Another Flaw of Keynesianism

It recently came to my attention that Keynesianism has a second flaw beyond what I deem "the Keynesian fallacy."

(The Keynesian fallacy is the belief that the circulation of money is the prime determinant of the health of the economy; if money circulates a lot, it creates wealth).

It recently occurred to me that Keynesianism has another fallacy associated with it: the belief that capital goods and labor are completely fungible (or as William Anderson puts it, "homogenous").
Therefore, whenever aggregate demand is too low, the solution is simply to increase aggregate demand, rather than to consider whether the specific demands and productions are miscoordinated or whether production is geared up to meet demand. For example, if there is a glut of rubber tires, the goal becomes to find a way to use all those tires rather than to divert production of tires towards the production of something that is more in demand.

So as a result, you hear statements about how government stimulus will definitely help the economy without costing anything or without crowding out private investment, because there are so many idle resources that will go to waste if they are not used, which the government can use. And, according to this way of thinking, as long as we have high unemployment, there is excess labor so there is no danger of the government diverting resources by employing people.

Generally, this theoretical framework can be summed up by this quote from Dean Baker:

The Post is also worried about the deficit, telling readers that there is a limited supply of capital in the world and that we are borrowing too much. Actually, for practical purposes there is not a limited supply of capital in the world when the United States and most of the other wealthy countries are seeing double-digit unemployment. We can pretty much spend whatever we want without coming up against resource constraints. (Unemployment -- means excess labor supply, get it?)

This, of course, is based on the assumptions that (a) labor is the only resource constraint, and (b) all labor is fungible.

The fact of the matter is that (a), there are raw materials and technological constraints that government can push us to the limit of, regardless of employment, and (b) that a glut in labor does not necessarily mean that there are no labor shortages in certain sectors.

Definitely government can crowd out the use of raw materials, technological infrastructure, and land, even when there is high unemployment. Moreover, government could wind up exacerbating unemployment problems if the stimulus creates demand for jobs that require skills that in short supply. This could, in turn, reduce production at other levels, thus causing the labor glut in other sectors to get worse as demand for jobs declines in that sector.

For an example of the first problem, let's say that the government spends money on building asphalt bike paths and on building new highways into largely untraveled areas (like the famous "bridge to nowhere") in the hopes of getting more settlement in those areas. That could deplete our supplies of the raw materials needed to make asphalt, and thus cost jobs that are involved in making other goods that require those same raw materials. Alternately, the spot the government takes for its road might have been used to build a factory, or some other facility that society might find more useful. This is not to say that spending money on repairing roads or on building new roads in necessarily bad (although what the federal government's role should be in such things is an issue in its own right), but it is untrue to suggest that it is costless and does not represent a drain on other potential uses of resources. In any case, any such project would need to be justified on its own terms, quite apart from its effect as a stimulus.

For an example of the second, let's say that the government decides to put the unemployed to work. There is a glut of people skilled in construction. Therefore, the government sets about trying to create more office buildings to put lots of construction workers back to work. What if, however, it turns out that these buildings also need engineers, and that, due to lots of people with a mathematical background getting into the financial industry instead of engineering (due to the recent investment bubble), there is a shortage of qualified engineers (building houses requiring fewer engineers than building large office buildings), meaning that increasing construction will take the engineers out of other occupations that require them? Then these industries will not be as successful and will lay people off, as they cannot find the number of engineers that they need in order to produce goods and employ people in the other positions in their business.

The obvious solution, of course, would be to get more people to become engineers. But (a) not everyone has the aptidue to become an engineer, and (b) there will be a delay because it takes time to train someone in that field.

In the absence of government intervention, there will still be some maldistribution of resources, as the market process may take time to get things into equilibrium (after all, learning certain professions takes time in any system). But the problem is that the government intervention, being isolated from direct market signals, is as likely to exacerbate a shortage as to solve one.

The problem with Keynesianism in regards to supply and demand ultimately boils down to the fact that it oversimplifies supply and demand into one homogenous mass, therefore eliminating a key element of the economy: diversity of resources. This causes Keynesian policy to become largely about coordinating the overall level of supply and demand, and to assume that all economic problems can be solved by adding or subtracting consumption. This, in turn, leads to all of the nonsense where simply increasing the number of exchanges is seen to be the same things as creating actual goods, which brings us back to the original "Keynesian fallacy."

That is all.

You Mean You'd Like to See them Nominate Someone Like Ron Paul?

Conor Friedersdorf really ought to at least pay lip service to him in this post at Sully's:

What I'd like to see in 2012 is a Republican nominee willing to apply these insights [e.g. about governmental incompetence and and the limits of human nature] -- all of which he or she will surely profess to believe -- to matters of foreign policy.

