Economic Myths and Fallacies
There is no greater source for economic fallacies than the lips of politicians. Why? Besides the fact the most politicians are mindless bureaucrats that have very little knowledge of the real world, it is also politically attractive to peddle "too good to be true" promises that result in visible benefits to a specific group while the costs are spread out over society. Uncle Sam likes to play Santa Claus. The government likes to pretend it can give people something for free. The government also likes to play Mommy. The government likes to make people dependent on its services. The government likes to decide who gets what and what people are and are not allowed to do.
To do this, the social engineers must be able to manipulate the economy and society. They need an ideological system that supports their tinkering. They need a formula that allows them to try new variables when their first attempts fail. Enter Keynesian economics. Keynesian economics is a joke. No educated person in the world takes Keynes seriously, at least from an economics perspective. Even the Keynesians don't follow Keynes's theory They have adapted it. This is precisely why it has such great appeal to politicians - it is flexible! Yet, his old broken theory is still referenced like it is gospel.
Why?
Because the solution to any problem is always "more government intervention." Keynes was a support of Socialism and he developed a "General Theory" that supported a socialist government.
This garbage is still taught to our children in government schools. As a result, people still recite myths and fallacies that have been debunked decades ago.
To do this, the social engineers must be able to manipulate the economy and society. They need an ideological system that supports their tinkering. They need a formula that allows them to try new variables when their first attempts fail. Enter Keynesian economics. Keynesian economics is a joke. No educated person in the world takes Keynes seriously, at least from an economics perspective. Even the Keynesians don't follow Keynes's theory They have adapted it. This is precisely why it has such great appeal to politicians - it is flexible! Yet, his old broken theory is still referenced like it is gospel.
Why?
Because the solution to any problem is always "more government intervention." Keynes was a support of Socialism and he developed a "General Theory" that supported a socialist government.
This garbage is still taught to our children in government schools. As a result, people still recite myths and fallacies that have been debunked decades ago.
"...one of the twentieth century's foremost intellectual scandals."
Hoppe dedicates the second half of chapter 5 in The Economics and Ethics of Private Property to showing that Keynes's theory of new economics is..."a tissue of logical-praxeological falsehoods reached by means of obscure jargon, shifting definitions, and logical inconsistencies, intent to create an anticapitalist, anti-private-property, and antibourgeois mentality." Hoppe, p.140
According to Hoppe, "Keynes's 'new' General Theory of Employment, Interest, and Money [is] fundamentally flawed and the Keynesian revolution [is] one of the twentieth century's foremost intellectual scandals." Hoppe, p.155
According to Hoppe, "Keynes's 'new' General Theory of Employment, Interest, and Money [is] fundamentally flawed and the Keynesian revolution [is] one of the twentieth century's foremost intellectual scandals." Hoppe, p.155
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Another One of the Many Keynesian Fallacies:
Government Spending and Increased Consumer Spending Helps Recovery During Recession, Increased Savings Hurts Recovery
Arguing that increases in savings hurts the economy's prospect of recovery during a recession is one of the most famous components of the Keynesian formula that advocates government intervention to 'help' spur recovery. Keynesians believe an increase in government spending is required to bridge the gap left by decreased consumer spending during a recession. They also propose 'stimulus' type policies driving consumer spending to artificially high levels - spending above the market levels during recession. These ideas are based on economic fallacy that has been destroyed beyond argument, time and time again. However, it is politically unacceptable (in the minds of our elected officials) to let the economy contract to repair damage done by previous ill-advised interventionist policy. These myths are perpetuated in hopes of pushing the immediate problems off to a future day of reckoning...After all, according to Keynes - "In the long run we're all dead."
Unfortunately for America, though it is the theory that government spending is beneficial to an economy that has in fact been proven dead, the policies based off of this fallacy live on.
In short, the conclusion reached by the Keynesians that increased savings hurts economic recovery is based on an assumption that is both incorrect in content and is in direct contradiction to the very assumption Keynesians use in advocating government spending programs.
