The Keynesian ant heap

In a recent op-ed in the Globe & Mail, Davos Man’s indefatigable mouthpiece for failed, mainstream thinking, Martin Wolf, passed the following verdict on the UK authorities:-

What Mr. Cameron recommends is even nigh on impossible. Why is that? Is it not common sense that if one has borrowed too much, one must pay it back? Alas, what makes sense for individuals does not make sense for an economy, because one person’s spending is another person’s income. Consider a closed economy. Income and spending must match. If the private sector decided to spend less than its income, to pay down debt and if the government also decided to stop borrowing, aggregate incomes would fall until they could no longer achieve what they wanted. All they would obtain, by following Mr. Cameron’s advice, is a race to the economic bottom

Were it not that their own confused thrashings about in the wellsprings of knowledge so muddy the waters that laymen—above all those most dangerous of laymen who have their hands on the levers of power—quickly lose all faith in their own ability to deliver a sensible analysis of the world around them, this would almost be funny.

Never ones to be overnice about maintaining a rigorous distinction between ‘money’ and wealth’; always eager to present the results of their own serial befuddlement and blind-alley reasoning as examples of ‘paradox’ or ‘fallacies of composition’; so entirely ignorant of the role of time or capital in the system that it condemns them to live in a kind of economic Flatland—they truly should be greeted with nothing more than a vitriolic, Swiftian scorn whenever they dare to start pontificating, rather than being according the hushed respect which so many confer upon their profound-sounding inanities.

In taking the latest outpouring from Mr. Wolf as an example, the first thing we should notice is that Keynesians are entirely happy to dismiss our Austrian idea of a ‘structure of production’ (of which their hallowed GDP components are only one, subjectively-selected subset), yet, when they start to espouse (as Wolf is doing here) their tautologous ‘circular flow of money’ argument, much less their insupportable ‘multiplier effect’, they are suddenly willing to rely upon the actual existence of a larger, ‘subsurface’, Hayekian component to the lesser, above-water, final sales part of the iceberg of spending and making upon which they are so fixated.

Moreover, even if we accept the lack of a deeper appreciation of the role of higher order activity which categorises these economic Neanderthals, this childish simplification of only considering the various ‘sectors’ as if such a statistically-compliant, but monstrous aggregation had any real world validity is really an intolerable reduction to the absurd of the workings of a vastly complex, ever-changing, economic network.

To say that ‘if the household sector doesn’t borrow, then government must’ is to roll the very different tastes, circumstances, and capabilities of – let’s take the case of the US – 300-odd million individuals, living in 100-odd million households, into one, indistinguishable blob of clay and then to throw it into the scales against the only true monolith in existence – Leviathan. Likewise, they do this when they talk about the ‘company sector’ as if the innumerably rich range of business enterprises, all eagerly beavering away to try to generate their various interested parties an income, is nothing but a mass of mindless automatons, marching monotonically to the same beat, as if they were part of a birthday parade for Kim Jong-Il.

They make a similar – but possibly even greater – error when they say that ‘if no-one at home will borrow, then someone abroad must do so’ and then fret that if that uncountable, planet-girdling, to-them-utterly-homogenous, ‘offshore sector’ does not wish to run the trade deficit which is that net borrowing’s usual counterpart (the crude mercantile implication being, of course, that ‘it’ will not wish to do so), then we’re all doomed. This is now to lump the 6.7 BILLION people outside our current exemplar of the US into a single, unthinking ant hill of identical preferences and possibilities!!!!

An extension of this approach is the constant appeal to the shibboleth that ‘we can’t ALL export our way out of difficulties’ – in direct contradiction of the truth that this is exactly what we each attempt to do, every single day of our working lives!

I try to export my skills to you and those like you endeavour to do the same – sometimes to me, but often to a group which does not (and, moreover, NEED not) actually include me at all. As we each expand our ability to produce those goods and services of economic value which we constantly seek to ‘export’ across our interpersonal boundaries – so as to profit from our comparative advantage of talents – and irrespective of whether these boundaries coincide with the artificial divisions which a ‘territorial monopoly of violence’ lays down (i.e., of whether they synch with political borders) – the chances are that we will all become richer in the process.

