I, too, think Keynesian economics is not just wrong, but dangerous. But I like playing devil's advocate too much, so here it goes.
By printing money, government can create the illusion of more wealth. This will lead people not only to consume more, but invest more and produce more. The catch is that the actual increase in wealth is much lower than the perceived increase in wealth. Thus there is this 'danger zone', that equals to (perceived wealth – actual wealth) – if this illusory resources are demanded, the bubble busts.
Now, bear with me, if this 'danger zone' is kept low compared to actual wealth, by keeping the offer of fiat money just slightly elevated, the risk of it being demanded should be minimal. Couldn't it be feasible, then, to collect some benefits of an artificially heated economy (a slow, steady bubble), without necessarily falling into a bust?
For a long time I've been wondering what Keynes meant by: “in the long run we're all dead”. To be honest, I do think the worst interpretation possible is the real one, but I might be wrong. Maybe he wasn't saying that future generations will pay our tab. Maybe he's saying the model can be sustained as long as there is an economy. The extra perceived wealth won't be a significant burden to those living then because they will be amidst the breakdown of civilization (assuming, of course, the 'extra perceived wealth' did not cause the breakdown of civilization).
If this was conceivable, than the theft caused by inflation could actually cause an increase of wealth in the long run. So, in consequences, even if not in principles, it would be a good act.
Take that. I'd love to see you destroy my impromptu flimsy arguments.
If you print just a little more money in order to create an impression of prosperity, the effects of this will very soon vanish. You wouldn't have all generations living a slightly better life (even if only in their impressions). You'd have a small time with this perception, followed by a small bust. The only way you can push the bust forward is to continue to print money. You describe actually what has been the orthodoxy for some time now: the pursue of a 2% inflation.
You can, indeed, have an everlasting 2% inflation. This doesn't mean there will be no booms and busts. You'll have endless booms and busts. We're seeing this right now. The thing is if the inflation is not big enough, it does not generates de perception of wealth. It can only generate this perception if it is relevant. It does not have to be big enough to pump the whole economy up, a single sector will do the job. 2% is not enough to pump the economy, so governments pump some sectors.
The chosen sectors will get the bonus taken away from the society as a whole. These sectors will inflate. People will come to them, seeking the extra revenue and when the bust come, they will suffer. The problem gets bigger: people struggle to get into the bubbles. People will go into colleges and study 2, 3, 4, 6 years to master a profession because of a bubble, and then the bust.
We've seen this in Brazil recently. Hundreds of thousands went to work in automobile and construction industries artificially inflated. Now they are unemployed, with expensive and hard obtained useless degrees.
This disaster calls for an action. Government comes to rescue. With the same old plan: let's take from these and give to those, let's print money and give it to our friends, let's inflate the next bubble. Here comes the slippery slope.
There is still another problem: taking the rewards away from some actions will cause the people to avoid them. Inflation reduces the incentive to work and save. Thus we will have less work and less savings. This diminution of work and saving will reduce the perception of wealth. This will call for more inflation. Less savings would reduce the production of capital goods and the spending of the inflated money would increase the production of consumption goods, leading the society to capital consumption, which is the most certain way to destroy civilization.
Let's say, finally, that Keynes would be successful for a day, a month, a year or a generation. The next day, month, year or generation would follow the lead. The snowball will grow up until the collapse.
Of course, if people were expecting the world to end in a year or two, we could have this period of Keynesianism. But it would be unnecessary, for people would do it anyway.
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Well, I'd argue that even a low, 2% inflation, would have an effect on the economy. Maybe one company got the loan it needed to keep his doors open - it doesn't have to be something big, in fact it cannot be big. It might be that governments (specially democracies with its urge to seek immediate results) find that too little, but if a 2% inflation could lead to a 0,1% extra economic growth, this would mean a 10% increase in economic output after a century, which is not nothing (okay, with a ludicrous 700% inflation).
Maybe the bubble on specific sectors has more to do with the immediateness intrinsic to democratic regimes than with actual Keynesian economics?
Maybe if it weren't for it, it could be possible to have an everlasting steady bubble instead of a series of bubble bursts?
But I cannot argue with one of your closing arguments: inflation takes away the rewards of saving and choosing investiments wisely. An increase of consumption goods instead of capital goods could indeed be disastrous.
To that, I must throw in the towel. I'll take back my flimsy arguments. Thanks for the trouble of knocking them out.
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