To the ordinary person in the street, the idea that we can rescue ourselves from a crisis caused by excessive borrowing by borrowing even more must seem mad. In this respect they are [he/she is] possessed of far more common sense than those who are currently advocating just such a course of action and purport to be our leaders.
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Samizdata quote of the daySeptember 7th, 2011 |
 13 comments to Samizdata quote of the day |
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Just to play devils’ advocate for a moment:
Isn’t it true that the truth is often counter-intuitive? Just because it doesn’t seem to make sense to the man on the top deck of the no.32 doesn’t mean it ain’t so, cf. the Monty Hall problem (and probability in general), steering into a skid, quantum physics etc.
Just a thought. Don’t get me wrong, it seems like, empirically, Keynes was basically mistaken wrong, but there are better arguments against it than that it doesn’t appear to make sense to the ordinary fellow.
CL, You cannot eat paper or promises.
It is clear that to make the car go faster is not going to put petrol in its tank. Even if it does look good for a few seconds.
Sadly, I think that there are many ‘ordinary’ persons who think exactly that borrowing even further is the solution to debt.
Point of order – much of the current crisis wasn’t, technically, caused by Public Borrowing of any kind. It was caused by a collapse in liquidity of the entire banking sector caused by a financial services sector with absolutely no downside on poor investments.
The rise in public borrowing, is a side effect of the depth of the recession, drop in revenues from the recession and the government having to bail out the banks who caused the mess in the first place otherwise they’d have to deal with a complete suspension of all economic activity due to no money in circulation.
Amusingly, in the case of Ireland, they were being held up as a paragon of financial virtue right up to the end of 2008.
I have a problem with Classical Liberal’s view above (in addition to his juxtaposition of his chosen pseudonym with his chosen examples of pseudo-rationality).
The Monty Hall problem is indeed somewhat counter-intuitive. However (for me at least) the explanation falls into place when one considers that the show host has added extra information to what was known by the contestant: thus the contestant now has more knowledge, so reconsideration must be in order: even if the decision does not change, the probabilities must. The reconsideration is that, initially, the contestant knew that there was a 1/3 chance of finding the car behind his/her chosen door and a 2/3 chance of finding it behind one of the other 2 doors. The show host adds his extra information that the car is not behind the door he opens, so the 2/3 probability case is now reduced to the unopened door not previously chosen by the contestant (with the 1/3 case remaining with the door originally chosen by the contestant).
In the case of steering into a skid, my experience on a skid pan in both front-wheel drive and rear-wheel drive cars is exactly what my instructor taught: drivers do the correct thing without thinking (which wheels are powered in this particular car). Therefore CL’s quoted example is not counter-intuitive (at least for drivers who are driving).
On quantum mechanics, the seemingly counter-intuitive nature of things comes from an absence of human experience with dealing with the extremely small. It is not really counter-intuitive; it is wrongly assuming knowledge where one has but ignorance – and should know it. [Aside: a better example of counter-intuition, where one might more reasonably consider one’s self somewhat informed, is the movement of a helium balloon inside the car as it accelerates or brakes.]
Finally, there is no absence of experience with dealing with a shortage of money: it is even more important than usual not to waste what money (labour, energy, raw materials or whatever) one has on non-essential or worthless things. Thus Keynes’ reported statement about digging holes and filling them in, if you can think of nothing better to do, is clearly wrong. That view of Keynes only works (as a distraction manoeuvre) if the better thing to do is revolt against those in control; thus it only works beneficially for those in control: not for the totality of society. [Aside: and it is better overall to paint one’s own house or grow one’s own vegetables: than to dig holes, fill them in, and have society pay back later one’s false wage for one’s non-contribution.]
The important thing is not to lose the (irrecoverable) worth of the available labour time in doing nothing or doing the worthless. That, however, is not a necessary responsibility of government, as is shown by private benefit from house-painting and vegetable growing. If the government-funded labour is actually worth what it is paid, that is OK: but not very likely, especially when government is inventing things to pay for.
The Keynesian view is just, and totally, mistaken in its belief that the paying for labour is what is valuable: the value actually resides in the worth of what is made with that labour.
Best regards
Nigel, purely in the spirit of debate, I do think Classical liberal has a point although his examples are not ideal. Money on the macro scale experienced by governments does not behave the same way as money on the micro scale experienced by ordinary persons.
You and I cannot print money, nor do we own serfs who can be taxed at will. If we wish to travel to the US, the exchange of currencies is a trivial matter but exchanging tens of millions of pounds for dollars to purchase oil is not. You can take a million pounds out of the country in notes, but billions of pounds can only ever exist as entries in the BoEs ledgers.
Planting a vegetable garden may be a productive use of your time but nature has no analogue of debt. The creatures of the forest cannot consume tomorrow’s lunch today so rustic metaphors are suspect.
I think you are entirely correct in that the micro economic instinct to prudence does hold at the macro level, however Classical liberal is quite right to point out that this may not automatically be the case.
Daveon is, technically, correct that the triggering event of the current economic crisis was a lack of liquidity in the banking sector. But that liquidity crisis lasted only a few weeks or months; it is about as far away from today’s problem as it is possible to get. US banks currently have $1.6Tr of excess reserves on deposit with the Fed, which they aren’t lending due to a shortage of good opportunities; large US corporations are sitting on $1-$2Tr of cash for which they can find no useful investments; US money-center banks are turning away large foreign deposits, or charging “storage fees” for that cash (essentially negative interest) because it costs them more in deposit insurance premiums and increased capital requirements than they can earn on it.
Today’s recession is not the fault of any liquidity shortage, but is purely and simply due to destructive governmental policies, including running massive deficits to fund activites with no economic merit whatsoever. I disagreed with the bank bailouts of 2008, but at least at that time there was a rational argument that the collapse of a few large banks (and especially AIG) would have triggered a worldwide systemic collapse. There is no similar rational argument to be made for any of the economic idiocies perpetrated by our government since then.
And I agree with Roue le Jour’s point.
The reason perpetual motion cannot work is because friction exists.
Keynesianism is an economic theory which ignores friction (the costs that are not seen because they are somewhat distanced as in Bastiat’s ‘broken window’).
Whatever triggered the economic crisis, it was inevitable, because the system has been running on a belief in perpetual motion wherein people have put in less and less real stuff and expected the wheel to go on turning.
I have read that what finally exposed the system to its own inevitable failure was actually coercion on financial institutions in America to lend money where money realistically should not have been lent because there was no hope of repayment or debt servicing.
But, again, that was only the trigger.
I don’t know about the streets of London, but here in the streets I walk, most ordinary(?) people have no idea what actually caused the crisis – borrowing or anything else, nor are they even aware that the borrowing is currently going on.
I try to stay out of the streets, myself.
But Laird, the life of a city breathes in its streets.
Once those are lost, the city is lost.
And once the cities are lost . . .
Is this off topic?
🙂
It is a very good quotation from Terry Smith.
As for the broader philosphical point…..
“Common Sense” (i.e. the ordinary reasoning of human beings) can be wrong, but the burden of proof should be on those who claim it is wrong.
Keynes (like his followers) does not produce either evidence or (real) arguments.
What he did was produce was superb verbal performances – full of little bits of cynical Bloomsbury Group humour.
And his followers?
They just “argue from authority”.
“X is policy suggested by economics so we must do X”.
A closed circuit – based on false assumptions as to what economics is.