Tuesday, February 24, 2009

The Keynesian Fallacy

I have coined a new term: "The Keynesian Fallacy."

The Keynesian Fallacy is the belief that the foundation of an economy is the circulation of money.

What makes the economy better is increasing the circulation of money, also known as the velocity of money. Put another way, what improves the economy is for money to change hands as frequently as possible in economic transactions.

This is why dumb ideas such as the idea that make-work jobs (digging holes and filling them back in) will help the economy (even if some jobs proposed by Keynesian stimulus packages are not "make-work," they are usually justified on a basis that would apply equally to useful or to make-work jobs, so the idea behind why the jobs might help the economy is faulty). Or the idea that increased spending is what an economy where people are drowning in debt need.

Ultimately, in reality, what matters is what is produced, how it is used, and what is consumed. Money is simply a medium of exchange (which makes it a "store of value" as well). Most economic transations and phenomena can be best understood by first taking money out of the equation and asking what is happening to the resources behind the money. Alternately, after deducing what the economic consequence of an action would be without reference to money, the best course to explaining how it would play out in real life is to figure out how the monetary situation would represent the action and its consequences.

More on this later.

That is all.

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