Let's play "Keynesian's Advocate".

Economics Economics Questions
1

Ok, first off, I’d like to preface this with the statement that I am not a Keynesian, nor am I even remotely sympathetic towards its ends/means/causes. That said, there’s a few arguments regarding “stimulation” that I’m having a bit of issue debunking, in my mind, though as per usual, I’m likely overlooking the obvious.

First one: Taking money from the “incredibly wealthy” and giving a bit to the bottom rung (note, I realize this is immoral, I’m speaking strictly from an economic perspective here): it is typically argued that taking, say, $2,000 (we’ll assume a 7% overhead for the government…haha!) from all households who make $250,000 (or more) then giving $100 to every household making $25,000 or less is more likely to stimulate the economy because the $25,000 household is likely to have less disposable income than the household making $250,000 (or more)–who is likely just sitting on that $1,866 each year, anyway. What am I missing here? Even assuming away overhead, I can’t see this being any more than a neutral; but the point does remain–it does seem more likely that those who making $25,000 (or less) will be more likely to spend that $100 than the household making $250,000 (or more) . Again, what am I missing?

Second one: Assuming the above does, in fact, have a negative effect on the economy effect on the economy, what about deficit spending? I realize that issuing debt that is bougt by a domestic entity will crowd out private investment, therefore lowering what the standard of living would have otherwise been; that said, there are two objections to this, it seems–the first being that it could be calculate the proper amount of debt to taken on to provide enough stimulus to negate the “crowding out” effect by those who would likely spend their money in the economy, therefore alleviating “the poor” or even creating a “net positive” boost to the economy. The second obection is that if the debt issued is purchased by a foreign entity, it doesn’t crowd out investment at all, therefore, as long as the debt is purchased by a foriegn country/individual, it’s not “crowding out” anything and therefore a net gain to the economy.

Again, I’d like to stress that I’m not a Keynesian and that I’m not attempting to debunk, derail, or 'cause conflict here; I’m merely inquiring so I can better understand the fallacies of Keynesian economics.

2
  1. The essential mistake is this: Spending is not what stimulates the economy. Savings is what does it.

A country is wealthier when it has more things that people want. How will it get more? By increasing it’s productivity, meaning making better use of the resources at its disposal. This is done by investing, in tools, in factories, etc. This creates not only more wealth, but more jobs as well. Meaning it benefits everyone, rich and poor. The rich profit from their investment, the poor get jobs.

Where does the money come from to invest? From people saving their money [= not consuming it] and investing it. Rich people do not stuff their money under a mattress, they invest it. Taking it from them and giving it to poor people who will consume it means nobody is investing, meaning the economy will not grow.

  1. A similar mistake is the govt spending money. Even if they do not take money away from people, but borrow it from abroad, well that money will have to be repaid. With interest. Where will the money to repay come from? The govt consumes the money it borrows, it does not invest it. So that the economy does not improve from that borrowed money.

  2. Keynesians will say that the problem is that factories etc are not running at full capacity, so we have to give them money to run at full capacity. But they neglect the important q, why aren’t they running at full capacity? AE says because those factories where built by mistake in the first place. Someone goofed and decided people will buy something, but the people don’t want it.

3

Dave put this better than me, but you confuse the effects of saving and spending. You think if we save money it is lost to the economy and if we spend money we “put it into the economy”. The opposite is the case. Sitting on money means it is loaned out to entrepreneurs. It’s not lost to the economy, but actually the most productive thing you could do with money. Spending money, on the other hand, uses it for consumption. That does not make society richer, it uses up resources. Spending more money does not make us richer, we won’t have more resources because of it.

4

Welcome back Fox, haven’t seen you post here for a while. Do you still frequent RPF?

First of all, it’s not as if the household earning $250,000 simply buries the money in a vault somewhere. Most individuals that earn large sums of money simply save more. They keep more in their bank account, they own more stocks and bonds, etc. So redistributing money from the “rich” to the “poor” does nothing to actually increase the amount of money circulating in the economy. What it does is it takes money out of saving/investment and reallocates it towards consumption.

This argument really is an argument against hoarding, or keeping your money isolated from the rest of society. This isn’t an argument relevant to the modern US economy, since deposit insurance takes away the risk of people losing their savings during a banking crisis. Thus, nobody really hoardes money. But if we did not have a government-guaranteed deposit insurance system (the FDIC), even then this argument would not hold, for the simple reason that, in the event of a banking crisis, hoarding is a necessary corrective tool which wrings the malinvestments out of the economy.

This question would require a long essay in order to do it justice. I would answer it, but midterms are coming up and I have some serious studying of my own to get to!