The theory that government spending helps the economy and that savings hurts the economy during a recession is incorrect because 1) The results of the Keynesian model attacking consumer savings are driven by the assumption that the marginal propensity to consume (MPC) is zero (it is above zero in real life - people have time preference. Net savings in the community is increased when consumers save. Real savings is a requisite for recovery.) 2) Even if we assume that everyone has the same MPC, money saved is lent out by banks to new investment so the net change in the community's income is zero - the Keynesian argument rests on the assertion that when consumers save the community's income is decreased (here Keynes makes the illogical leap that savings = hoarding = economic goods literally drop out of existence). 3) Before the government can spend anything, it must first expropriate scarce resources from inherently more efficient uses in the private sector. The act of coercive expropriation by government always decrease a community's net wealth.
Now, let's explore the inherent contradiction in the Keynesian argument. Keynesians assume in their argument against savings that changes in income have no effect on consumption - that the marginal propensity to consume is zero. For instance, store owners will continue their exact same pattern of consumption even if their income decreases because consumers decide to save money and don't spend it at the store. This extreme assumption obviously does not represent a real-world scenario. It doesn't properly account for the time preference of consumers. Minor adjustments to the assumptions of the Keynesian model to represent a more realistic scenario cause the model to fall apart. But...for argument's sake, let's stick with the Keynesian assumption used to attack saving....and apply it to the Keynesian argument for government spending.
The assumption of a zero MPC drives the entire result of the Keynesian theory that increases in saving decreases a community's income. Now, flip this scenario around holding the assumption above constant - this would mean an increase in income (received from increased government funds) would have no impact on consumer spending! Meaning, increased government spending would have no impact on the community's income level. This is the exact opposite of what government propagandist present in their arguments for increases in government spending.
How do they reach the conclusion that government spending increases a community's income? They conveniently change the assumptions driving the model! In the case of government spending, the Keynesians assume a positive MPC. The blatant inconsistency of how the Keynesians treat MPC in the assumptions leads to the contradiction in their conclusions.
The conclusion that government spending / consumer spending is good and savings is bad during a recession is the result of inconsistent assumptions in the Keynesian models. However politically enticing the Keynesian theories seem on the surface, these policies cannot and will not achieve the results marketed to the people. The results don't change just because a politician promises you something for political reasons. An honest reality shows that A always equals A.
A$A
Additional Suggested Readings:(These two essays by Robert Murphy sufficiently destroy the popular arguments of two of the most articulate and well respect Keynesians; Paul Krugman and Steve Fazzari)
Nothing Paradoxical About Thrift - Robert Murphy
Consumers Don't Cause Recessions - Robert Murphy
Arguing that increases in savings hurts the economy's prospect of recovery during a recession is one of the most famous components of the Keynesian formula that advocates government intervention to 'help' spur recovery. Keynesians believe an increase in government spending is required to bridge the gap left by decreased consumer spending during a recession. They also propose 'stimulus' type policies driving consumer spending to artificially high levels - spending above the market levels during recession. These ideas are based on economic fallacy that has been destroyed beyond argument, time and time again. However, it is politically unacceptable (in the minds of our elected officials) to let the economy contract to repair damage done by previous ill-advised interventionist policy. These myths are perpetuated in hopes of pushing the immediate problems off to a future day of reckoning...After all, according to Keynes - "In the long run we're all dead."
Unfortunately for America, though it is the theory that government spending is beneficial to an economy that has in fact been proven dead, the policies based off of this fallacy live on.
- See the Theory of the Business Cycle to learn what causes recessions and depressions and why artificial stimulus is extremely harmful to an economy. Hint: Valuable saved capital is consumed in order to maintain consumption demand levels.
In short, the conclusion reached by the Keynesians that increased savings hurts economic recovery is based on an assumption that is both incorrect in content and is in direct contradiction to the very assumption Keynesians use in advocating government spending programs.
