Loyal readers may have seen my previous article, where a blogger lays out his thinking about a cliche you see all over the mainstream, that “My Spending Is Your Income” is some profound wisdom to which we need to erect monuments.
I pointed out that Hayek won a Nobel Prize for refuting just that fallacy, but the author was unhappy, and asked me to refute him directly.
Always one to please, Smiling Dave will now address his article point by point. The author has already admitted I summarized him correctly, when he wrote me, “So after detailing my blog post and my full argument at the very end all you do is shrug…”
You know my methods by now. he gets Italics, I get the regular font. All Italics are actual quotes.
1…if there was one simple lesson that I wished everyone knew about economics… that could explain the essential core…it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know…
Yes, my spending is your income. I agree. But that does not mean every single problem that attacks my income is always your lack of spending.
Devil’s Advocate: I don’t get it, Dave. If he’s right, he’s right, and you just admitted he’s right. My spending IS your income.
SD: Devil if you don’t eat, you will die.
DA: True dat, but so what?
SD: Therefore, anyone who is dead must have died because he did not eat enough.
DA: Now wait just a minute, Dave. None of your sophistry, please. Not eating is only one cause of death. But there are many hundreds of others.
SD: Same thing here. My not spending is only one cause of you not having income. But there are many hundreds of others.
DA: If all you have is a hammer, everything looks like a nail. All this fellow knows about is spending, so all problems in the economy look to him like a lack of spending.
SD: Precisely. Let’s quote some more:
2…we are all interconnected and dependent on each other to spend money and buy each other’s goods.
SD: True. If you do not eat, you will die.
3…if I decide to stop spending money and instead save it, that means some shop is going to suffer a decline in business. If it is steep enough, they may even have to lay some people off. Hence, what seems like being frugal and responsible on my behalf by saving money, if followed by enough people, hurts the overall economy and costs jobs.
No. Big, big, huge mistake. Wrong in so many ways.
First of all, saving money does not harm the economy at all. I can either copy and paste why not from a previous article, or link to it. I’ll link to it: http://smilingdavesblog.wordpress.com/2013/02/14/how-mises-dismissed-that-whole-keynesian-thing-with-a-decisive-one-liner/
So that’s one reason he is wrong. Businesses do not suffer at all if people save.
But there is a second. The reality is that consumers never “stop spending”, certainly not in the 21st century. Maybe in Bizzaro World, but not on Earth. Have a look here: https://smilingdavesblog.wordpress.com/2011/08/24/classic-keynes-and-why-the-credit-card-refutes-him/
and also here: http://smilingdavesblog.wordpress.com/2013/01/23/summary-of-keynes-theory-and-the-flaws-in-it-that-any-layman-can-spot-a-mile-away/ [In particular, read the part where Samuelson starts talking].
And there is a third flaw as well. Not only is saving not a bad thing, it is also a great thing. Because nowadays people who save do not stuff money under their mattresses, but put them in banks. And banks then lend them to businesses, who can use the money to expand and be more productive. Roger Garrison has pointed out a huge theoretical blunder in Keynes’s model of the economy, that Keynes assumes spending and production can both increase at the same time, that indeed they always go hand in hand. The poor soul never understood the concept now taught in Econ 101, of the Production Possibilty Frontier. You can either consume more or invest more, but not both at the same time. You cannot invest except to the degree you stop consuming, and vice versa. Because investment means taking existing resources, not consuming them, but instead making more means of production out of them.
DA: That kinda make sense, actually. If you eat everything up, where will you have what it takes to expand your production machinery?
SD: In the previous article, we wrote that the blogger’s argument is a non sequitor. Now we have shown that not only is it a non sequitor, but that it is positively wrong. Saving money is not bad for the economy, it is good for the economy.
We move on:
4. This is not to say that we should never save, but rather that excessive saving is damaging.
That does not hold water. All savings, according to you, should be bad, because all savings causes losses of income. Your spending is my income, remember? Why is it a good thing to kill some income?
Guys, I tire. The rest of the blogger’s article is riddled with mistakes as well, all of which I have covered on my blog many times, and are discussed at mises.org. All the seeker of truth need do is mosey over to mises.org, or do a search here for Keynes, or for J.B. Say. I only wrote what I did so far to make the blogger happy, because he wanted me to address his argument explicitly.