That is all.

A Good Point

Over at Unqualified Offerings, Thoreau makes a good point, one that occurred to me but that I had never bothered to formulate or blog on:

Essentially, it boils down to if lawyers' legal opinions - later deemed incorrect - on an issue such as torture are used to absolve the people responsible for carrying out the orders of accontability, then the lawyers should be held accountable.

Despite talking points by a lot of neoconservative talk-show hosts about how liberals are trying to censor legal opinions, the fact of the matter is that by offering an opinion in an official capacity that encourages illegal behavior, the lawyer is more or less guilty of legal malpractice.

It is one thing to express an opinion as a private citizen, or to argue as to what the law should be. But to give legal advice with the express intent of making an act okay that would not be okay without the advice - that's not okay.

Of course, we need to see how deep this thing goes. One or two issues can be chalked up to political differences. But if there are consistent issues where a lawyer has advised the government to break the law, at a certain point accountability needs to be had.

That is all.

Do (Did) Criminally-Charged Holocaust Deniers Deserve Asylum?

I'm of two minds on this.

On the one hand, laws prohibiting Holocaust denial are a violation of free speech. The hypocrisy of Judge Peters in giving asylum for a terrorist but not for people whose only "crime" was writing something, however false and horrible, is blatantly apparent.

On the other hand, I vehemently disagree with Holocaust denial and I also believe that the vast majority of Holocaust denial is not done in good faith. While what the British government is doing to Messrs. Sheppard and Whittle is unjust, I am unlikely to shed a tear over them.

Should we have asylumed them? While I am not inclined to say that we should have, they are likely no worse than other people we have asylumed in the past. Perhaps, then, that is the problem; not our unwillingness to asylum people in cases where the issue (free speech for genocide deniers) is politically incorrect, but our willingness to grant asylum when the issue is politically correct.

I would probably be okay with making overall asylum policy much tighter, provided it applied to everyone equally. It may sound selfish, but this is a British problem involving Brits on one side and Brits on the other, and I am not inclined to intervene directly. Definitely I don't feel a sense of owing anything to Messrs. Sheppard and Whittle.

Having said that, I would be much more disturbed if the U.S. adopted similar laws here, ironically enough for the old Martin Niemoller reason, that if we let them (i.e. the government) come for the unpopular, even the evil, in an unjust way, eventually they'll come for us as well. But having said that, I am not terribly inclined to try have us try to deal with other countries' problems on this front, unless of course, it involves the other country enforcing unjust laws against U.S. citizens or, to a lesser extent permanent residents.

That is all.

Sailer on Guinier on Ricci

An excellent takedown by Steve Sailer.

In particular, I am annoyed by this statement of Guinier's:

When a city replaces a bad test, as New Haven wanted to do, the employees who did well on it do not lose their right to compete for promotions

No, they did not lose their right to compete, but they lost their right to a promotion that they had earned. Also, if you can only compete as long as the deck is stacked toward a certain income, then you do in some sense lose your right to compete, as you lose whether you pass or fail.

That is all.

Sandra Tsing Loh on Marriage

I think that this piece can be best summed up as "marriage isn't fulfilling for a self-absorbed, stuck-up jerk."

Ultimately, most modern takes on marriage or family or whatnot always seem to end with the author suggesting that marriage is an outdated institution that needs to be changed to be less permanent, and if children are involved seem to suggest that we reallly would be better off if parents didn't bother to raise their children so much and let the society, daycare, and schools do more of the heavy lifting (although Ms. Loh's doesn't touch as much on the subject of children).

Ultimately, all of these things seem to come out of the convicion of the author that she (or occasionally he) is the most important person in the world and that the overweening purpose of her life is to be entertained and fulfilled. Children, spouses, pets - ultimately nothing else must get in the way of their bliss.

I confess to somewhat have some of the same personality tendencies myself; but then again, that is why I'm still single, because I'm smart enough to realize that until I mature enough to do so, I should not take on the responsibility of a marriage -or, for that matter, a serious relationship.

(And before anyone thinks that I am advocating a "free love" lifestyle, I am also a virgin).

That is all.

A New Sponsor

Glaivester has a new sponsor!

It is at the top of the right side bar.

This site deals with information about prepaid (i.e. pay-as-you-go) phone plans as an alternative to "traditional" cell phone plans that require greater commitments on your part.

Please note that this is an advertisement, and that Glaivester is not affiliated with or responsible for the content and claims of the site.

That is all.

He Lost the Election; but He Got His Message Out

An article in Slate about Ron Paul's latest, and (surprisingly successful so far) attack on the Federal Reserve.

It is definitely worth a read.

That is all.