7 votes

I need help disproving Keynesian Theory

Everyone agrees with this:

  • Consumption is good
  • We cannot consume more than is produced, on net
  • To consume more requires us to produce more

The divide is on HOW to accomplish this. Two basic contradictory proposals:

  1. focus on increasing consumption which will "trigger" the needed production increase...or
  2. focus on increasing production to allow for the consumption increase

I think approach #1 is foolish. But I'm having a really hard time coming up with a simple, clear, concise, elegant explanation to show why it's foolish.

If you've heard such an explanation, or can come up with one, please let me know.

I think approach #1 is the single most dangerous and prominent misunderstanding of economics. Basically all future prosperity depends on debunking it...so no pressure.

EDIT: Thanks for all the feedback. Based on comments, I want to clarify something...

I'm not trying refute the fallacy that GOVERNMENT should decide for us what to consume. Yes, this is definitely a part of Keynesian Theory, but the broken window fallacy already does a nice job of refuting that part of the theory.

I'm saying that EVEN free people deciding on their own to increase their consumption on goods that really would make their lives better, does NOT stimulate the production increase required to meed those new demands.

In fact, those production increases come from the opposite of consumption: they require human work, innovation, technology, and under-consumption.

So whether or not the increased consumption is market driven or government driven, I don't think it causes production to increase, and I'm looking for a good way to show that.

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Hazlitt's work represents the most detailed critical analysis of The General Theory ever undertaken from an Austrian perspective. Hazlitt embarked on this project because, in his view, although general critiques of Keynes and The General Theory had been made, no critic had completed a detailed, paragraph-by-paragraph, analysis of the work and accordingly followers of Keynes could argue that previous critiques were shallow and did not indicate an understanding of Keynes' revolutionary ideas.[1]

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Sorry lost me on second sentence

Why is consumption good? Good for who?

On a personal level I think like this.

Consumption and Production is bad but sometimes necessary.
But if I need to consume then I try to produce what I can.
If I cannot produce what I need to consume then I produce more of what I can and exchange it for what I can't.

So to point 1. Increasing consumption doesn't benefit me if I have to work harder to produce more to meet that unnecessary consumption.
So to point 2. Increasing production would inspire me to consume more than I needed. Again if I have to work harder to increase production then it doesn't benefit me.

So if there is no benefit to me then why increase production or consumption beyond my needs? Apparently because it benefits someone, or someone convinces me that I need more than I really do. But we are all playing the same game so who again benefits?

In balance one person's benefit is another person's loss (rich benefit poor lose almost every time) and the only way this is not true is when:

The productivity increases without working harder because of technological advances.
Then consumption needs can go up without any impact to someone else. I.e standard of living increase match technological advancement

For this though we need a currency exchange that tracks technology or man hours or 1kwh electricity or something tangible. So Austrian economics is better than Keynesian economics!

Keynesian vs. Austrian is a diversion from the problem

The real problem we have is Fed counterfeiting truck loads of money, which is really stealing wealth from the people. When this is fixed most problems are solved. Since this free money is used for buying politicians, foreign governments, private armies, corporations, etc. nothing is going to work for the people. Ask Ron Paul for further clarifications.

Shrink the economy to two people:

And they produce two peaches and two apples, the two people will somehow share four pieces of fruit.

If there are four peaches and four tomatoes, the two people will figure out how to allocate their eight pieces of fruit.

Add enough people, and you'll need pricing and markets, but regardless of scale it remains fundamentally the same. Increased production enables increased consumption; not the other way around.

Some people get lost in tremendous volumes and millions of people, and imagine that "boosting demand" means something, but consuming is not producing. Ultimately someone has to grow the peaches.

Author of Shades of Thomas Paine, a common sense blog with a Libertarian slant.


Also author of Stick it to the Man!


Keynesianism says nothing

Keynesianism says nothing about the government making the choice for you.

The answer to your question is that both things are true.

If an economy has gains in productions, the gains go to lower prices, which go in the pockets of producers, which causes higher buying power, which goes into the pockets of consumers. If an economy has gains in consumption, the gains go directly to the producers, which causes higher buying power, which goes into the pockets of consumers.

See, some people argue that the reasons we don't have more jobs, is because it is too expensive (production costs) to create those jobs. Others argue that people aren't creating jobs because they don't see the demand necessary for the jobs to be created.

In reality, it is all cyclical. If you can reduce an industry's (this is important. An industry, not a company) production costs, they can make goods cheaper, which will attract more demand. This will lead to them needing to hire more people, which will create jobs, which will put even more consumption back into the economy.
On the other side, if you can increase the ability of the consumer to consume, they will buy more of the goods because they have more consuming power. This will cause companies to hire to meet the increased demand for the goods. This will create jobs and put even more consumption back into the economy.

