1.34 Now comes demobilization. You point out to me a surplus of a hundred thousand workers, intensified competition and the pressure that it exerts on wage rates. That is what you see. 1.35 But here is what you do not see. You do not see that to send home a hundred thousand soldiers is not to do away with a hundred million francs, but to return that money to the taxpayers. You do not see that to throw a hundred thousand workers on the market in this way is to throw in at the same time the hundred million francs destined to pay for their labor; that, as a consequence, the same measure that increases the supply of workers also increases the demand; from which it follows that your lowering of wages is illusory. You do not see that before, as well as after, the demobilization there are a hundred million francs corresponding to the hundred thousand men; that the whole difference consists in this: that before, the country gives the hundred million francs to the hundred thousand men for doing nothing; afterwards, it gives them the money for working. Finally, you do not see that when a taxpayer gives his money, whether to a soldier in exchange for nothing or to a worker in exchange for something, all the more remote consequences of the circulation of this money are the same in both cases: only, in the second case the taxpayer receives something; in the first he receives nothing. Result: a dead loss for the nation. 1.36 The sophism that I am attacking here cannot withstand the test of extended application, which is the touchstone of all theoretical principles. If, all things considered, there is a national profit in increasing the size of the army, why not call the whole male population of the country to the colors?"
Cutten, I appreciate your viewpoint and explanation. It has gave me some great new insight on this subject, especially the part of why government doesn't employ 100% of people 100% of the time. But going back to the thread subject, how would you compare Keynesian economics to that of a doing nothing approach? I am unable to see a way of comparing the two because of the immense number of variables affecting the outcomes of both systems over a given time period.
But the US acts like it has an infinite pot of money. Does that count? Personally, I can't wait until the government can't borrow at ludicrously low interest rates anymore. Once the easy money is taken away, we'll see the fallacy of our government's philosophy/actions.
'... A nation is in the same case as a man..'. That's what the Keynesians are so afraid of.The individual can deduce from his/her day-to-day dealings with finance that Keynesianism is bunk. Bernanke is a High-Priest or Wizard of Oz. We just need to pull back his curtain. (Or buy him a Diamond encrusted Beard-Trimmer and he'll never leave the house).
Hi, just a question : don't you think that multiplier effect as presented in Keynes'theory is unlikely to work with the same efficiency ? We are in fully globalized economies which reduces substantially the benefit for local producers + keynes policy was done at a period when information (the depth and seriousness of the crisis) could not reach the target (you and me) before the extra cash distributed. Now no matter how much you inject in the economy to encourage consumers expenses it seems to me that as they already know the level of pesimism around (thanks to internet, mass medias..) they will not spend in the proportions expected by Keynes in his theory. Not only we are in fully opened economies but the assimetry of information between the crowd and the policy makers is far narrower. sorry for my English,
Japan tried this for 15 years in a row, yet the consumer resolutely refused to "spend" with abandon. All they had to show for their ballooning government debt (now 180% of GDP) was a bunch of bridges to nowhere and similar white elephant projects, along with a zombified banking system. Yet this is what the west is now doing, they are following the Keynesian Japan playbook to the letter. There is also the question of who is to say consumers should spend and not save? Why is spending on consumables a good idea when your balance sheet is in tatters? What on earth is anyone doing telling other people what their spending preferences should be? It is not only economically flawed, it is fundamentally authoritarian and illiberal, and contradictory to the idea of a free society.
The most common approach to measuring and quantifying GDP is the expenditure method: GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X − M). C is down due to house prices falling and credit cards being maxed out. I is down due to in part to C being down ie inferred logic. So increasing G does in this case bring about an increase of GDP vs doing nothing. We don't want to increase G when the economy is doing well since that crowds out normal I which will not be able to compete for the same goods and services as the government is able by paying an above market price. Other considerations: 1) The US dollar is actually up vs the other world currencies making it less expensive to import consumables and also now a better return on investment for say China than investing in either the GBP or the EURO which have been tanking. 2) $ being up is good for China to allow them to keep their people employed making products for the USA. 3) China gets $ when selling products to the USA. So all things being equal, spending more money to stimulate the economy is the best response from the government. I actually think they should increase spending by another $ 1 trillion to be spent on repairing the roads, etc in a green way as possible including incentives to buy and build green cars. The problem with Japan is that they have a shrinking population base and did not actually clean up the assets in their banks like the administration hopefully will try to do or is trying.
It also didnt work because global capital markets cant really be overtaken by one government. All the money just fled japan for other pastures.
There is relatively little keynesianism now (for the big size of US economy). More even less if war is over.