Tuesday, March 17, 2009

More about the Limitations of Keynes

Economist Don Boudreaux, in response to comments from readers, explains his views on Keynes's shortcomings as an economist:

I have never disputed that Keynes was a great pioneer in probability theory. I do dispute that he was a great economist.

His ruminations on animal spirits and on the marginal propensity to consume don't come remotely close to being sufficiently micro-theoretic. The important question is how do individual choices interact with each other -- conflict, mesh, adjust, create synergies -- to bring about material prosperity?

Recognizing various psychological properties of individual human decision-making is important, but such recognition remains chiefly in the province of psychology and not economics -- at least not in that all-important species of economics that aims to understand how individual choices create results that are no part of anyone's intentions (such as, say, a production structure that creates pencils).

Economic growth and widespread material prosperity require enormously complex adjustments at very detailed levels. The Austrian notion of capital, of course, is a paramount example of this fact that Keynesians (and monetarists) ignore. Capital, in fact, is not a blob that only grows, shrinks, or remains unchanged in size. It is a hugely vast complex of specifically adjusted relationships, both physical and commercial, that concepts such as aggregative concepts mask.

(This occurs among the comments to the linked post; you'll therefore need to scroll down to find it.)

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