This is exactly what fractional reserve banking attempts to do. By allowing the banks to create practically as much money as they want (while in a free market, assuming all the risks of creating that money), you can get everything in one. In this system, savings no longer matter. Because savings no longer matter, people can (and, of course, will) consume as much as they want. Hell, they will borrow money to consume more than they want. And by allowing the cost of production and investment to be relatively cheap/set by the market, you are removing production barriers.

The downside is, you cannot assume that the market is perfect. If you allow the market to dictate its own levels of risk, you cannot naturally assume that it will adjust risk in a way that you think is beneficial.

Moreover, there lies in an issue in trying to reduce production costs or increase demand in a temporary or sustainable matter. When you do the first, you are banking on the action taken being sufficient to cause an economic boost that will cover the consequences of the temporary action. For example, in supply-side, if the government allows farms to pollute more, that will reduce costs. However, it will cause environmental damage from the pollution, which will have tangible economic costs. The government is making the bet that the lifted regulation will cause an increase in the economy to offset the temporary damage. Demand-wise, take any government stimulus. The government borrows money from the taxpayer or the loanee to do some economic stimulus. They are hoping that the stimulus will offset the interest cost or hit to savings.

So, we should aim to remove barriers that are more sustainable. Supply-side, remove taxes. Demand-side, remove bans.

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

Advertising is done in an effort to increase consumption.

Advertising is a manyplus-billion dollar industry. Aside from producing memorable jingles advertising produces sales. More advertising produces more desire for consumption which produces more consumption.

This is why all Keynesians should shave the sides of their heads and rent them out for advertising space. I believe people would stop arguing with them entirely if they did this.

Chris Indeedski!

Daily Paul cured my abibliophobia.

Advertising shifts consumption, not macro increase

Effective advertising will create shifts in consumption: consumers will buy more of the advertised products and less of other things.

I don't see how that can happen at the macro level, though.

Basically advertising increases "want" of a product. Advertising all products to increase the "want" of all products (and eventually consumption of all products), definitely sounds like a Keynesian plan...and I think it would be foolish.

It's not the "wanting" of goods that's limiting our prosperity. That's already hardwired in to human nature. The limit is our ability to produce more goods. That comes from time, work, technology, and innovation...all of which require investment and savings and UNDER-consumption in the present.

They put the cart before the horse.

You have to first produce something before you can consume it.

Check out the Laissez-Faire Journal at LFJournal.com

"The State is a gang of thieves writ large." - Murray Rothbard


End of discussion.

Author of Shades of Thomas Paine, a common sense blog with a Libertarian slant.


Also author of Stick it to the Man!


LOL.Hey guys, I need help


Hey guys, I need help disproving the necessity of the state. Can anyone help?

There's a post on here somewhere about how we all see what we want to see. "Disproof" doesn't exist except in the mind of the interpreter of information.

In this vein, Keynesian Theory will never be "disproven" any more than any religion's faith will be disproven.

All the same, I wish you the best.



I'm a bit more optimistic though.

You might very well be right. But I just can't accept that we can never discover truth. If that's the case, then seriously, what's the point?

This will explain everything


Lots of people dismiss this because of the presentation; don’t let that distract you….it’s really outstanding. If I was really looking for the answers to your questions I would write out the lyrics, maybe even divide them between the players (watch it you’ll see).

If you need more information or clarification let me know….enjoy

PS if you need written information read Dr Benjamin Anderson's classic work "Economic and the Public Welfare". He had a whole chapter on Keynes.

"Before we can ever ask how things might go wrong; we must first explain how they could ever go right"


Thanks for sharing

I've seen it before, and like it a lot.

I really like "Fight of the Century": http://www.youtube.com/watch?v=GTQnarzmTOc I'm often able to bring up examples from that video.

Ironically, there's a Christmas themed one that deals EXACTLY with this issue (fallacy of consumption driving the economy): http://www.youtube.com/watch?v=7uKnd6IEiO0 But I think that one is less sufficient in its explanation...and not a real fair debate, so it would put off people who hold that fallacy as true.

the fundemental flaw

The fundemental flaw is that human labor should never be wasted.

Key word is human. as we automate and increase the average persons productivity we no longer require so much production per person so workers go idle.

No single person or group can permanently delay the inevitable shift to a resource based society. Right now the government spwaned an entire artificial industry catering to products that nobody wants or needs to help spur human employment.

The pace of automation is FAR outpacing the governments ability to artificially create demand and within the next 5 years most business will be automated.

The real question is what do we do with all the unemployed people... how do we increase consumption of those with no income?

#1 is the ONLY option because we already have an overabundance of production... at least in first world countries.

