A simple criticism of Keynesian macroeconomics asserts that demand stimulus cannot lead to higher employment and real production because such an outcome would constitute violation of the “no free lunch” principle. Simply stated, that principle suggests that you can’t create anything of value without sacrificing some resource. The criticism is most often applied to the idea that government stimulus could improve social welfare. The critics complain that any valuable production created by government stimulus must take resources away from the private sector, so any increase in employment created by the government must be at the expense of private output. Furthermore, because such critics typically assume that output chosen by the private sector is more valuable than government production, so more government spending is often asserted to lower social welfare. Stephen Moore (“Why Americans Hate Economics,” Wall Street Journal, August 19, 2011, page A11) expresses this sentiment colorfully by calling Keynesian macroeconomics “a witchcraft that … simply took basic laws of economics we know to be true for the firm or family … and turned them on their head as national policy.”
The problem with this kind of criticism is that “laws” derived from pondering the situation of the single firm or family may not work in a social system composed of a multitude of firms and families. Our Keynesian Basics pages describe why there will often not be enough demand to justify fully employing the economy’s resources. If a rise in demand, from private or public sources, employs previously idle resources, production rises and welfare improves. The demand “stimulus” need not take resources from any other activity; it mobilizes resources that were previously unemployed.
Is this a “free lunch?” Not really. Demand stimulus does not create output out of nothing. The resources mobilized by new demand already existed, they just were being used inefficiently because the economic system on its own cannot guarantee full employment. There is nothing about this theory that violates any basic economic “laws.”
Mr. Moore, and many other critics of Keynesian macro ideas simply assume that the market system on its own will always create adequate demand to get to full employment and potential output. These criticisms do not refute the logic of Keynesian theory by applying versions of the “free lunch” principle. Instead, such criticisms simply assert, without a careful logical argument, that Keynesian economics is wrong. To support this assertion, critics must explain why the economic system, on its own, will always generate enough demand to reach full employment. Again, discussion in Keynesian Basics explores how difficult it is for the system to meet this lofty goal and therefore why policy intervention is often important to mitigate the deeply unfortunate, and sometimes tragic, waste of resources and human potential created by unemployment.