Tuesday, March 3, 2009

Sending Kling Back to Basics

Arnold Kling rips, without much justification, a Robert Murphy column on "The Paradox of Thrift". Amazingly, Kling titles his critique, "Back To Basics", while his post seems to be lacking in real, real basic stuff.

In my opinion, he starts off with an equation that is the opposite of "basic", in the sense that he is using an equation in the first place and takes the argument out of the world of acting man. It leaves out key elements, which will be obvious to see when we get to his verbal argument, which is:

Let me see if I can put this in terms of a homely example. Our family decides not to go out to eat this week, because they want to save and buy a new TV next year. However, our interest in a new TV does not get conveyed to the TV makers. So, the restaurant cuts back employment and output, but the TV makers do not increase employment and output. Total employment and output fall. Somebody somewhere reduces their saving because they don't have a job. That person would have bought a TV next year, but now they cannot afford it. So our family gets the TV, and the TV maker does not regret failing to make more TV's.
What basics are missing, let me count the ways? First, Kling needs to read Henry Hazlitt's very basic, Economics in One Lesson, about the seen an unseen consequences of economic activity. If someone stops eating at a restaurant to save money for the purchase of a television set in a year, that money doesn't disappear, it goes into a bank where it is lent out, which increases the productivity of the country, overall. [Or, at worst, it is hoarded, and prices fall to the benefit of everyone else.] As for the employees who are laid off at the restaurant, this does not mean that they can not be employed. Another basic is that there are supply and demand curves for labor, a person laid off at a restaurant may only need to deal with a supply curve that only moves by say 10 cents less an hour to find employment on the demand curve (Duh, the demand curve doesn't disappear), or (hint) savings might have increased, thus increasing the demand for labor overall and our laid off worker may get a new higher paying job.

Nobody loses any jobs, and productivity increases. As for his nutty charge that "our interest in a new TV does not get conveyed to the TV makers". Does he think every tiny move by an economic actor gets conveyed, or even should be conveyed? But, lets say that there are many economic actors that decide to save for a new TV, say a million. Two things could happen. One, the television manufacturers will detect this and borrow some of the increased savings to increase production. Or, the television manufacturers do not detect this added demand, prices soar, and then television manufacturers start running second and third shifts to meet the consumer demand.

Kling's analysis is simply asinine. And I don't think this country, overall, will ever get to solid basic economic understanding until we start calling idiots, idiots. Kling is an idiot.


  1. He may or not be an idiot, but just to clarify what (I think) Kling was doing: He wasn't endorsing the analysis you quoted. Rather, he was saying, "Murphy thinks he knocked down the paradox of thrift, but that's only because Fazzari's exposition was weird. If I were going to give an illustration of the paradox, I would do it like this: blah blah blah, and notice that Murphy's arguments can't touch my illustration."

    In the comments to Kling's post I pointed out where I thought he was making elementary mistakes too, don't get me wrong. But I just want to clarify that I don't believe Kling was offering his own view of how the economy works.

  2. Yeah, I see what you mean, but his illustration is still wrong--it's full of holes whether it is just his attempt to clear up Fazzari's approach or not.

    What it sounds like to me is that he is saying that Murphy is attacking Fazzari's straw man, here's the real theory. Leaving it at that point, as he does, suggests a very likely agreement with the theory.

    Otherwise, wouldn't the natural thing in such a case be, "Here is 'The Paradox of Thrift'correctly stated and btw, here's why it is wrong?"

    Further, he seems to carry out the use of his model into his argument, further down the post, with "Bryan" which leads me to believe he believes his model is somehow accurate.

    He also is clearly on a slippery Keynesian slope with his concluding sentence: "I think it really is possible to have fluctuations in employment. Bryan's thinking applies in a frictionless economy that is always at full employment, but I don't think it applies in reality."