The GDR Effect - A Challenge to Keynesians

Image credit. This is entry is a case of "Resteverwertung" (making use of leftovers). I am cleaning up drafts of posts that, for some reason or other, I had decided not to publish yet. Though I have more to add to this post by now, for historical reasons, I keep it in its original form. It is one of the earliest posts at Qaesivi, going back to November or December 2015, and thus a good reference point for judging my development. The link does not work. I do not remember the source from which I gathered Keynes's quote.

Here is Keynes, writing in 1926:

“It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”

Source.

In its capacity as the only counter-cyclical agent in society, the state has a role to play in reinvigorating an economy stuck in recession. This is the basic idea of Keynesianism. And it is a reasonable idea. 

Unfortunately, Keynesians offer little in the way of confronting thoroughly what I will call the GDR-effect. 

By the GDR-effect I mean that massive state intervention can not only lead to significantly poorer economic performance than in the absence of such invasive policies, but it may be a cause for perpetuating stagnation under conditions of underperforming economic activity. 

Keynesian policies may actually coerce people to accept a standard of living considerably lower than they might attain under feasible alternative policy conditions.

The reason I use the term GDR to name the effect is because it may be possible to lead a tolerably comfortable life, as in the GDR according to some, even though the standard of living is much lower than it could be. Perpetuating deleterious Keynesian policies may lock people materially in a suboptimal state of affairs and fixate them psychologically to their disadvantaged status quo.