Comments on: The Fallacy of Composition

By: Keynes

Keynes — Tue, 17 May 2011 22:20:38 +0000

“Economists tend to be divided into two groups. The first sees the economy as a perpetual motion machine that magically grows even as people consume down the capital stock (which replenishes itself and even expands on its own, just as long as consumers continue to spend). The second sees economic growth occurring only because people save for the future and create new capital that matches with consumer needs and desires. It does not take a genius to recognize the “bad” economists and the “good” ones.”

Just to be logically consistent — and to point out where you’ve gotten the Keynesian hypothesis wrong — neither economist (should) see the economy as always starting from a tabula rasa. The economy works dynamically — not statically.

Example: Keynesians don’t assume that capital stock is ‘automatically’ replenished. They assume that as the economy cycles — that is, as the capitalist invests and the consumer spends — it perpetuates itself (this does not deny that the capitalist does not save and invest — this is seen as part of the cycle). A breakdown of either investment OR consumption can lead to the cycle being brought to a halt.

When this occurs, investment falls off and consumers stop spending — that is, BOTH parties begin to ‘save’ WITHOUT investing (in your example, you’ve confused saving with investing — one can save without investing… this is important).

If, for example, the capitalist sees that no consumers are buying his products and that the prices of these are falling (deflation) he may choose to hold onto his money — which, due to deflation, is now increasing in value vis-a-vis commodities on a daily basis.

So, I’m afraid your argument isn’t even internally consistent — let alone being a real exposition of your opponents views.

Sorry. I hope you’re not an academic economist…

By: Philip Pilkington

Philip Pilkington — Wed, 23 Feb 2011 15:39:17 +0000

“The first sees the economy as a perpetual motion machine that magically grows even as people consume down the capital stock (which replenishes itself and even expands on its own, just as long as consumers continue to spend).”

That is the single most disingenuos caricature of Keynesianism I’ve ever come across. You should be ashamed of yourself…

By: to Nicolai

to Nicolai — Wed, 20 Oct 2010 15:58:02 +0000

Saving is investment. If everyone saves – they are investing. And of course they are using their money to invest into the most urgent dissatisfactions necessary to eliminate to maintain their investment capability. To do so, the most urgent discontents are probably those related to their own welfare – shelter and food, social activity. You see, those activities in that context ARE savings! That is, they(eating, sleeping, rest time) are the most rational(as per the valuation of the actor) means toward the ends of increasing future consumption. A society composed of man with the sole purpose to labour – and not to consume at all – is perfectly viable, and not only that, it would the most productive economy imaginable.

By: ECON

ECON — Fri, 15 Oct 2010 15:41:40 +0000

Keynes you must be reminded noted that there are short and long run views to any economic action and in the long run “we are all dead”. In the short run government spending works in the recession/depression economy but in the long run it cannot continue…

By: Nicolai Hähnle

Nicolai Hähnle — Sat, 02 Oct 2010 14:21:57 +0000

Since I am genuinely interested in learning more on this topic, let me perhaps phrase a somewhat silly question. At the very least, this question would somehow have to be answered before I could reasonably consider the “Paradox of Thrift” to be incorrect.

Imagine that everybody saved _all_ their income. As far as I understand what you have written, this is perfect for building up capital and growing the economy. But what are people going to do with that capital? After all, if everybody saves all income, then nobody will buy anything and the economy will simply stop doing anything. It’s the total collapse/standstill.

Yes, that’s a very hypothetical scenario, everybody would have to build up stockpiles of food that will last them for three years or so before that total collapse could happen. Still, from a theory point of view, you should be able to explain how that scenario fits into a world where the Paradox of Thrift is incorrect.

By: Nicolai Hähnle

Nicolai Hähnle — Sat, 02 Oct 2010 13:55:24 +0000

You claim that the “Paradox of Thrift” if false, yet you give zero explanation as to why you think this is the case, except that somehow magically growth occurs by “capital meeting with consumer needs and desires”, which seems nonsensical given that an increased consumer savings rate corresponds to reduced effective consumer desires. (By “effective” I mean that the consumer maybe desires more, but by saving money indicates that he is not willing to pay for that desire, which is really equivalent to the desire not being there in the first place.)

On the other hand, proponents of the “Paradox of Thrift” are able to explain their point of view in an easy to follow way with no problem.

Maybe I am not a genius, but as a layperson, you make it very hard for me to believe your case.

By: Alexa M

Alexa M — Mon, 23 Mar 2009 23:52:55 +0000

I have read several of these articles on popular monetary fallacies by William Anderson. It is very informative and is helping to increase my knowledge and understanding of current economic issues. Being in High School, it\’s hard to trust what any teacher or textbooks says, so articles of this sort are more helpful than I think the authors know. This is a thank you to Doctor Anderson and the other writers for FEE!

By: Devon Young

Devon Young — Tue, 27 Jan 2009 04:46:13 +0000

On my site, http://www.AudacityOfCommonSense.com, a conservative “bookmark” site, I link to lots of sites that help Americans keep an eye on their elected officials, access objective journalism (which exists almost exclusively on the web nowadays), read their founding documents and much more.

One of my goals is to educate folks on money. I feature sites on the Federal Reserve, personal money management, where the government is spending our money and so forth. I am adding this site to “Audacity”. I found you through C-Span’s TV book after seeing Burton Folsom’s lecture on FDR: New Deal or Raw Deal.

Thank you for your work helping the public understand these crucial issues.