Brianna

Keynesian Spending is Cargo Cult Economics

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Not that this article will contain any new ideas for anyone in this forum, but I thought you might enjoy reading it anyway.

Cargo Cult Economics

Pretend that you are on a desert island with six other people. One guy hunts, another fishes, a third collects firewood, the fourth hauls water, the fifth gathers fruits and vegetables, the sixth builds huts, and you … eat. Yes, that’s right. Your job is eating. You pick up seashells off the beach, and give them to the other inhabitants in exchange for fresh fish and palm frond huts, and explain to them as you do how lucky they are that you are there to stimulate their production. After all, if you weren’t there, who would they sell those coconuts to? Who would consume their fish fillets and firewood? And how else would they get all those nifty shells?

The truth is, if this were happening on a real desert island, you would have been tossed offshore a long time ago. After all, it’s blatantly obvious that you’re not pulling your own weight in this scenario. You clearly haven’t produced any valuable goods and services. And those seashells aren’t actually worth anything; they’re just empty tokens that you’re trying to give away in order to pretend to be earning your own keep.

So if this is such an idiotic idea, how come we teach it in economics classes the world over?

Don’t believe me? Just replace the word “beach” with “Federal Reserve,” the word “seashell” with “dollar bill,” and the word “island” with “America.” It’s the dominant economic idea of our times. All we have to do is get Bernanke to turn on the presses and give the dollar bills to the unemployed, who will go out and give them to businesses in exchange for goods and services, and this will stimulate demand and help the economy. Right?

Well no, not exactly. Because you see, the unemployed in the real world have done as much to acquire their empty dollar bills as the loafer on the island did to acquire his seashells. They haven’t produced value. They haven’t contributed to the economy. They just used their empty tokens to transfer resources from the productive to the non-productive. And whether those men were not productive because they were lazy or because they couldn’t find a job is immaterial. The intentions of the man holding the worthless token do not change the facts of the case.

During WWII, the American forces who landed on Pacific islands to fight the Japanese had planes come in with supplies, some of which they were usually willing to share with the natives. Once the war was over and the Americans went away, the islanders often tried to imitate the practices of the soldiers in the hope that this would bring them and their wealth back to the islands. They built crude imitation landing strips, aircraft and radio equipment, and mimicked the behavior of the soldiers they had seen in hopes that these sympathetic gestures would lure planes full of cargo onto the island. Of course it never worked, and eventually most of the practices stopped.

These groups were called cargo cults, and the label cargo cult eventually came to stand for a group or an idea that imitated superficial behavior while missing the point of the whole exercise. In the case of the islanders, the point they missed was that while planes do indeed need landing strips in order to land somewhere, a pilot will only fly a plane to a destination if he actually has a reason to go there. In the case of the Keynesians, the point they missed is that while money is indeed a requirement for modern commerce, money only works when the person who holds it has actually produced something of value in order to acquire it. Otherwise, it will simply take its value from the goods that someone else has produced, making the man who gives away the empty money in exchange for the goods nothing more than a liar and a thief.

Keynesian spending is cargo cult economics, and printing money to stimulate demand is no more likely to bring wealth to a country than having islanders build straw airplanes and coconut radios. It does not bring prosperity, merely a transfer of resources from the productive to the non-productive until the productive catch onto the scam and band together to vote the loafers off the island.

http://opinion-forum.com/index/2010/12/cargo-cult-economics/

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Sorry, no. Though if I can't find a proper engineering job by July or so, I might be tempted to change my mind :-)

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Defense? I still think that's where the coolest engineering is... would have LOVED to be one of those guys:

(even if they didn't win, the technology is amazing)

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Maybe. The job I interviewed for last October would have been doing controls work on jet engines; either civil or military (F-35 JSF). The one I interviewed for last week would have been working on something called C-RAM (Counter Rocket Artillery Mortar). From the job description, it sounded like they wanted people to help troubleshoot a device that was designed to counter enemy fire (hence the name). I wouldn't mind a defense job, though some defense jobs would be more worrisome ethically than others. There are probably no defense jobs I would refuse on ethical grounds right now, though that might change in the future depending on just how bad the government gets. But my specialty is really trajectory work, space work. So... if any of you aeros on this forum know someone who's hiring, PM me please!

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This is really a brilliantly clear illustration of the flawed premises in statist economics. Thanks for sharing, and keep thinking :-D

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Although it has to be said that current printing is not for the purpose of stimulation, whatever the Krugmans of this world may say, but simply diluting away obligations to creditors home (anything held by the GSEs, for example) and away (the Chinese).

The issue with a logical attack on the government on the basis of stimulus not working is not particularly effective for that reason, I believe. Efforts should focus on why diluting debt away is a terrible idea.

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Keynesian spending ... It does not bring prosperity, merely a transfer of resources from the productive to the non-productive ...
Redistribution is the heart of Keynesianism. The classical approach to recession was "liquidation": recognize losses, fire a lot of people. Then, start from a new bottom and rise again. The Keynesian approach is to take from the many still left standing and give to the one's who have been badly hit. Politicians like Keynesianism because it tries to remove blockages in the system and address debtor stagnation by stealth redistribution rather than by widespread liquidation.

