Thursday, 19 February 2009

Spending your way to penury

The governments’ economists are reciting the Keynesian mantra of the “paradox of thrift.”  Saving, they say, causes money to “leak out of the system.”  They’re reciting the mantra that consumption drives the economy.  Consumption, they say, drives more than two-thirds of the overall economy. What the politicians need to do to “rescue” the economy, they say, is to limit private saving and spend, spend, spend!

That’s a command that every politician likes to hear.

So governments are spending. Governments and their economists are exhorting you to spend.  Australian Kevin Rudd is giving Australians shopping subsidies, and he’s insisting that you spend it. The Obamessiah doesn’t trust you to buy up large, so he’s spending nearly a trillion on your behalf

The governments’ economists keep insisting that spending is good, and saving is bad. They’ll tell you that it’s consumption that drives the economy.  But what they’re doing is reversing cause and effect, and even a US$787 billion dollar bar tab can’t change that.  As Amit Ghate points out,

production must ultimately be understood as being for the sake of consumption...  But this of course does not mean that consumption makes production possible, manifestly it’s the other way around

The fact is that consumption spending directs productive expenditure to particular areas of the economy, but it's productive expenditure that drives it.

Here’s a model of the economy*.  See for yourself what drives it:


It sure as hell ain’t consumption.

And to answer the obvious objection: Yes, government spending is always consumption spending.

As Murray Rothbard used to say [hat tip Anti Dismal],

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

* Figure produced by Paul Ekins & Manfred Max-Neef, and pinched from Mark Skousen’s book Structure of Production.)


  1. As I have noted over at No Minister today, The Messiah is suffering because his high spending bailout is not as popular as the media might have us believe.
    The Republicans are back.

    In contrast, the relative caution shown by our John Boy is paying off.

  2. PC said...
    Here’s a model of the economy

    Oi! I can see that your economic model flow diagram contains a single closed-loop feedback controller in there, ie, the flow feeds back from investment to {improvement, eduction, machines}.

    Are you sure that your diagram cannot be modeled by some non-linear coupling of consumption with investment back to the drivers, ie {improvement, eduction, machines}?

    So, is this where main stream economists got it wrong, ie, they assume that the consumption is doing the feedback but rather it is actually the investment that is doing the feedback to the primary drivers, {improvement, eduction, machines}?

    I reckon that it is possible that both consumption & investment can form a non-linear coupling therefore they can both drive the primary causes {improvement, eduction, machines}?

    Whadday reckon? Shall I submit my model to the journal of Economic Dynamics and Control and if the editors like it and pay me, then I'll shout you a doz of VBs for you to take to Tutukaka at the weekend.

  3. FF

    "Are you sure that your diagram cannot be modeled by some non-linear coupling of consumption with investment back to the drivers, ie {improvement, eduction, machines}?"

    It probably could be but it would be very difficult to know whether you had the right factors and variables in there and whether their type and magnitude was correct. Then there are time delays and phase lags and all sorts of nasties to deal with as well! Very messy and difficult to know whether you had it right or not. Also it would a problem to allow for the some scalars and relationsuhips to change subtly or suddenly. The most diffficult would be to get the dead weight of govt intervention in there. That would be a difficult part.

    If you do build a model it would be interesting to see whether those guys would publish it or not.



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