Richard Posner has read Keynes’s General Theory so you don’t have to. He does a superb job of summarizing (HT: Greg Mankiw) what Keynes actually said. Other than pointing out the opaqueness of the work, Posner says little against it. The title of the piece is “How I Became a Keynesian” so I guess he found the arguments compelling.
Part of Keynes is compelling, the part about animal spirits, the idea that people get worried about the future, that the riskiness of the future is hard to quantify, and that this leads to people reining in plans for consumption and investment, leading to hoarding and reduced demand for all kinds of goods.
What is not so compelling is the conclusion that this can be rectified and improved on by the government taking up the slack, regardless of the reason. What is not so compelling is the idea that consumption creates growth. Consumption might create production (it depends) but consumption is not growth except in the very immediate term. (I almost said the short run, but you say the short run in a piece on Keynes and you can hear the mocking chorus that in the long run we’re all dead. If the long-run is five years, it’s not true. If it’s 50, our children are alive and we care about them).
Also missing from the Keynesian story is the role of money creation and where the animal spirits of caution come from. They aren’t spontaneous, certainly not in today’s world, a world where Posner want to apply Keynes’s insights. People are cautious right now in reaction to past recklessness. The Fed and the policy-makers are trying to keep the party going with massive increases in money reserves, cash-for-clunkers, home owner subsidies to people whose mortgages are underwater, and the so-called stimulus package which is stimulating the incomes of some people, financed out of future taxes on the rest of us.
But as Hayek would point out, the party needs to stop. We need to clean up the mess. It’s not an easy mess to clean up but to pretend that we can clean it up by pretending it didn’t happen seems to me to be a form of free lunch fantasy.