This concept helps me make a point about cause and effect. If you help Peter, you hurt Paul. Monetary and fiscal policies cannot effect long-run economic changes. Therefore, these policies are bandaid policies that cover up the injury and postpone its natural return to equilibrium. If you use iodine on a cut instead of a bandaid, your cut will heal faster but the initial pain will be greater.
In order to achieve equilibrium and have a stable economy, we need to abolish the Fed and get the government out of economic policy. Economic data has shown time and again that equilibrium will be achieved despite what the Fed or the government does. Their actions change the short-run dynamics and exacerbate the problems; extending the length of economic downturns.
Think of a swinging pendulum. If you leave it alone, it will eventually come to rest pointing straight down; its point of equilibrium. If, instead, you give it a push toward the center when it has almost reached the left or right end of its swing, thinking that this will help it reach its equilibrium point faster (because you are pushing it toward the center), the actual effect will be to increase its swing. It will then move farther the other direction than it would otherwise have traveled. The more you try to help it, the wilder its swing will become.
It may be true that you can help achieve equilibrium faster if you push the pendulum to the left just after it has started moving to the right, but in economics, that point is hard to predict. Or impossible. The reason is that the data used to determine the swing of the economic pendulum is not available until the pendulum has moved to a far different position.
Keynesian economics is bandaid economics. Hayek economics is iodine economics. Unfortunately, almost all politicians follow Keynesian economics because the bandaid feels better and has colorful cartoon illustrations on it.
Jim