The theory that government spending helps the economy and that savings hurts the economy during a recession is incorrect because 1) The results of the Keynesian model attacking consumer savings are driven by the assumption that the marginal propensity to consume (MPC) is zero (it is above zero in real life - people have time preference. Net savings in the community is increased when consumers save. Real savings is a requisite for recovery.) 2) Even if we assume that everyone has the same MPC, money saved is lent out by banks to new investment so the net change in the community's income is zero - the Keynesian argument rests on the assertion that when consumers save the community's income is decreased (here Keynes makes the illogical leap that savings = hoarding = economic goods literally drop out of existence). 3) Before the government can spend anything, it must first expropriate scarce resources from inherently more efficient uses in the private sector. The act of coercive expropriation by government always decrease a community's net wealth.
Now, let's explore the inherent contradiction in the Keynesian argument. Keynesians assume in their argument against savings that changes in income have no effect on consumption - that the marginal propensity to consume is zero. For instance, store owners will continue their exact same pattern of consumption even if their income decreases because consumers decide to save money and don't spend it at the store. This extreme assumption obviously does not represent a real-world scenario. It doesn't properly account for the time preference of consumers. Minor adjustments to the assumptions of the Keynesian model to represent a more realistic scenario cause the model to fall apart. But...for argument's sake, let's stick with the Keynesian assumption used to attack saving....and apply it to the Keynesian argument for government spending.
The assumption of a zero MPC drives the entire result of the Keynesian theory that increases in saving decreases a community's income. Now, flip this scenario around holding the assumption above constant - this would mean an increase in income (received from increased government funds) would have no impact on consumer spending! Meaning, increased government spending would have no impact on the community's income level. This is the exact opposite of what government propagandist present in their arguments for increases in government spending.
How do they reach the conclusion that government spending increases a community's income? They conveniently change the assumptions driving the model! In the case of government spending, the Keynesians assume a positive MPC. The blatant inconsistency of how the Keynesians treat MPC in the assumptions leads to the contradiction in their conclusions.
The conclusion that government spending / consumer spending is good and savings is bad during a recession is the result of inconsistent assumptions in the Keynesian models. However politically enticing the Keynesian theories seem on the surface, these policies cannot and will not achieve the results marketed to the people. The results don't change just because a politician promises you something for political reasons. An honest reality shows that A always equals A.
A$A
Additional Suggested Readings:(These two essays by Robert Murphy sufficiently destroy the popular arguments of two of the most articulate and well respect Keynesians; Paul Krugman and Steve Fazzari)
Nothing Paradoxical About Thrift - Robert Murphy
Consumers Don't Cause Recessions - Robert Murphy
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A Failure of the 'New Economics' - Henry Hazlitt - In this book, Hazlitt demolishes the fallacies of Keynes's magnum opus chapter by chapter.
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The Quotable Keynes
Below is a list of actual quotations taken from Keynes's magnum opus, the General Theory of Employment, Interest, and Money.
THIS IS THE DOMINANT ECONOMIC THEORY FOLLOWED BY THE FEDERAL RESERVE TO DETERMINE MONETARY POLICY AND THE US GOVERNMENT TO DETERMINE PUBLIC POLICY!!!
Keynes's theory can be described as convoluted, illogical, completely irrational in context, and at times, unintelligible. Whatever adjective most fittingly describes Keynesian economics, "sound", "sensible", and even "functional" do not come close to making the list. Investigate for yourself. Here are a few examples:
1) According to Keynes, “there are no intrinsic reasons for the scarcity of capital.” It is “...possible for communal savings through the agency of the State to be maintained at a level where it ceases to be scarce.”1
2) What policy is the US following to get out of the current recession? Increase consumer spending and lower interest rates to promote investment. Respectable economists admit that it is not possible to increase consumption and investment simultaneously, all other things equal. So, where did this brilliant strategy come from?
Keynes proclaims, “there is room, therefore, for both policies to operate together; – to promote investment and, at the same time to promote consumption...”5
Keynes gives us his own formal definitions of the terms involved: “Income = Consumption + Investment; Saving = Income – Consumption; therefore, Saving = Investment”6
3) Of course Keynes's monetary theory is full of holes...he doesn't even correctly define money. Keynes defines money is a “subtle device for linking the present and the future.” 7
Notes
1 Keynes, 376; 2 Keynes, 217; 3 Keynes, 374; 4 Keynes, 376; 5 Keynes, 325;
6 Hoppe, 171; 7 Keynes, 293; 8 Hoppe, 160
THIS IS THE DOMINANT ECONOMIC THEORY FOLLOWED BY THE FEDERAL RESERVE TO DETERMINE MONETARY POLICY AND THE US GOVERNMENT TO DETERMINE PUBLIC POLICY!!!
