John Maynard Keynes was a smart man, and a full analysis of his ideas goes well beyond one blog post. But most people claiming to be “Keynesians” haven’t really read Keynes. Instead, they expound two nonsensical ideas that sound vaguely like Keynes: “government spending solves all problems”, and “people buying stuff creates economic growth”. Both can be easily disposed of.
For the first, note that all government spending comes from somewhere. Therefore, all government spending is at something else’s expense. If the government taxes, it’s at the expense of consumer goods. If they borrow, it’s at the expense of investments. If they print it, it’s at the expense of anyone holding cash. Government spending is only a win if the new use makes us better off than the original use. Sometimes it does. Often it doesn’t. But there’s nothing magical about government spending that solves all woes. Usually, this argument is just an excuse to spend more on some pet project.
For the second, this confuses cause and effect. A healthy economy highly correlates with consumer spending. A lot of not-very-smart people assume this means spending causes a healthy economy: the reason people are broke is because they aren’t buying stuff. But this is a logical fallacy. In reality, consumer spending is our goal, the thing we want. A healthy economy is the means of achieving that goal. The economy is the cause and spending is the effect. People aren’t broke because they aren’t buying stuff: they aren’t buying stuff because they’re broke.
This is easier to see if one looks at physical stuff, rather than money. In all but the very short term, production and consumption are equal. If consumption is low, there must be low production. It’s much, much easier to consume than produce: production is the hard part. Hence, our problem is that we need more production. At the individual level, no one is ever short of demand: a construction worker would happily buy a private jet if he could. He can’t because he can’t afford it, and he can’t afford it (on the average) because he can’t find sufficiently productive employment.
The Rationalist Conspiracy 
I haven’t read Keynes either, but I also don’t honestly meet many people claiming explicitly to be “Keynesians.” When I do hear someone talking who might be fairly called a Keynesian, that person is usually strongly left-leaning and not an economist, which gives me a couple of reasons to discount their views somewhat. Recently, though, I heard an interview with Paul Krugman, on CFI’s podcast “Point Of Inquiry” that gave me pause. Yes, Krugman identifies as a liberal, so I can assume he is ideologically biased (as are we all, presumably, to some degree). But he is also obviously a HEAVYWEIGHT economist. The interview was plugging his book, “Stop This Depression Now.” His (oversimplified) point seemed to be: As a general rule, government spending stimulates economies and austerity hurts economies. All theories to the contrary, including those espoused by obstructionist Republicans in the U.S., are pseudoscience. All the evidence weighs in favor of Keynesian economics; there is not a shred of evidence to support government austerity policies. Have you read Krugman? What do you think of his arguments?
Krugman is probably being paid millions to be a political shill. Obvious reasons why:
http://lesswrong.com/lw/gz/policy_debates_should_not_appear_onesided/
http://lesswrong.com/lw/gw/politics_is_the_mindkiller/
The US government (state, local, and federal) spends something like $7 trillion annually. If government spending is always good, why not spend $14 trillion? Why not $70 trillion?
>Krugman is probably being paid millions to be a political shill.
How much would you be willing to bet on that, at what odds?
>For the first, note that all government spending comes from somewhere. Therefore, all government spending is at something else’s expense. If the government taxes, it’s at the expense of consumer goods. If they borrow, it’s at the expense of investments. If they print it, it’s at the expense of anyone holding cash.
I think this qualifies as an example of the misleading picture of “government as a consumer” – the idea that the private sector creates wealth and then the government skims some cream off the top.
This is a flawed way of seeing things. Instead, we should see government as merely a different way of structuring the same economic transactions. For example, a private security guard and a police officer both create economic value, but the security guard gets paid by some particular people who hired them, while the police officer gets paid by everybody via taxation. Fundamentally, though, there isn’t much difference between the two cases. Economic value (in the form of protection from crime) is being created, and the person who created it is being paid for it.
It’s true that all government spending is “at something else’s expense” in the sense of having an opportunity cost, but that’s trivially true of all spending, public or private.
>For the second, this confuses cause and effect. A healthy economy highly correlates with consumer spending. A lot of not-very-smart people assume this means spending causes a healthy economy: the reason people are broke is because they aren’t buying stuff. But this is a logical fallacy. In reality, consumer spending is our goal, the thing we want. A healthy economy is the means of achieving that goal. The economy is the cause and spending is the effect. People aren’t broke because they aren’t buying stuff: they aren’t buying stuff because they’re broke.
I believe the key concept here is the liquidity trap.
The second point is completely valid.
The first point assumes pricing is working properly. It almost always does work properly, but we know there are some problems with price adjustment, particularly the phenomenon of prices that are “sticky downwards”—which means that markets may not clear under certain circumstances (principal circumstance: bad monetary policy).
This means that spending could literally be a free lunch, by increasing inflation and expected inflation and therefore giving prices the space to clear. Of course, extra money via QE would do the same thing in a better way (read Scott Sumner regularly for the reasons why). But the principal Keynesian story is still roughly valid in its own context.