This is no less the case when—as is well-nigh inevitable— we find the odd, residual imbalance between A and B (and even the less common one between C and everyone else from D through Z) on that single instant when we take the misleading, if regular, snapshot upon which we depend for accounting and tax-related purposes of the inconceivably extended, thrummingly dynamic matrix of global interchange in which we cannot help but be participants.

Yes, to sustain spending above one’s means may lead one into difficulties, especially when that spending is not being directed to wealth-creation or future income generation and even more particularly when it is being financed (rather than savings-funded) by an inflationary increase in money and credit. Hence the present difficulties of US mortgagees, Chinese property speculators, and the many European sucklers at the fast-drying teat of the tutelary Provider State.

But, otherwise, such exercises in five-finger arithmetic are, at best, a travesty of economic reality and, at worst, a breeding ground for ill-judged macro-intervention and invidious, nationalistic finger-pointing.

A similar distortion comes about when it is argued that if present policies reduce spending and if, therefore, prices begin to fall, profits will evaporate and set in train a feedback of even lower incomes and outlays in the future.

Again, this is true only insofar as it goes and, typically, the Keynesian propounders of this deflationary doom do not go anywhere near far enough.

The key to resolving this supposed conundrum lies in those last two items—incomes and outlays. Profit is the difference between income and outgo (less such legal deductibles as depreciation, etc). So, even if most prices were to fall for the reasons the likes of Mr. Wolf often suggest they should, there is nothing to say that a given entrepreneur’s unit costs may not go down faster than his selling prices—particularly if the difficult climate induces him to maximise his efficiency, eliminate all sub-marginal activities, and focus narrowly on what is his most remunerative unertaking. In this case, it is impossible to argue that he will not be left with a profit.

Moreover, even if the monetary count of whatever profit that left him with turns out to be lower than it was before, there is nothing to say that this will not now allow him to buy just as many – and possibly more – goods and services as was his wont (including the direct purchase of labour services) since, as was first postulated, prices have meanwhile fallen, boosting the real or effective value of his net income!

Granted, this does require the unstinting exercise of an unsentimental flexibility on the part of all counterparties involved and it may even require the renegotiation of any monetarily-fixed obligations, such as debt contracts. It also presumes that, at root, whatever credit contraction there may be underway is not allowed simultaneously to shrink the core money supply, else that latter’s real value has no chance of re-equilibrating itself.

To say that none of this is easy to achieve under today’s political and institutional framework is, alas, a truism, but neither is that admission one of finally accepting defeat. Certainly it does not mean that, instead of seeking to apply a judicious dose of social and legal lubricant to the state-stiffened joints of the exchange mechanism, we should douse the whole structure in gasoline and set light to it, as recommended by the sort of economists who are accorded the greatest number of column inches in our most prestigious national newspapers.

Truly, there is no hope for the world while we allow our self-serving political elite to derive post hoc justification for its members’ depredations from dilettantes such as Wolf – ‘second-hand dealers in ideas’ all – who are irredeemably prey to the many logical fallacies and faults of truncated reasoning which allow them to persist in propagating such errant nonsense with such unshakable conviction.

24 Comments

  • Paul Danon says:

    Terrible writing.

    • Tom Mueller says:

      I disagree! Granted – his writing offers an intellectual challenge; but it is well worth the effort!

    • Simon Bennett says:

      Many years ago I attended a short business writing course. One of the few things I still remember from this course was a simple aphorism, namely that: “you should write to express rather than impress”. Unfortunately Sean falls into the latter rather than the former category of writers. Having said that, I think Sean has many deep incites into the current malaise that infests mainstream financial journalism and economic thinking. If only he could express these ideas more crisply and concisely, and felt less of a need to impress us with his eloquence, then we would all be better off.

      • John says:

        Keynes’ eloquence certainly impressed many. Had I lacked strong economic convictions and were to choose between the two, Hayek would probably have lost out by sheer virtue of charm.

      • Tom Mueller says:

        Mr. Corrigan – I enjoy your purple prose – incadescent violet actually.

