A Deviation from Keynesian and Return to Capitalism

The economy has cycled through various paradigms over the centuries.  It has shifted from feudalism to capitalism, capitalism to communism, and finally a mixed economy based on Keynesian principles.  I contend that the Keynesian economic policies that have been in practice for the last fifty years have not engendered the same success as Adam Smith’s laissez-faire economic policies.  The Keynesian economic policies used are stifling and limit the individual, whether a person or a business.  I will demonstrate that while Keynesian economic policies may have been appropriate during the economic environment after World War I, they have become outdated and are unable to meet the economic issues that we are facing today.  Keynesian economics and the welfare programs currently used throughout the world create governments that are too big and unwieldy and strip the individual of their basic rights and moral ethics.  I will provide my view on how an individual’s interests are best served when capitalism reigns free and individual rights are restored.

In The New Liberalism Keynes outlined the economy’s development throughout history.  During the 15^th and 16^th centuries, there was maximum governmental control and minimum individual liberty.  The power elite held control based on physical coercion of the masses, for example through wars.  From the 17^th and 19^th centuries there was an era of abundance with maximum individual liberty and minimum governmental influence.  This was the age of the laissez-faire economic theories postulated by Adam Smith in his book The Wealth of Nations written in 1776.  During this phase large corporations conducted their business without interference from the government.  The invisible hand controlled the markets when the individual choices of buyers determined where the resources were directed.  The markets were free to cycle with little to no regulations.  The final stage of economic development was a period of stabilization.  During this stage individual liberties began to decline and governmental control of the markets increased.  The government was tasked with creating a stable economy and promoting social justice.

In The Psychology of Modern Society, Keynes further theorized that under free market economics, the smallest segment of society held the largest portion of the money.  This group saved the majority of its income and did not spend it which could have instilled growth in the overall market.  Under capitalism, corporations or businesses owned the means of production.  Individuals had to sell their labor in the market to gain access to those means of production and obtain the basic necessities such as housing, food and clothing.  This was accepted as the normal standard.  Keynes believed that after World War I the working classes were no longer willing to accept this.  They were no longer willing to allow a small percentage of the population to control the money and directly influence the markets.  Keynes believed that in order to engender growth in the markets, money needed to be spent and the best authority to manage the economy was the government. 

Keynes economics influenced the creation of the New Deal, and became the established economic doctrine after World War II.  Keynes wrote The General Theory of Employment, Interest and Money in 1936 and was attempting to create a new rule book that would allow the government to manage the economy through fiscal and monetary policies.  Under Keynes view, the government was charged with stabilizing markets, provide for continued expansion of the market and achieving full employment of the working population.  Government achieved these goals through spending, taxing and borrowing.  The government became a consumer that borrowed money to spend on public works projects.  The purpose of borrowing was to create a deficit which would in turn create jobs and increase the purchasing power in the markets.  Further, in following the Keynesian principles the government assumed the responsibility of providing welfare benefits to the population.

It is my contention that we are beginning to witness the dark side of Keynesian economic policies.  I do not believe that Keynesian economics are able to meet the challenges of the economic crises that we have been experiencing since 2008.  I believe that we are losing our identity under these economic practices.  We are losing touch with the basic moral principles of frugality, industry, personal responsibility and common sense.

Keynesian economics devalue the individual.  Governments that follow the policies create welfare programs that engender the belief that the government will provide the citizens with the basic necessities of life.  This creates an entitlement mentality and the expectation that the government will provide more benefits, when in reality it cannot afford these programs.  This engenders the creation of individuals who are no longer producers in their own right and working for the benefit of themselves, their families, and their communities.

Further under Keynesian economics the government has gotten too big and the resultant bureaucracy is unmanageable.  The government is creating too many regulations that prohibit free enterprise and entrepreneurship.  Prior to the housing market collapse in 2008, our country followed mixed economic policies that involved both Keynesian economic policies and free market premises.  The government had no direct control over the market.  However, after the economic collapse, the government began enacting severe regulations on the markets. 

For example, the government created the TARP program that purchased the bad debts of millions of defaulted loans and other toxic assets from the banking industry.  This was done to prevent the banking system from collapsing, however in return for accepting the monies, the banks were forced to follow the strict regulations enacted by the government.  The government also bought stock interests in General Motors which effectively nationalized the company.  Finally, the recent health care reforms that have been passed are attempting to regulate the health care industry.  The crux of this program is the requirement that all individuals must have health insurance or else they will be penalized with a fine.  This is an attack by the government on individual rights.  This provision of the law is being addressed in the legal system to determine if the individual requirement of having health insurance violates the United States Constitution, and ultimately individual rights. 

