Mises Regarded Keynes's “G” As the Most Unscientific Balancing Wheel Economic Managers Could Employ

By the same token, Mises has no stomach for the idea that a nation could simply deficit-spend its way to prosperity, as advocated by many of Keynes’s followers. He holds that such economic thinking is fallaciously based on governmental “contra-cyclical policy.” This policy calls for budget surpluses in good times and budget deficits in bad times so as to maintain “effective demand” and hence “full employment.”

But Mises regards the “G” in Keynes’s “full employment” formula of Y = C + I + G; (National Income = Consumption Spending + Investment Spending + Government Spending) as about the most unstable, politics-ridden, and unscientific balancing wheel that the economic managers could employ. For one thing, the formula ignores the political propensity to spend, good times or bad. And for another, it ignores market-sensitive cost-price relationships and especially the proclivity of trade unions and minimum wages to price labor out of markets—i.e., into unemployment.

Thus he holds Keynesian theory, in practice, proceeds through fits of fiscal and monetary expansion and leads to inflation, controls, and ultimately stagnation. Further, “G,” so used, generally means the secular swelling of the public sector and shrinking of the private sector—a trend that spells trouble for human liberty. In a way, he anticipated and rebutted the Keynesian thesis a quarter-century ahead of Keynes in his 1912 work, The Theory of Money and Credit, in which he contended that uneconomic wages and forced-draft credit expansion, and not capitalism per se, carried the seeds of boom and bust.

—William H. Peterson, Mises in America (Auburn, AL: Ludwig von Mises Institute, 2009), 12-13.