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Lawrance G Lux

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SHORT ANALYSIS OF KEYNESIAN STIMULUS
By Lawrance G Lux
Last edited: Monday, March 08, 2004
Posted: Monday, March 08, 2004



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Keynesian theory has been with Us since Keynes proposed it in the 1930s. It was a hoped solution for the Great Depression, but showed little success when attempted. It has continued to be advocated and used since this Period, always with disappointing results.


Politician and Economist, whatever their Conservative or Liberal mode, all accept unchallenged the conventionalism of Keynesian stimulus as promotion of economic performance. Few have been the economic studies to actually prove the existence of such benefit to the Economy. Most Economists admit to the existence of other factors generating economic performance in addition to the studied Keynesian stimulus package utilized, but fail to differentiate the degrees of impact between the factors. Keynesian stimulus thus reigns without essential proof or vindication by hard statistical numbers. The trouble enters with political use of the dogma, leading to great quantities of deficit, while the benefits have yet to be concretely established.

An alternate view of Keynesian stimulus can be proposed, and should be studied by economic model. Consider Resource Supply by establishing a normal Bell curve, with Quantity supplied under the Curve. The Bell curve is established by the fact of Cost of Production limiting Resource Supply on the left half of the Bell curve, in the face of inadequate Price to generate production of product. The right half of the Bell curve is established by the limitation of Ore and Recovery equipment. Any Economist will relate this Resource Supply Curve will never resemble a natural Bell curve in the Short-term, but will eventually develop a Bell curve formation over extended period–where more Years are added to the Production duration. The Bell curve proposed can be quartered at this point, as is done in normal statistical analysis. Keynesian stimulus can be analyzed at this point.

Speculation can be advanced that Keynesian stimulus will only provide a geometric effect, if and only if, Resource production actually resides within the first Quarter of the Bell curve formed by the Quantity/Price possibilities, the following Quarters all construe d as normal Production levels–unrestricted by low Price values canceling Profitability of Supply. Keynesian stimuli in these later three Quarters seem likely to supply only arithmetic effect–or the addition of Government consumption of Resource. It is necessary to examine this Contention for plausibility.

Position in the initial Quarter of Production assures undercapitalization of Resource Recovery, due to the fact the Price values generated are inconsistent with provision of advanced Equipment and Labor because of lack of Profitability. Equipage is outdated and outmoded, while substantial Labor assets will have already been laid off, or non-hired. The Second Quarter already reflects introduction of Profitability to Resource supply, because of the rapid increase of Quantity supplied. Capitalization and Lobar retention have already proven desirable. The Third Quarter begins to express the difficulties and limitations of extraction, which result in eventual diminishment of supply. The Fourth Quarter expresses inabilities to extract greater amounts of material. The Curve travels along an axis set by Price for the Product supplied.

Government spending for Resources will obviously generate Capitalization, hiring of Labor, and enhanced Profits within the First Quarter, thus providing geometric stimuli to the Economy as a whole. Government spending in the following Quarters, though, will only provide additional Profits to the Resource Recovery, and arithmetically push Supply into the Third Quarter from the Second Quarter. There will be no more than the standard capitalization and employment of Resource recovery, or only an arithmetic increase in business ventures; otherwise put, simple extension of business enterprise without impact on the greater Economy. Government spending, on the other hand, faces the same constraints on Resource Recovery, as does the Private Sector. Government spending comes into direct competition for Resource with the Private Sector, with the Curve sloping downward because of the increasing difficulties of Resource supply in greater quantities.

Keynesian stimulus by deficit spending provides direct favoritism for Government spending within this competition in the latter three Quarters. Government is allowed unfettered purchasing power, while the Private Sector must operate within the boundaries of Profitability for operation. Government spending by advent of Taxation would have withdrawn Demand for Resource from the Private Sector, but deficit spending leaves Private Sector Demand unaffected. The Private Sector immediately starts practices of eliminating unnecessary Costs, Downsizing, and raising their Product prices to meet the increased competition for a shrinking provision of Resource.

Economic study of Keynesian stimulus must be originated, without predispositions that it is always beneficial to Economic performance. It could provide far more Inflation than economic performance. A real possibility exists that Keynesian stimulus actually retards levels of Business profitability, due to the unfettered competition Business must face from the Government. Excess Government deficit spending almost assures suppression of Employment, in order for Business to minimize expense. The additional deficits create Money, through injection of funds into Industries, such practice altering their Production and Profit schedules in the worst direction, a general bias against their Private Sector Consumers. There need be reevaluation of current belief in Keynesian stimulus.

Copyright.LawranceGeorgeLux2004

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Reviewed by Franz Kessler
Very interesting article. I know too little about economics, but I would argue that a lot may depend where and how stimulus is applied.
Stimulating the economy by the government in investing in modern infrastructure or education might make sense. But history has conclusively shown that several colonial empires ruined their finance (and their empire) by over-investing in 'defense.' Franz

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