        But then – I also enjoy reading Conrad Black. ;-)

        I have an unfair advantage given I can read the obtuse prose of academic German in the original. I have always been a fan of yours, but Simon Bennett’s criticism is well put. Academic friends of mine cannot follow you given their inexperience in Teutonic turns of phrase.

        I humbly suggest that you would have a greater anglo-following if you were to vet your contributions by a uniligual anglophone editor.

        But hey… what do I know?! Perhaps you would prefer to limit your fan base to ahippopotomonstrosesquipedaliophobiacs

      • Tim Lucas says:

        Respectfully Sean, I agree. I really like what you have to say, look forward to your articles and think them too important not to read. However, most people to whom I have given your work give up half way through. This – in my view – is a very great shame.

        Perhaps, though, you might consider writing Austrian economics poetry as I’m sure you’d gain critical acclaim.

    • Adhocrat says:

      I feel quite frustrated. I’ve always had difficulty remembering who’s on whose side and which direction each team is trying to score in – I’ve never particularly enjoyed team sports. In economics I’m barely aware of who the teams even are. I hear labels like Keynesian, Austrian School, Neo-classical, market fundamentalist, bullionist, and really can’t keep track. I feel the point of this article has sailed over my head while I try and figure out if the commentator is talking about the guys in the red and black shirts or the team wearing green.

      Is there any kind of objective truth in economics which everyone can agree on? Fractional reserve banking = bad, for instance?

  • Tom Mueller says:

    Bravo!!! Brilliant analysis!!! bis bis!

    Is history repeating itself?

    Bernanke and his cabal of central banksters are focusing on America’s and Great Britain’s mistakes of 1931; and in doing so are determined to avoid a reprise of sad history. In doing so they ignore Germany’s mistakes of 1921 & 1931 as the world teeters on a the edge of a precipice.

    1921: Worldwide deflation was already in full swing as von Havenstein unflinchingly debased the German currency by essentially attempting to reflate a moribund economy

    1931:Germany’s new Central Banker – Schacht abandoned his post protesting German foolhardy policy encouraging a second round of impossibly overwhelming foreign-funded bad debt, linked as it then was to consumption as opposed to investment.

    Corrigan is correct to decry Wolfand together with his cohort of ignorant cheerleaders urging us all to leap Lemming-like over the cliff.

    Money is

    …Karl Marx perhaps phrased it best – “History repeats itself, first as tragedy, second as farce.”

  • Phil says:

    Simon, with respect, if you are going to criticise someone’s writing ability/style, at the very least you should make sure your own spelling is up to scratch. You meant ‘insights’; ‘incites’ has a completely different meaning.

    • Simon Bennett says:

      Well spotted. Criticism noted. At least I wasn’t criticising Sean’s spelling, then I would have been a complete hypocrite!

    • Simon Bennett says:

      Just for the record, I in no way criticise Sean’s ability. My complaint is with the choice he makes in writing style. I have no doubt that if he decided to write simply and directly his articles would be so much easier to read, and much more enjoyable as a consequence.

      • Tom Mueller says:

        It is not a matter of style – but a matter of culture. I remember back in my University salad days; how my English professors would fault my writing style. According to them it was quite simple. A paragraph must have more than one sentence because a paragraph must have more than one idea.

        They accused me (falsely) of composing run-on sentences.
        They were incorrect. I was writing in a German style where connected ideas were embedded in subordinate clauses all together in one long sentence… very German.

        I pleased my anglo-professors by rewriting subordinate clauses into independent sentences. I ended up becoming a proof-reader for some British students studying German philology. They too were adopting the German style and getting into trouble with their own English professors. They too could not wrap their heads around the fact that anglopones require sentences to be limited to one major idea.

        I adore Sean’s writing style. Clearly he reads Hayek and von Mises in the original. It shows! Trust me… Sean’s prose is worth the effort and is not so difficult once one becomes accustomed to the nested subordinate clause structure where one sentence becomes one paragraph of interconnected ideas.

        That said – I humbly submit, if Sean were to have some unilingual proof-reader rewrite his subordinate clauses into independent sentences (without changing so much as even one sesquipedalian iota) he would garner a much larger anglophone following!