Tools of war are not always obvious. The worst weapon is an idea planted in the mind of man. Prejudices can kill, suspicion can destroy, and a thoughtless, frightened search for a scapegoat has an everlasting fallout all of its own.


You trying to say that we already produce MORE than what we want... and the whole problem is figuring out how to consume it? No, there is no such thing as "overabundance" in a world with limited resources and unlimited wants.

"Overabundance of production" is non-sense, but is a prerequisite to socialism. Of course, if this overabundance doesn't exist, then trying socialism would be stupid.....

.....Yep, we all still want more, people are still in debt, the FED is still handing out free money so it's "customers" can balance their books..... And that's just in first world countries.

"Overabundance" is no way of describing,"making stuff that no one wants to spend their money on." That's mis-allocation of resources, and causes an UNDER-abundance, or scarcity, of the things we actually DO want.

"I do not add 'within the limits of the law,' because law is often but the tyrant's will, and always so when it violates the right of an individual."

Im not saying this is right...

Im not saying this is morally right... but this is what the first world countries are essentially is doing.

this is why I said "No single person or group can permanently delay the inevitable shift to a resource based society. "

We have the capacity of over production and WE DO over produce because the idea of economic success is flawed.

As long as economic success is measured in low unemployment and high consumption then government will keep trying to artificially create demand(consumption) to make the economy look better.

Tools of war are not always obvious. The worst weapon is an idea planted in the mind of man. Prejudices can kill, suspicion can destroy, and a thoughtless, frightened search for a scapegoat has an everlasting fallout all of its own.

"The pace of automation is

"The pace of automation is FAR outpacing the governments ability to artificially create demand and within the next 5 years most business will be automated."
I think this prediction is a bit ambituous and unrealistic. This to me, is like those people in the 70s that said we would have rocket cars.

To climb the mountain, you must believe you can.

technological innovation is exponential

technological innovation is exponential.

"rocket cars"(helicopters or small planes) would be feasible if it were not for government regulations, existing transport systems(like roads) and fuel costs. but that is besides the point.

the cost of robotic automation is hitting a sweet spot in price. 5 years ago a 3d printer or a programmable robot "worker" was like 150-500k dollars... now a high end 3d printer is 1000 dollars and a programable robot automation system is around the 20k mark... both of which are more advanced/versatile then the 4 year old 200k systems.

At that price, an average small business can buy several systems instead of hiring workers RIGHT NOW. but in 5 years we may have 1500$ programmable robot systems.

Its no stretch to imagine many(if not most) service and manufacturing jobs will be automated in another 5 years.

Tools of war are not always obvious. The worst weapon is an idea planted in the mind of man. Prejudices can kill, suspicion can destroy, and a thoughtless, frightened search for a scapegoat has an everlasting fallout all of its own.

I do not think people

will care about abstract logic. Even 70% of our folks do not stick to reason and embrace anarchism or populism. As far as morals, religious share the same morality of sacrifice for common good as socialists do.

Regarding Keynesian:
1) Politicians, foodstamp recipients, affirmative-action recipients, veterans on fake stress syndrome disability, police trade unions, etc would care less for the long term solution if their today's government paycheck is cut even by 10%. People want free stuff from the government today, not in 10 years.

2) Intellectuals, trade unions and affirmative action recipients do not want to work hard as free-market capitalism would requre.

As long as the system can milk the rest of the world by printing paper money that others value as gold, Americans wont quit the ediction. It would be foolish even for faithkeepers policemen who live on taxpayers money.

"Even 70% of our folks do not

"Even 70% of our folks do not stick to reason and embrace anarchism or populism."

Crap, I missed your scientific poll of the DP community?

Econ 101.

You can't say "consumption is good." As it may be good for some, not for others and all varying levels in between as determined by each individual human's and corporation's individual utility for consumption.

You can say, people need to be able to determine the best use of their own resources without external interference for the pricing mechanism to work correctly and for supply and demand to align.

At a macro scale (Econ 102) you can point out the basic macroeconomic equation for GDP. It's not subjective.

Keynsianism works on a VERY VERY LIMITED basis in VERY VERY SPECIFIC limited circumstances which is....

...in a FREE market, during the process of debt LIQUIDATION, when markets are not clearing, the monetary base is SHRINKING and the macro economy is contracting, one-time government stimulus will help markets clear.

That's it.

It has been bastardized and extrapolated to assume incorrectly that government spending "stimulates" the economy. I guess it does, the way that crack cocaine "stimulates" a person, including all subsequent consequences.

The problem today is we do not have a free market, we are not liquidating debt, and the monetary base is INCREASING.

So, all that the government is doing now is pushing crack on the economy.

