There is a growing consensus amongst economists and pundits alike that stimulus packages, job protection and other means of “insulating” the economy from “market failure” are in the interests of all Australians. The argument goes like this: the private sector has dropped off, it is afraid to invest, to spend, and it’s only appropriate that government picks up the slack, or the “idle capacity”, until the situation improves. This is the foundation of Keynesianism, and ignores the need to destroy unneeded capacity and the capital deployed there, as quickly as possible, as the surest means of sustainable recovery. The cure is individual adjustment of prices, costs, and wages to each other - the return of coordination. All of this can be brought about automatically only if the competitive forces of the market are given free play.

The Keynesians are correct in one sense: the current stimulus and budget will have short-term benefits in terms of measured GDP. But then again, so do natural disasters and I don’t think anyone would be advocating the need for another round of Victorian bush fires or Queensland flooding.

Economists and politicians will relentlessly cite carefully selected and “adjusted” data to stress the successes of their programs, but one thing they neglect to tell us is that the results will only be temporary. Not only that, but they come with an immeasurable (debt and malinvestment) cost to the economy in the long run. But in the words of the master himself, “in the long run we’re all dead”, so who cares? It is the political dream: being able to boost the statistics in the short term, to justify increases in government involvement, with complete disregard to what will happen in five, ten, twenty years down the road. This is the attractiveness of Keynes: whether the theory itself is correct or not is irrelevant!

Whilst socialist policies currently being implemented may cause GDP to rise (or fall less) in the short term, it is not the same thing as causing an increase in prosperity or wealth. GDP, a flawed (government) statisticians' tool, builds in a bias towards disguising the costs of government and over-counting its benefits. Government spending doesn’t “spur” economic growth; it doesn’t “fill the void” left by the private sector; it only diverts capital resources from more desirable to less desirable uses. This is yet another fallacy of Keynesianism - they chronically confuse "income" in terms of paper money with real income in goods and services. Of course it is possible to increase paper money income to any amount by debasing the currency. But real income can only be increased by working harder or more efficiently, saving more, investing more, and producing more. This is why we can't get too carried away or be too impressed by the economists and politicians citing the increase in dollar incomes, in dollar GDP, to show that we've never had it so good!

As pointed out in the Wall Street Journal "Review and Outlook" of March 6, 2009, “Recessions don't last forever, but bad policies can prolong the pain.”

Recovery and growth are impeded, not stimulated, by the threat of less competitive labour markets, regulatory uncertainty, the threat of increased protectionism, certain higher tax burdens in the future, especially on capital income, and the use of the tax system explicitly for purposes of redistribution of income.

As Adam Smith put it many years ago in a 1755 paper,

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

The cost in lost freedom as a result of current (socialist) government policies may be immeasurable. The cost to our economy will be enormous. We owe future generations better. We owe them a free and prosperous country. History and theory show us the way to achieve both, and it’s not through the fallacies of Keynes.

So, are we all Keynesians now?

Thankfully, not yet.