        I say this with no little urgency – Sean Corrigan is the quintessential lonely prophet crying in the wilderness. Under no circumstance, should any impediment prevent his message from being heard! This is more important than intellectual pride – his message must be heard by any all without some dismissive wave of the hand citing “Margaritas ante porcos”.

        He is my favourite writer on current events. Until I read him I unjustly dismissed Libertarians. I still need to wrap my head around some Libertarian catechism, which still leaves me baffled, but I am grateful for Corrigans’s insights which have saved me much coin over the last few years!

  • Samuel Eglington says:

    Sean, I find re-reading the bits I don’t understand before continuing usually solves the problem. However there is one point on which I could use some futher explanation.

    “It also presumes that, at root, whatever credit contraction there may be underway is not allowed simultaneously to shrink the core money supply, else that latter’s real value has no chance of re-equilibrating itself.”

    How realistic is this presumption and what steps would be needed in order to protect the core money supply.

  • Dan Mosley says:

    Sean, you make a very large assumption in this analysis – that when demand drops, wages and prices will immediately fall and adjust to a new equilibrium. This is a very simplistic view of how the world works. It is a fact that wages and prices are sticky in the short run; this has been observed time and again in recessions.

    • Dan, with the 700 odd people I employed , within a month of Lehman we had agreed short time working, pay cuts , lay offs, temporary play offs, redundancies etc etc. We were more profitable within the year. So many in the private sector have done this. Now the public sector , that is a different matter.

      Your example was dealt with by Sean and I when you put it up in the first place. You do not see the logic. You think everyone will not consume and not reinvest when the prices are adjusted. You assume away the real economy . Best to just agree to differ and move on. We will alway publish the logic of deleverage.

      • Dan Mosley says:

        Toby,

        My argument did not really have anything to do with people not consuming and not reinvesting – maybe you should re-read my example.

        Now I’m sure you did very well in rebalancing your business post Leman. But I’m more interested in what happens in the economy as a whole. For example, Ireland and the Baltic countries have had to deflate to make their economies competitive again, and they are finding it an extremely difficult and painful process which goes hand in hand with high levels of unemployment.

  • Steven Cox says:

    It is a pitiful commentary on government schools that they have left two whole generations unable, and childishly unwilling to read such clear writing as Mr. Corrigan’s. Those who complained the loudest about “style” have revealed that the “style” to which they are accustomed is mostly television.

    • Tim Lucas says:

      Indeed Steven. Wishing the world were different, however, will not change the fact. If this frustrates you, then I suggest that your comment be made to those in a position to change the education provision of the country. Alternatively, I know an excellent mentoring scheme designed to help poorly educated children improve their ability to read, the details of which I can supply if you’d like. Asserting your moral superiority thus will neither help Sean Corrigan’s message get out, nor improve educational standards.

      • Steven Cox says:

        I’m very sorry, Mr. Lucas, that you have evidently watched so much television that you mistook my defense of Mr. Corrigan’s clear style for an assertion of moral superiority. I spent many happy and fruitful years laboring with young minds. They, unlike hardened adults, took it to heart when I urged them to read good literature to cultivate their minds, rather than watch television. Of course it is much easier just to watch television, and our culture shows that most have chosen that course. I have less patience with those adults, who could, even today, could make better choices, but then whine when Sean’s style is not “cool” or “mod” enough to suit them.

        • Tim Lucas says:

          Thanks for the reply Steven. I love a good sitcom! The more purile the better!

    • Tom Mueller says:

      Bravo! I share your sense of frustration. You remind me of Joseph Sobran, another great intellectual writer, who identified his political views as “paleolibertarian anarcho-capitalism”

      My favourite Sobran quote:

      “In one century we went from teaching Latin and Greek in high school to offering remedial English in college.”

      http://www.absoluteastronomy.com/topics/Joseph_Sobran

      Ha… “remedial English” to no effect! Sans spell/grammar check on laptops, all too many students in our august halls of academe are functionally illiterate!

  • Harry Koza says:

    I think Sean Corrigan’s writing, while it may display the orotundity of Conrad Black, and while it may send the less-lettered reader scurrying for his thesaurus, is bang on. As for the absurb notion that he should “dumb it down,” what’s the point of a vocabulary replete with sesquipedalian erudition if you can’t use it? Read up, people.

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