Comment: Start with the broken window fallacy.

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Start with the broken window fallacy.

At any given time, there is a certain quantity of resources in the economy: labor, land, and capital. When one sector of the economy is "stimulated" resources are directed toward that sector and away from another sector: call this the "de-stimulated" sector. The "multiplier effect" emanating from the stimulated sector is counterbalanced by an inverse multiplier effect emanating from the de-stimulated sector.

For a simple illustration of this concept, see Chapter 2 of "Economics in One Lesson" by Henry Hazlitt.

However, it does not follow that the effect of stimulus "nets out" to zero, since not all economic activity is equal. On what basis can we compare the economic activity generated in the stimulated sector to the economic activity which has to be forgone in the de-stimulated sector?

The only rational means of comparing different enterprises is through profit-and-loss accounting. The more profitable enterprise is the preferable one, the one which is most conducive to the general prosperity. Public enterprises are, for well understood theoretical reasons, rarely if ever profitable at all, and certainly not as profitable as private enterprises. Likewise, government interventions in otherwise private enterprises tend to support the less profitable at the expense of more profitable competitors.

Keynesian stimulus invariably shifts resources from more profitable enterprises to less profitable enterprises, thereby wasting resources, and leaving society poorer than it would have been had those resources been directed by the market.

In the end, it's not about consumption versus production, neither is good or bad in itself. It's about who/what is directing resources in the economy: the market or the State. The Keynesians are in error because they believe that the general prosperity can be improved by having the State direct resources instead of the market - same as the socialists.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."