Friday, October 28, 2005

This Guy Hates Keynes...and not in a good way

I am really just stuck on Economics lately. I have to admit it's more the arguments that grab me than the actual numerical/descriptive analysis of economies.
Have you read the "glass window" fallacy? This is old, but was popularized by an economist WSJ writer Henry Hazlitt in a book called "Economics in One lesson." The guy HATED Keynes. He wrote a whole book line by line trying to refute Keynes "General Theory" book and was famous for saying "What is original in the book is not true; and what is true is not original" (which is more or less what Keynes says classical economists would write about his book.)
Anyway, the glass window fallacy: Some kid throws a rock through a baker's window. This is good for the economy because the baker has to give work to the glass installer who pays the sheet glass maker who buys goods (including baked goods) from others with the money. Hazlitt makes the standard refutation of this fallacy by saying the baker will spend $100 replacing the window, but would have spent that $100 somewhere else (presumably on something more desirable or productive). So it doesn't help the economy.
It's not surprising this guy hates Keynes. What Keynes would say is that Hazlitt is absolutely right IF the baker has Zero Propensity to Save Money (e.g. he spends every dollar he has). What if he has savings? What if there is deflation and people are not spending money because they know things will be cheaper in a month (like happened in The Great Depression and in Japan in this decade), causing personal savings to increase, spending to decrease, which causes more deflation...
How do you get the baker to spend money he wouldn't otherwise spend?
1. Break his window
2. Tax him and have the government spend the money for him (not very efficient except for taxing rich people, because most people during a depression need to spend most of their income).
3. Have the Government borrow money (a proxy for the baker borrowing money) and spend it on general productive projects like the Tennessee Valley Authority or police to prevent windows from getting broken.
The whole issue of credit (government and consumer) and propensity to save/invest vs. spend seems by-passed by monetarist types.
Another issue I haven't read discussed is how shifting the distribution of aggregate income alters demand.
A dollar to a poor person = 100% $1 of demand. That's consistent with the classical "Says law" that supply (cost of supply is paid out to "factors" like workers) = demand (because every supply $ will be spent and no more, no less). But the richer the person the less they need to spend and the more they will save/invest. Since the savings rate is a pretty serious indicator (along with things like the consumer outlook or attitude), it's surprising that it doesn't seem generally indexed to distribution of GDP rich<--->poor.
Especially since that has dramatically shifted over the last 20-30 years.
That can actually cause stagflation because more money in the system, if not spent, will result in both inflation and a slower economy.
I think.


Anonymous Anonymous said...
I know what I like and I like it, have a laugh on me.

10/28/2005 12:38 PM  

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