Tuesday, November 11, 2008

Here's the Nobel (Riksbank) Prize Winner on Econ 102

Paul Krugman quoted by the Mises Institute today:

[O]ne of the high points of the semester, if you're a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone's income.

In fact, consumers' income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

Now think about this one a minute. When you refuse to spend a dollar, something automatically takes the place of that spending. Specifically, you have saved that dollar, and it is available for debt repayment, capital formation, charity, or (yikes) taxation. Hence, Krugman's (and Keynes') premise is absurd; there is no dollar that fails to function in our economy. Even the wad of bills stuffed in a mattress sends economic signals (specifically; the owner expects deflation to make banks fail and prices to fall).

And so Keynes' ship "Paradox of Thrift" finds itself where it ought to be; crashing against the hard rocks of Bastiat's "That Which is Unseen." When we divert resources from their desired use to a less desired use, we reduce utility and deepen economic difficulties. It's scary that they give out prizes for thinking like Keynes'.

4 comments:

pentamom said...

What utter nonsense! He might have a point if people actually DID stuff their bills in their mattresses -- you're right that it would still function, but not in the way you we normally think of it "functioning."

But the proportion of people who do that is so tiny as to make the whole point nonsense. If you put the money into a CD or a passbook account (generally regarded as the least productive places to put it outside your bedframe) it is still available to the economy because it increases the bank's assets! And banks lend money which functions in the economy! Come ON! This is so basic it takes my breath away! I could understand someone who hadn't even taken Econ 101 and didn't have a good grasp of what happens when you put money in the bank making this mistake, but I'm just appalled that anyone with a single semester of Econ could say this, let alone someone who's long been considered an "authority" on economics.

Bike Bubba said...

The scariest thing IMO is that (as one who took Econ 102 (they actually called it 252, but whatever), is that this fallacy is taught to virtually every econ student on the country. Like Reagan said, a lot of people know a lot of things that just aren't true.

pentamom said...

Yeah, I didn't want to be too know-it-ally and point out that Intro to Macro and Intro to Micro are usually 200 level courses, but I thought of that. (It's not for nothing I have a completely useless double major B.A. in Accounting and Business Management. Thus ends the incoherent statement of the day.)

And yeah, you're right, they're TAUGHT that Econ 101 and 2-- whatever, but just as anyone who's completed first grade should be able to tell you that 1 + 1 != 3, anyone who's studied economics at all ought to be able to call bull on this, no matter what the book said.

brian compton said...

Paul Krugman quote from a 10/31/08 NYTimes Op-Ed, quoted by the Mises Institute today:

http://www.nytimes.com/2008/10/31/opinion/31krugman.html