Robert Higgs has a wonderful essay that explains the fallacies of Keynesianism in terms anyone can understand. Some excerpts (click here to read the whole thing)
Capital and its Structure
Instead, the theory pioneered by Ludwig von Mises and F. A. Hayek in the first half of the twentieth century—a theory that fell into near oblivion after the Keynesian revolution in macroeconomics—is a theory of malinvestment, which is to say a theory of how an artificially reduced rate of interest leads business firms to invest in the wrong kinds of capital, in particular the longest-lived capital goods, such as residential and industrial buildings, as opposed to inventories, equipment, and software with a relatively short life. Thus, in the Austrian view, Fed-induced low rates of interest, like those between 2002 and 2005, led firms to overvalue longer-term capital projects and to shift their investment spending in that direction—producing booms in building construction, among other things. This shift would make economic sense if the interest rate had fallen in a free market, thereby signaling that people wish to defer more consumption by saving more of their current income. But if people have not changed their preferences in this way and continue to prefer present consumption relatively as much as they did previously, then businesses will make mistakes by choosing these kinds of investment projects, which are, in effect, attempts to anticipate future demands that will never eventuate. When the projects ultimately begin to fail, the boom that the artificially lowered interest rates set in motion will collapse into a bust, with attendant bankruptcies and unemployed labor, as unsustainable projects are liquidated and resources shifted, painfully in many cases, to more viable uses.
Because the vulgar Keynesian is blind to these microdistortions and to the need for their correction in the wake of an artificially induced boom, he fails to see any need for the bankruptcies and unemployment that necessarily attend a substantial economic restructuring. He supposes: if only the government stepped in and used its own deficit spending to make up for the reduced private investment and consumption spending, then business would be restored to profitability and workers reemployed without any economic restructuring.
It comes as no surprise, then, that people who think along such lines are currently working to continue a policy that contributed greatly to producing the unsustainable boom of 2002–2006, namely, subsidized lending to would-be homeowners who cannot meet normal commercial qualifications for receiving such loans. It does not occur to the vulgar Keynesians that too many resources have been directed into house and condo construction and that lending to homeowners who cannot afford to purchase homes unless they are subsidized to do so signals an uneconomic use of resources at the expense of the taxpayers who directly or indirectly finance these subsidies.
Vulgar Keynesians do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation. If inflation should become an undeniable problem, we may count on them to support price controls, which, on the basis of sketchy knowledge of such controls during World War II, they are convinced can be made to work well.
Malinvestments and Money Pumping
With their great, simple faith in the efficacy of government spending as a macroeconomic balance wheel, vulgar Keynesians disregard malinvestment, past and future, and support government spending in excess of the government’s revenues, the difference being covered by borrowing. Of course, they favor central-bank actions to make such borrowing cheaper for the government. In fact, they chronically prefer “easy money” to more restrictive central-bank policies. As noted previously, they prefer easy money not only because it lowers the visible cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption goods—such increased consumption spending’s being viewed as always a good thing, notwithstanding the near-zero rate of saving by individuals in the United States in recent years. Reflecting on the vulgar Keynesian attitude toward Fed policy, I keep recalling an old country song whose refrain was “older whiskey, faster horses, younger women, more money.”
He ends with a section in regime uncertainty which I think was a major impediment to recovery in the last year.