A possibly Keynesian story

[jon_leonard]

Suppose the US suddenly develops a taste for Moai: Immense stylized sculptures carved from volcanic island rock. So an industry of expert carvers develops, along with additional transport infrastructure to get them to the mainland, and then drive them to places like Nebraska (they may be too heavy for current trucks and roads

Comments

[anonymous]

Jon - I'm hardly an expert here, but I don't think that Keynesian econmics has anything to do with any particular business, but rather the overall cycle.

The basic insight of Keynes (as far as I understand it) is that in times of economic uncertainty, people will save more, and spend less. Which is good in a variety of senses, but it does mean that money stops circulating - consumers stop buying a variety of widgets, which means that widget manfacturers / sellers start go out of business, making the economy worse, and thus further reinforcing the desire of individual consumers to save more and spend less. So they spend even less, and manufacturers of gidgets and fidgets go out of business as well. So unemployment gets worse and consumers start spending less . . .

The idea behind Keynsian government spending is to break that vicious cycle by helping consumers get more capacity in their pockets, and thus become more willing to spend again. It's not to prop up any particular widget industry, necessarily. Hence paying people to dig ditches. And hence no prop up of silicon valley when dot-com went boom.

At least, that's my understanding. I'm probably totally wrong.

[anonymous]

Doh, Michael Cohen replying here.

[jon_leonard]

Right: The core of my question is how to tell that a recession is an "ordinary business cycle" recession, or due to some weirder cycle like my far-fetched story above. If you just look at things like GDP and employment, it looks very much like the Keynesian story. So either there's some way to tell the difference, or Keynesianism doesn't work as described, or the inevitable cost to a dampened business cycle is tremendous waste.

I believe you have a correct understanding of how Keynesian government spending is supposed to work. I'm trying to sort out how much to believe it, and when.