Keynesian Fallacies - Why Recessions and Contractions Really Happen

Okay. Let me think for just a second....

The current "Economic Stimulus Package" passed by the Congress and signed by the President is either Mercantilist or Keynesian in nature. The intent of the Package is to provide more money for consumption.

The belief is that there has either been generally too much produced that must now be consumed, or not enough consumption of that which has been produced; essentially two sides of the same coin.

Those two sides, Mercantilist and Keynesian, state that there can be either "general overproduction" (meaning that everything is overproduced), or "general underconsumption" (meaning everything is under consumed).

However, in actuality, there can be NO general overproduction or general underconsumption. By definition, if there is a sector of the economy in which there is overproduction of particular good and services, there must be a sector of the economy in which there is particular underconsumption of goods and services.

This situation can only be described as malinvestment. Too much of one thing has been produced, while inadequate provision made for consumption of other things.

Production and consumption are manifestations of the economic demands of Individuals with subjective valuations. Each individual has an entirely different set of valuations from each other individual. These valuations are infinite and in a constant state of change.

General overproduction and general underconsumption imply that all individuals have exactly the same set of valuations and that these valuations are static and unchanging.

In fact, there can only be general malinvestment, and these malinvestments must eventually be liquidated.

The process of liquidation is an economic contraction, either a recession, or a depression.

Therefore, flooding the economy with money in an attempt to "stimulate" consumption can do no more than mask or cover over the malinvestments, by causing more malinvestments, which will have to be liquidated at some point in the future.

Eventually, the extent of malinvestment will exceed the ability to "stimulate" the economy by inflating the amount of money in the economy.