In Hayek vs Keynes Debate, No One Advocates the Investment Process

Over at Bloomberg Nicholas Wapshott is stirring up things among the micro vs. macro dismal scientists. (Keynes and Hayek, the Great Debate (Part 4))

In order for Keynes to be right, he would have to be lucky. Only if the increment in Government spending is a true investment (with continuing payoffs that in total exceed the expense) would there be a lasting impact on the economy. In many cases, including the 2009 surge in U.S. spending, the investments are poorly selected and will not return a surplus. Fast spending, desperation spending, indirect spending, and spending by the Government on behalf of the rest of us are highly likely to fail to be effective or have investment returns, for the same reason that fast spending, desperation spending, indirect spending, and spending by an individual on behalf of another person is likely to fail to be effective.

It is necessary that the spending be an investment for a Keynesian expansion to work. Otherwise, the money is wasted, and the economy may even shrink afterward.

What happens in real life is that politicians spend money because it looks like they are doing something. It doesn't mean that Keynes was right when Bush or Obama request spending. It only means that the entire country is making a mistake, which the entire country will pay for later. It reminds me of the story about the fellow looking for a lost object at night under a lamppost because the light is better there.

Hayek also made the mistake of failing to indicate more directly the problem with mis-investing. Although he did correctly describe that individuals knew where to put the money better than government, he was not active enough in suggesting ways that the investment decisions that citizens make could be improved or increased in their efficacy.