Keynsians on unused resources in a recession

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    A common argument i hear from keynsian economists is that when there is high unemployment and low fixed capital usage (empty factories) government could step in and produce real goods that would not otherwise be made and thus make a bad situation better. What is the austrian argument against this, why is it an inefficient allocation of resources?


    Efficient allocation of resources means that they are being used to produce goods that satisfy people’s highest-valued ends in the least-cost manner. It is not efficient to merely produce more stuff.

    During the boom, monetary inflation and credit expansion results in a pattern of demands for goods and resources that results in the build up of the capital structure that proves to be unsustainable. Once the pattern of demands for goods and resources change in the crisis the efficient thing to do is to re-allocate the mis-allocated resources and mal-invested capital structure into those lines of production that best satisfy people’s preferences. For example, once the housing boom is over and demand for housing and the resources to produce housing throughout the capital structure have collapsed, the efficient thing to do is for some construction workers to find jobs elsewhere, some factories producing roofing shingles to be re-configured to produce other materials, and so on. Having build too many houses in Vegas during the boom, it is not efficient to use the resources to produce too many houses in Reno. If Keynesians are really against unemployment and excess capacity, they should favor eliminating all government impediments to the re-allocation of labor and capital goods.


    Check out this book. it isnt exactly the most gripping read in the world but it explains this.

    Basically, Hutt argues that, for all practical purposes there are no idle resources in the Keynesian understanding. There may be resources that are not currently used but they are not being used because their most valued use in the market it to wait for use in the future.

    When the government tries to employ unused resources through spending projects, it will likely pull just as many resources from existing uses as it does from idle resources, if not more. Further, even if government projects are able to pull ALL resources for a new project from idle resources, this is interfering with the use that is most valued by the market, to wait for use in the future.

    As far as labor employment, in an unhampered economy, prolonged unemployment for an able worker only happens by choice whether he values leisure over work, or holding out to find a job with more money, or other reasons. Unemployment is either caused by government interference or by personal choice.


    Thank you both, i wanted the austrian answer and i got it! 🙂


    These answers make so much sense; they definitely answer what Keynesian Robert Skidelsky said in response to the objection that resources that are allocated by central planners or governments rather than by the market are sure to be wasted:

    “Well it’s a short-run/long-run thing, isn’t it? The fact is that the efficiency of allocation is the long-run engine of growth. In the short-run when you have lots of unemployed resources, it doesn’t matter whether they’re allocated that efficiently. You’ve just got to get the level of activity up. That is the most important thing. And I’m afraid it’s what the government believes today. They say oh no, we can’t have government spending because it misallocates resources. I mean it makes growth less fast than it would be. But that’s a very, very unimportant question in the short-run because actually what you need in the short-run is all the resources to be used.”

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