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The leftists are fond of criticizing the "supply-siders" as being advocates of "voodoo economics". Well, there is *some* validity to that criticism.

But Keynesianism is voodoo economics on steroids! "If you spend more, you will become wealthier!" - and - "If only you make sure that you consume like mad, production will take care of itself!"

Now *that* is voodoo economics! Laffer was a piker compared to Keynes!

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But Keynesianism is voodoo economics on steroids! "If you spend more, you will become wealthier!" ...
True, and yet there is a sense in which Keynesianism "works" and this aspect gives Keynesians their ammunition. Let me explain: The classical approach to recession was "liquidation": recognize losses, fire a lot of people. Then, start from a new bottom and rise again. The Keynesian approach is to take from the many still left standing and give to the one's who have been badly hit. The classical approach is to allow the recession to be as deep as it has to be; the Keynesian approach is to stop it from going as deep as that, by resorting to redistribution.

For instance, in the current recession, households have changed some financial behavior, cutting back on their debt and their recurring financial obligations. It may not appear that this has happened, but it has happened to some extent. In fact, though some of the changes have been small, they're also unprecedented (for instance total household indebtedness previously rose for decades, but has actually not just flattened out but has turned slightly downward). Still, if the government had left things alone, this pullback would have been much sharper, with people correcting much more rapidly. Instead, the government has stepped in, borrowing from future production, to "help" the economy now. The result is that the recession has been less deep than it ought to have been, and so people have corrected much less. As a consequence, the recession has been longer than it otherwise would have been.

Not only does the government prolong the pain now, but the only way it does so is by making the long term that much less attractive.

When Keynesians say "in the long term we're all dead" it actually encapsulates their psychology quite well.

Mike Shedlock has a nice variation on this, saying "For Keynesians, the short term is forever": i.e. every year they find that they have to keep recommending a little more borrowing from future wealth "for the short run". Like chief Vitalstatistix, they keep evading, hoping that "tomorrow never comes".

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But Keynesianism is voodoo economics on steroids! "If you spend more, you will become wealthier!" ...
True, and yet there is a sense in which Keynesianism "works" and this aspect gives Keynesians their ammunition.

Yes, you are right. There is a sense in which Keynesianism *appears* to work.

The Keynesians want to avoid having to "bite the bullet" and pay the appropriate economic penalties for the sins of the boom which preceded the bust. But you cannot *really* cheat reality. So *someone* has to pay the price for those sins.

So Keynesianism comes down to this - you avoid having to "bite the bullet" and "take the necessary losses" (for the time being, that is), by making *someone else* have to "bite the bullet" and "take the necessary losses" for you! When the government eases the economic pain for some men, it increases the pain for someone else. It "redistributes" the pain - it does not *really* diminish the pain. And the most pernicious thing about Keynesianism is that it eases the pain today, by actually *increasing* the amount of pain we all are going to experience in the future! For Keynesian economics consumes capital in order to make possible consumption today. Of course, that is a fool´s game, since sooner or later the capital will run out - and then the game will be over. Then civilization may very well collapse!

Therefore, Keynesianism only "works" as long as there are victims. And only as long as the influence of altruism makes the victims willing to put up with this vicious evil. Ayn Rand was spot-on when she identified the principle of the "sanction of the victim". Keynesianism, ultimately, rests on *altruism*. In order to understand how to fight Keynesianism, and all other forms of socialism and semi-socialism, we must understand the way in which socialism and semi-socialism rely on altruism. Of course, the reason that the Conservatives have been so ineffective in fighting socialism is that they do *not* understand this. The Conservatives even *embrace* altruism themselves!

So Objectivism is sorely needed to deal with Keynesianism. For Objectivism understands that Keynesianism is, at root, a *moral* conflict, and not merely an economic conflict.

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So Keynesianism comes down to this - you avoid having to "bite the bullet" and "take the necessary losses" (for the time being, that is), by making *someone else* have to "bite the bullet" and "take the necessary losses" for you! When the government eases the economic pain for some men, it increases the pain for someone else.
Exactly, the goal is: let's suffer together, lest some of us fellows suffer alone.
So Objectivism is sorely needed to deal with Keynesianism. For Objectivism understands that Keynesianism is, at root, a *moral* conflict, and not merely an economic conflict.
Exactly.

There is a thin silver lining: appeals to pure altruism doesn't work well, and usually have to be supplemented by appealing to self-interest.

Unfortunately, this is expressed via fear: if you do not help, the house of cards will collapse, and you will suffer too; help or the bad guys will pull you down. Then, the way "the bad guys" are defined is used as a device to seize the freedom of good guys. So, instead of blaming a mix of bad lenders and bad borrowers, the politicians frame it as Wall St. vs. Main St., which allows them to go after the good guys on Wall St.

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