The short answer is: one of the major differences between Austrian and mainstream economists is capital theory. Mainstream economists view capital as a homogenous variable K. Austrian economists view capital as heterogenous. Thus, in the mainstream world, a little spending or credit expansion can “prime the pump,” push up consumption, thereby increasing business profits and thus allow businesses to invest in more capital, K. However, because Austrians do not view “capital” and “business” as homogenous, they do not make such simple relations. In the Austrian world, increased deficit spending robs credit markets of credit and puts that money to use in lines of production which do not best serve the individuals who make up the market economy. In the Austrian world, increased consumption spending favors the lower order stages of production, which makes any recovery after a recession that much more difficult. Perhaps I’ll expand on this later.

5

See, here is the major difference between mainstream macroeconomic theorizing and Austrian theorizing. The mainstream macroeconomist looks at an economy in recession and says “well, if ‘spending’ increases, then ‘business’ profits will increase and so will ‘investment’ in ‘capital’.” They aggregate absolutely everything. The Austrian economist looks at an economy in recession and realizes that there are serious incongruities and malinvestments which are a drain on the economy as a whole and which need to be “cleared” from the market in order to permit growth to resume. The solution isn’t as simple as increasing aggregate spending, or consumption spending, or government spending, or investment spending. The solution is having these malinvestments removed from the economy so that the economy is no longer shackled with a ball and chain around it’s ankle. These malinvestments will not be removed by using policy tools to affect some form of aggregate spending or saving.

6

You are missing small business owners. A small business owner may be facing lean times in his business and only drawing out $25,000 a year. In most years, he may be making $250,000. Any amount he’ll get will be saved or reinvested in his business. My own family of small business owners regularly fluctuates in income, but spends little and saves most in either lean times or good times.

As it is, there is no real correlation between income and savings. A $250,000 a year person could be deep in debt and driving Ferraris he can’t afford and a $25,000 person may be deliberately living in near poverty to save most of his money, as many Hasedics do.

7

I appreciate all the replies; they’ve been very helpful.

I’d like to point out, however, these are not necessarily my own personal views or views that I think are correct; there just points that I hear a lot, but am not personally able to counter, fully, in an extended debate against a Keynsian.

And yeah, I still frequent Ron Paul Forums; sadly, most of the economically literate people are gone, which leaves a huge space for several forums members’ fallacious economic views to run rampant (ie: insurance drives up the cost of healthcare, free trade costs us jobs and therefore wealth, etc). Once in a while we get a Keynesian or Fed hawk that shows up, but not too often.

I stay, primarily to downplay the fallacies some members to committ and to attempt to educate, where possible.

8

If you’re still around this thread and willing to reply, Smiling Dave, I have a question regarding one of your comments.

Where does the money come from when it’s saved?

9

Mr Schnapps,

Are you asking how people make money? Some work for it, some inherit it, etc.

If we exclude theft and money printing, people make money by producing something, tangible or intangible, that other people are willing to pay for. They then sell and get paid for what they produced, and have money.

EDIT: TY Z, forgot about selling what they already have.

10

Wealth/assets/property is created through (comes from) voluntary exchanges of wealth/assets/property and labor. Hence, it is wealth/assets/property which is saved. Money is merely a kind of wealth/assets/property which can be easily exchanged for most other wealth/assets/property on the market. All money is wealth/assets/property. Not all wealth/assets/property is money.

Z.

11

Where does wealth come from? Spending does not make you (or society) wealthy. Spending is an effect, wealth is the cause. Wealth comes from production; from creating something that other people want.

Where does a rich person’s savings come from? Barring criminal actions, either directly or indirectly (through inheritance), it comes from being more of a producer than a consumer.

What does a rich person do with their earnings? They might save up for a large capital acquisition, or provide capital to other producers (via stocks or bonds) – or perhaps just keep it in the bank. An excess of available capital helps keep interest rates naturally low (larger supply of money than demand).

What does someone who is living hand-to-mouth do with extra cash? They tend to spend it, rather than save. Consumption is actually a destruction of wealth.

So the answer to the question in the OP comes down to: is it better to save and carefully invest in some form of production, while helping to keep interest rates naturally low, or to spend it on consumer items? Is it better to consume and destroy wealth, or to save and create wealth?

It’s also interesting to note that once spent, the money will flow back to the producers anyway (the people who are producing the items purchased by consumers) – but society will be less wealthy after the round-trip.

BTW, this idea should not be separated from the morality side. The moral is the practical. Stealing from one person for the benefit of another (or a thousand others) is immoral, period.