Paradox?

There is a great opportunity being missed while Congress investigates the sub-prime crisis [a government intervention term]. I am not suggesting for one minute that any government body has reason to pursue an inquiry into a legal and voluntary transaction between two parties which in this case happen to be a creditor and a debtor. If one enters such an arrangement without the clear understanding of its terms, then it is the responsibility of the party to seek clarity. It is not a matter of Congressional oversight whether a person is a fool in financial terms; what is it they say about a fool and his money?

What truly should be up for debate are Keynesian economics and pointedly his mystical “Paradox of Thrift”. This paradox could very well be the root cause of the sub-prime problems. Admittedly, it is pure fantasy to believe that more than a handful of Congressmen would understand the basics of any economic problem or considering such fable as Keynes’ General Theory has given them the rationale for unfettered government spending and redistribution, there is little faith that cause is truly a concern. However as long as we are dreaming, would it not be interesting to call before the Congressional committees John Maynard Keynes himself and to have one serious grilling from a member truly versed in classical economic thought. Perhaps the questioning would go along these lines:Congressman: Good morning Mr. Keynes

JMK: Pardon me, but people usually address me as Sir Lord Keynes.
Congressman: That is all right, Mr. Keynes is more than appropriate for a ghost. Mr. Keynes in your General Theory, it was surmised that unemployment and more specifically economic depressions are caused by insufficient demand. In other words, the cause is not the entrepreneur over estimating the true demand for goods and services; it is the consumer not spending enough, is that a correct perception?
JMK: Simply speaking, that is about right.
Congressman: What would be the cause of this insufficient demand?

JMK: Considering that people only have two choices when it comes to their income, either spend it or save it, then the lack of demand would be caused by saving. In the circular flow of money, savings represents a drain from economic activity. Thereby the act of saving causes people to lose their jobs.

Congressman: Are insinuating that individual savings are bad? I am a little confused. After all, people save for all types of future events; a house, college, retirement, vacations, and etc. Are you also saying that people should not plan financially for somewhat predictable events or even those that are unforeseen?

JMK: Well, this is where it gets complicated. You see you have the MPC [marginal propensity to consume] and the MPS [marginal propensity to save]. Combined, these marginal propensities need to equal one and therefore….

Congressman: Mr. Keynes, answer the question! Are you saying people should not financially plan for future needs?

JMK: Well not exactly, they can plan for the future but in doing so they create a drag on the economy which will cause unemployment. You see the individual acting in their best interest, accumulating wealth in the form of savings means less spending which results in unemployment. You see, savings is good for the individual; but potentially cataclysmic, economically speaking, for a group of individuals.

Congressman: Let me get this straight, if I save as an individual, either to plan for future events or as an engine to increase wealth and my neighbor does the same along with my neighbor’s neighbor and so on, it becomes good for thousand upon thousands of individuals who save but at the same becomes bad for the same set of people?

JMK: Exactly!

Congressman: Mr. Keynes, can an individual spend their way to wealth, even including a state of perpetual indebtedness? If savings is bad economically, then conversely aren’t you proposing then that individuals should spend every dollar which in turn drives economic activity? I can become wealthy and financially secure by merely spending?

JMK:  Well, I admit that doesn’t sound right, but like I said before, it is very complicated when working with the MPC and MPS and getting them to equal one.

Congressman: How can people spend themselves into wealth or how is that saving money is good for every individual except when every individual does it?

JMK: Ummm, that is a good one isn’t it. Why it is a paradox. That’s it, a paradox. You know like when Al Gore tries to explain how during global warming you have record cold temperatures or a hurricane season without any hurricanes. Anyway, spending is necessary for economic growth and full employment. When individuals save, then somebody else must do the spending, that is where Congress comes in to play. You spend what the individual won’t. It is sort of like having your cake and eating it too.

Congressman: And just where does the money come from for Congress to spend?

JMK: Why from taxes or debt underwritten by the Federal Reserve System.

Congressman: Where do you suppose people get the money to pay their taxes? I mean do they spend less on groceries, heating and cooling, clothing or any number of any day items.

JMK: Don’t be foolish, they take the money that would have been saved for a new house, college, vacation, or retirement to pay their taxes.

Congressman: Mr. Keynes, so after they pay their taxes, money that otherwise would have gone for a new house, college, vacations, or retirement; how do they pay for such items now that they have been forced to pay taxes so we can spend what they wanted to save.

JMK: Easy, if you want a house, get a mortgage; if you want to go to college, get a student loan, if you want a vacation, take out an equity loan on your already mortgaged house. If you want to retire, that is why we have Social Security.

Congressman:  All right, let me summarize this string of thought. Savings is a drain on the economy, even though it is good for the individual; government is needed to spend what the individual won’t and therefore taxes the individual out of their savings. An individual who needs money for predictable and unforeseen events can still do so by incurring massive amounts of debt.  This is all premised on your economic theory that spending is the key to economic growth. Furthermore, is it not true that savings, regardless the reason, is nothing more than delayed spending.  In conclusion, the reason for the sub-prime market is a lack of savings which your theory said was bad. In the end Mr. Keynes, it is you that has caused this debacle.

JMK: [letting out a ghostly shriek] Paradox!

 

The paradox has been longed used by theorists to explain how opposite actions can simultaneously be true. In the case of Keynes, the act of saving is both good and bad for the individual within the same period of time. Can it really be true good equals bad; or truth equals a lie; or right equals a wrong? The answer as illustrated by our imaginary questioning of John Keynes is an emphatic no. The paradox becomes metaphorically the escape hatch to a bad theory or wrong premise. In Keynes’ case there were several wrong assumptions in place. First, he saw savings as a drain in the circular flow of money. He failed to acknowledge that savings in reality is delayed spending.  He also failed to articulate in his General Theory as to where government derives the dollars to spend, or as just illustrated that taxes actually deprive individuals of savings that are necessary for future financial needs. All in all as proven by the Austrian thought, Keynes mistakenly believed that spending was the engine for economic growth and in turn categorized debt as an asset instead of a liability. When confronted with these flaws, Keynes had only two options: 1) admit that his General Theory was not valid 2) Declare a paradox.

 

Ironically the declaration of a paradox is the same method used today by climate alarmists. In the book and movie, Al Gore attempts to preempt the obvious question of how it is possible to have catastrophic global warming which affects the whole world; yet at the same time have the third coldest February in the continental
United States since records have been kept or one of the coldest Aprils. How is it you can point to the destructive hurricane season of 2005 as evidence of global warming; yet a year later have no hurricanes. After all, if man is the cause and manmade emissions from one year to the next have certainly not declined, then why what was experienced one year did hold true for the following year. Just like John Maynard Keynes, Al Gore and his alarmist followers have declared a paradox.

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