Ultimately, the economy will need to go through detox before it can return to health. Feeding it more crack only pushes off the day of reckoning and will make that day worse.

the monetary base is SHRINKING

Can you clear this up......the money supply could be shrinking.....either M2 or M3.....but that would be because volicity would be slowing.......but i don't think the monetary base would be shrinking....unless the Fed was liquidating assets.....shrinking it's balance sheet,which would be draining money from the system....at exactly the wrong time....which is the exact opposite of what they would do....they would want to be adding to the system by buying assets.

"Before we can ever ask how things might go wrong; we must first explain how they could ever go right"


Maybe this then....

Consumption is..."the whole point"

is that better?

In the economic sense, consumption is enjoying our productive efforts in ways that make our lives better.

The only reason to under-consume in the present is so we can consume more in the future...again, consumption being the goal...and I'm sticking with "good". :)

No. That's Keynsian thinking.

Economics demonstrates that FOREGONE consumption that is rather INVESTED, increases overall economic prosperity.

This is the bane, i.e. the weakness of Keynsianism. Keynsianism says that consumption drives prosperity. That's true when private investment has been CROWDED OUT by government spending. Money spent by government is money NOT invested by the private economy.

Government spending must be reduced. There will be a temporary shock as investment dollars realign to private investment.

Again, the government "stimulus" is equivalent to crack. The "realignment" is equivalent to detox. And the private investment is the former crack addict engaging in productive activity.

eh, still missing my point

I'm not saying consumption is good because it "drives prosperity". Consumption is good because it IS prosperity.

Certainly, that is not a prescription to increase consumption now. Austrians argue (which I agree with) that we should consume LESS (now) and save/invest more (now) to increase productivity in the future...but even they understand that the reason to have increased productivity is so we can have more consumption in the future. Consumption is the goal.

If consumption isn't the end goal (enjoying the fruits of our labor), then what do you think is? The labor itself? If that's the case, you're welcome to come over to my house...I'm sure I could giving you all kinds of "prosperity" (work).

Why government stimulus is even in this debate is confusing to me. I'm not talking about government stimulus. I'm talking about consumption...even consumption by choice by free people.

But you have to consider government spending

I see your point on consumption, i.e. current vs. future consumption.

Government spending steals consumption from the future and spends it now in order to "stimulate" the immediate or immediate next period. It draws DOWN investment and, hence, future prosperity (future consumption). It lowers the trajectory of productivity growth arising from investment (from the trade off of current consumption vs future consumption.)

If these points haven't been

If these points haven't been addressed already, I'd like to add them:

Economic Calculation Problem:
^explains why central planning is always less efficient than the market

How an Economy Grows and Why it Doesn't:
^explains capitals, savings, consumption, and risk in a comic book format

To the OP

The best analogy is given by Peter Schiff in his 2006 mortgage bankers speech. He tells a story about fishermen on an island. It's a really easy way to grasp production and consumption. I forget how far into the video it is, I believe it's parts 1 or 2.


The reason why your question is difficult to answer, and why so many people fall into the Keynesian trap, is because you ignore capital.

In the short term, #1 absolutely holds true. If you focus on consumption, it will in fact trigger additional production. However, it will happen at the expense of capital. Capital comes from savings, which comes from delaying consumption. If you increase consumption, you decrease savings, which decreases the future stock of capital. As a result, you won't be able to produce as much in the future. In other words, focusing on consumption in the future will be harder, as things will become more expensive, so every incremental dollar of "stimulus" won't create as much demand.

In the long term, focusing on production means you are putting off your consumption, investing instead in additional capital. As a result, you are able to produce more later, which makes it cheaper. As a result, you will be able to consume more later.

In the island fisherman analogy, the fishermen can either choose to spend their time manually catching and eating fish (consumption) or weaving fishing nets (savings). By putting off consumption and instead investing in nets, they are able to fish (produce) much more in the future due to the capital (the nets). As a result, they are able to consume more later. If you stimulated demand, people would simply manually catch more fish, but they wouldn't create more nets for the future, so in the long run you're hurting yourself. Hope that helps!


Actually, I own Peter Schiff's more recent copy of the book.

Completely understand and agree with the premiss about capital and savings.

But even in that example, before they have nets, increasing demand can't help them catch more fish. Even in the short run.

According to the story, they already spent all day trying to catch fish by their hands (maximized their productive efforts) and could only catch one fish each day.

They couldn't possible increase consumption, and even wanting to increase consumption wouldn't help.

I'd argue that consumption doesn't in any way lead to increasing production, not even in the short run.

ding, ding, ding!!!


It is not a matter of production vs. consumption

It is a matter of consumption of standard "stuff" now vs. consumption of more, cheaper, better "stuff" in the future.

IT'S ALL CONSUMPTION!!!! The question is WHEN to consume.

"I do not add 'within the limits of the law,' because law is often but the tyrant's will, and always so when it violates the right of an individual."