"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Thursday, November 10, 2011

The Paradox of Thrift

There is a great discussion going on at reddit, and since I have my own blog, Iĺl discuss it here. The first post:

From what I understand of Austrian economics, you guys use praxeology, or the study of human action using pure logic, to come to conclusions.
I also understand that you guys believe that humans act in their own self interest, rationally, with intent.
Keynes believed the same thing. He said that during a recession, people lose money and jobs (by definition), and that if a person is losing money, or fearing his job, he will cut back his budget. Since one man's spending is another man's income, another person will lose income as a result of this. That person will cut back on his spending, and will cause another person to lose income as a result. This is referred to as the paradox of thrift.
So let me ask you: why haven't Austrians deduced the paradox of thrift using Austrian methods?

Good stuff, no? If I don´t spend my money, someone will be out of a job, which will put someone else out of a job, and so on forever. This never ending downward spiral can shut down the whole country, or even the whole world. No wonder the Keynesians insist that spending makes the world go round.

Is there a flaw here? There sure is, in the very first sentence. Letś look at it again.

During a recession, people lose money and jobs, by definition.

Note that there is no attempt whatsoever to explain  why people are losing money and jobs. Indeed,  Keynes writes in his famous book that it is just sheer human stupidity that suddenly affects large masses of humanity, and makes them stop spending money. These things just happen, he says. Must put a stop to it, or those silly asses will bring down the whole country with their ridiculous thrift.

Thus economics is the study of mass hysteria, a branch of abnormal psychology.
They didn´t spend.

Aren´t you glad Smiling Dave is here to explain the real reason recessions happen? AE [=Austrian economics] says recessions are caused by what common sense says they are caused by, money and resources wasted. Just as if you threw your money out the window you would have a personal recession, so too if the country as a whole throws its money out the window creating parasitic jobs as opposed to productive jobs, the wealth of the nation decreases. And what causes people to create vast amounts of parasitic jobs? Money printing, as Austrian business cycle theory explains. This article goes into it a bit.

In short, a recession begins before we even know itś there, when people are getting jobs that spell their own doom. They are being hired to parasitic, non productive jobs, which will lead to their getting fired sooner or later. Parasitic jobs cannot last.

In other words, Keynes' so called paradox of thrift description of people getting fired left and right is 100% correct. Except that far from describing a problem in the economy, it is describing a solution to a problem, the problem of too many people having parasitic jobs. Those guys being fired ¨deserve" to be fired, in the sense that they are in unproductive jobs.

Thatś the first flaw in Keynes' paradox of thrift. He is seeing something with out knowing what it is. To him all those people getting fired is a disaster to be averted at all costs; to someone who knows whatś what, it is a healthy economy fixing itself by eliminating useless parasitic jobs.

The second flaw is that he didn´t think through what will happen to all those people out on the street. He assumed they are all doomed forever to be unemployed. But actually what will happen is that they will get productive jobs, probably at a lower wage than their inflated parasitic salary, and they will make us all richer. [Unless there are laws preventing this from happening, such as FDR introduced in the 30ś and Obama is doing now].

There is a final flaw, one we have talked about repeatedly in this humble blog. Job losses are not caused by lack of spending in general, but rather by lack of spending in some particular area, the one where the parasitic jobs are. Because if Mr A. doesn't spend his money, the money doesn't disappear. He puts it into a bank. The bank doesn't hide it under a mattress either, it lends it out to people [or nowadays to the govt, which is a whole 'nother problem]. I discuss this at length, with appropriate quotes from the greats, Hazlitt and Rothbard, right here [see point 2].

So back to the original question. Why didn´t those Austrians figure out the paradox of thrift, using the very methods they are so proud of? We know the answer now. They did indeed figure it all out, and put it in the proper context as well.

No comments:

Post a Comment