Keynes's mistake

The demand for commodities is not a demand for labour. If one does not appreciate this economic insight, then one can pout off nonsense like people have money in their pocket but are scared to spend it, and so the government should just jump in and try to stimulate the economy.

This doctrine is so rarely understood that its complete appreciation is perhaps, the best test of an economist. I will use an example to explain what I think it means. If memory serves me correct, JM Keynes actually made public pronouncement encouraging housewives to buy more towels in order to stimulate the economy. I even believe he said that these women should stop using those threadbare towels they have now. And even if he never said it, I have seen enough people in my time use this logic to explain how to stimulate the economy. First off, the towels have already been made. Some one else demanded the labour. The housewife is only buying the commodity. Even if she buys two extra ones, she is not helping the economy. For I don't see how you can help the economy by buying something you don't need or can do without. Market economies, properly run, are never that fatuous. The distribution of resources, brought about by this buying of unneeded towels is irrational and not optimal. Furthermore, the housewife is being asked to spend money at the expense of something she may need more desperately. And if this purchase does cause someone to make more towels and of course demand some labour, these commodities may not be needed. False signals have been given in the market that may result in a overproduction and mis-allocation or resources.

So often has misunderstanding of this doctrine resulted in the most fatuous of government economic decisions as well as the demands for these fatuous decisions.

The italicized quotes have been taken page 58 of my copy of F.A. Hayek's The Fatal Conceit.