Keynes's theory can be described as convoluted, illogical, completely irrational in context, and at times, unintelligible. Whatever adjective most fittingly describes Keynesian economics, "sound", "sensible", and even "functional" do not come close to making the list. Investigate for yourself. Here are a few examples:
1) According to Keynes, “there are no intrinsic reasons for the scarcity of capital.” It is “...possible for communal savings through the agency of the State to be maintained at a level where it ceases to be scarce.”1
- This single thought chain may be the most absurd idea I've ever heard seriously proposed by an economist. Keynes is essentially saying that if intervene in the market and reduce the interest rate to zero there is no reason why the tools people plan to use to make things of value should not exist in the same abundance as the air we breath! It also logically follows that consumer goods should not be scarce either. If this insane theory held any water, the Federal Reserve could basically eliminate the field of economics all together. After all, economics is the study of allocating scarce resources with alternative uses. Keynes says we can use the government to eliminate scarcity. Open any credibly introductory economics book and the first line will be something to the effect of “people have limitless wants and desires, but we live in a world of scarce resources.” Don't get me wrong, this is in fact what the Fed is trying to do; they detach monetary policy from sound economic theory in hopes of achieving a fantasy utopia where scarcity doesn't exist.
- Why haven't we been able to achieve the utopia where scarcity no longer exists? Keynes explains that a low interest rate decreases the profits of greedy capitalists, so they plot to ensure “capital has to be kept scarce enough”2 to satisfy their “money-making passion”3. Luckily Keynes, the open proponent of socialism, provides a solution which includes “...the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”4
2) What policy is the US following to get out of the current recession? Increase consumer spending and lower interest rates to promote investment. Respectable economists admit that it is not possible to increase consumption and investment simultaneously, all other things equal. So, where did this brilliant strategy come from?
Keynes proclaims, “there is room, therefore, for both policies to operate together; – to promote investment and, at the same time to promote consumption...”5
Keynes gives us his own formal definitions of the terms involved: “Income = Consumption + Investment; Saving = Income – Consumption; therefore, Saving = Investment”6
- Here's an amusing attack by Hoppe against Keynes's formal proof of the possibility of promoting investment and consumption simultaneously in order to increase a community's income: “Under these definitions, a simultaneous increase in consumption and investment out of a given income is conceptually impossible! Keynes is not terribly disturbed over “details” such as these.”6
3) Of course Keynes's monetary theory is full of holes...he doesn't even correctly define money. Keynes defines money is a “subtle device for linking the present and the future.” 7
- Money is a medium of exchange. It no more links the present to the future than any other non-monetary good. Time preference and interest link the present to the future. In reality, the demand for money has nothing to do with investment or with consumption. “The demand for money is the unwillingess to buy or rent nonmoney, including interest-bearing assets (land, labor, and/or capital gods, or future goods) and non-interest-bearing assets (consumer or present goods).”8
Notes
1 Keynes, 376; 2 Keynes, 217; 3 Keynes, 374; 4 Keynes, 376; 5 Keynes, 325;
6 Hoppe, 171; 7 Keynes, 293; 8 Hoppe, 160
General Theory of Employment, Interest, and Money by John Maynard Keynes
Keynes is the most famous 'economist' of the twentieth century. His explanation of employment is wrong. His explanation of interest is complete nonsense. His explanation of money just plain silly. His jumbled logic fits perfectly with interventionist central planning, so of course it has been embraced by our wise leaders. If you ever wonder what in the world Ben Bernanke studied to come to the conclusions he does....this is it.
Keynes is the most famous 'economist' of the twentieth century. His explanation of employment is wrong. His explanation of interest is complete nonsense. His explanation of money just plain silly. His jumbled logic fits perfectly with interventionist central planning, so of course it has been embraced by our wise leaders. If you ever wonder what in the world Ben Bernanke studied to come to the conclusions he does....this is it.
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