These regulations are evidence that our government no longer promotes a mixed economy and is entering into the area of central planning in an attempt to control the market.  Further, it is my opinion that the government is using these fiscal and monetary policies to encroach upon the rights of the individual, both people and businesses. 

Keynes was right in his analysis of the progression of society in terms of its economic development.  However, the practice of Keynesian economics has supported the development of an anti-capitalistic viewpoint.  Businesses are punished with high taxes and sanctions.  The producers are vilified for accumulating wealth.  The government is acting under the guise of preventing the businesses from abusing the system and attempting to keep them honest.  Yet under the current regulation, a company that has altruistic purposes is also being punished and limited in their development.  Such regulations and controls on the markets are not the answer to solving our economic issues.  These regulations stifle and prohibit growth.  Under these conditions, the government becomes the strongest entity and controls the markets.  We are no longer a mixed economy; we are becoming a centrally planned economy.

The government is in essence punishing a successful individual for achieving their goals and earning their reward.  This can instill a belief that it does not pay to work hard or be creative as the government will simply take the reward.  Further, the welfare policies in place create a dependence on the government and the expectation that the government will provide services from the cradle to the grave; in other words a nanny state. 

The ultimate power of deciding which regulations and programs to enact is held by small group of individuals, for example to Federal Reserve, Securities Exchange Commission and the United States Treasury.  This premise goes against Keynes original critique of capitalism with a small group of people having control of large amounts of money.  This small group of individuals are attempting to predict how the markets will react to the measures they put into place.  With respect to the social justice movement, this group is also attempting to predict the wants and needs of the citizens.  This group of individuals has the power to make policies, create restrictions and attempt to control every aspect of our lives.

The best approach to resolving the economic crises is a return to the laissez-faire markets.  The free market principles support individual rights and rational actors.  It assumes that individuals will act in their own self-interests and are able to make rational choices.  It assumes that people can rationally decide what they can do without versus what they need and will make the appropriate choice.  Keynes economic policies take that rational choice from the individual and make the decision for them.  The government is thinking for its citizens, they are no longer thinking for themselves.

The government needs to be downsized.  The unwieldy and expensive programs set forth by the government need to be returned to the private sector.  Also due to its sheer size, the government is not able to respond quickly to a crises when it arises.  Alternatively, a business is able to react quickly as it is specialized and focused on one aspect of the market and not like the government attempting to control and predict the activities of the entire market. 

Also, the countries that have Keynesian policies in place are reverting to free market practices.  China is an example.  Their economy was centrally planned, but due to the severe limitations and lack of ability to accurately predict the wants and needs of the market, China began to emulate free market practices.  China is now on the threshold of becoming the dominant economic power. 

As further support for the free market, it has also been proven that capitalism raises the standard of living for everyone.  Capitalism was responsible for the technological advancements in medicine, science and computers.  It also engenders competition between businesses which allows for those companies to better themselves and thereby create better products and services that are purchased on the market. 

While I do not want to return to the dog eat dog capitalism that was popular prior to World War I, I think that the current economic policies stifle the individual and that the ultimate answers to the economic crisis actually lie with the individual.  Businesses do need to be observant of the basic moral principles of responsibility, honesty and integrity.  The government does need to be involved in overseeing the economy to make sure that there are no abuses of the system and also enforce reasonable regulations on businesses that violate the rules.  However, the government should be once again limited from interfering with the markets with monetary policies.  The government is closely approaching a centrally planned system that as we know from history has always failed.  If the role of government is not curtailed there is, in my opinion, no foreseeable resolution to the economic crisis but the bankruptcy of the United States and other nations.

In closing, the ultimate responsibility lies within the individual.  We are partially responsible for the current economic conditions.  We must begin to educate ourselves about the issues facing the nation.  An educated populace is the best protector of their own freedom and self-interests.  The better educated we are and the more actively we are involved in monitoring the government and businesses, it will in turn force them to be more aware of where the power ultimately lies and the policies will begin to change.  We need to return to the values of hard the work, honesty, a sense of purpose and accountability for one’s actions.  If the government continues using Keynesian economics we will be living in a nanny state and H.G. Wells 1984 will become a reality.