Ground Control to Major Krugman

16 08 2011

The reductio ad absurdum is a time-tested mode of logical dissection wonderfully suited to exploding arguments that may, on the surface at least, seem compelling. One simply assumes a proposition is true, then takes that proposition to absurd (but logical) end. If I were to use this method to argue against Keynesian economic stimulus, for example, I might say something like this:

Assume for a moment that consumption drives economic growth, and that the unemployed can’t consume. Thus, when unemployment is high, the economy stagnates or contracts. Increasing employment is then of paramount importance, so by Keynesian logic, we can argue that militarization and its associated spending might provide a pathway to prosperity. Violence is undesirable, so we could prepare to battle some fictitious foe – say, for example, aliens. Remember, all that matters is that governments spend in order to get money into the hands of the previously unemployed.

Preparing for an alien invasion to get the economy juiced? Isn’t that a bit ridiculous?

It clearly didn’t seem so to Nobel Prize-winning economist and NYT columnist Paul Krugman, who recently used this brilliant bit of reductio ad absurdum to…support his belief in Keynesianism. Digging ditches or preparing for a showdown with E.T., Krugman argues, will jump start an economic recovery because individuals will be earning income, which means they can purchase goods and services, which creates jobs.

The takeaway here is that no matter what type of artificially stimulated activity individuals engage in, positive economic progress is a likely outcome because it is consumption that drives growth. There’s simply no reason to go through the trouble of designing, say, a bridge, tunnel, or other useful but complicated piece of infrastructure when digging a ditch and filling it in has the same overall effect and can be accomplished much more quickly.

This raises the question of why government should even bother spending money on shovels; in this Keynesian dreamland, consumption could be promoted by engaging in direct transfer payments to unemployed individuals and, by extension, unemployment benefits must be extended at all costs to avert economic catastrophe. It should come as no surprise, then, that prominent politicians and commentators have advocated exactly that.

On its surface, this all seems quite ridiculous. But why, exactly? That’s a question not often addressed by Krugman’s critics. Economics is a value-free science; effective economists must set ideology aside when examining the way individuals interact to form markets. While we may consider it immoral to spend stolen tax dollars on utterly useless projects or pursue inflationary policies that devalue accumulated wealth, our conception of morality cannot be used to asses the effectiveness of Krugman’s Keynesian proposals.

The mistake in Krugman’s (and Keynes’s) logic is as fundamental as it is simple: consumption does not create wealth or fuel growth. Production does. This concept was succinctly expressed by the French economist Jean-Baptiste Say at the turn of the 19th century, and was clearly restated in an article by Peter Anderson:

If individuals wish to procure a good they must give something in return that is also desirable to individuals. Therefore in order for one to be a consumer one must first be a producer of a good in which others find utility. Thus individuals desire the commodity of money not as an end in itself, but rather as a means to procure more desirable goods. However, in order to acquire money one must first produce a good that will exchange for money.

Key here is that individuals must produce a good that others actually desire to create real wealth. And that’s the stark difference between the outcomes of the sometimes messy and imperfect free market and the planned, controlled economy that Krugman fantasizes about.

In the former system, wealth is generated as entrepreneurial individuals and firms strive to produce goods and services that consumers desire. In the latter, any useful product workers happen to create (when they aren’t digging ditches or preparing for an alien invasion) is nothing more than a beneficial accident.

The wealth-consuming Keynesian theories advocated by the alien-fearing Krugman and his contemporaries are not wrong merely because they can be taken to absurd conclusions; instead, they must be recognized as fundamentally backwards and counterproductive. While we may occasionally get a few roads, bridges, or ray guns out of the Keynesian deal, burning through wealth to fuel consumption will only serve to make all of us poorer.

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One response

17 08 2011
KathUsitalo

“burning through wealth to fuel consumption will only serve to make all of us poorer”
and more dependent, and helpless, and weaker until the government controls…. hmmmm…you don’t think that’s the goal, do you?

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