After Explaining Vickrey’s Second Fallacy at Length, Smiling Dave is Ready to Respond

This is the third article in an ongoing series.

Part 1 explores Vickrey’s Claim that Deficits are Great.

Part 2 lays out his case that savings is just terrible for an economy not running at full capacity.

And here we are at part three, right here, where Smiling Dave continues his campaign to get Vikrey defrocked of his Nobel Prize, and have it handed over to Dave. The strategy is continue in a straight line, and refute all Vickrey wrote in Part 2.

Devil’s Advocate: Sure Dave, as if you stand a chance.

SD: Maybe I don’t, but Vickrey has already refuted himself, doing my job for me.

DA: What are you talking about.

SD: It’s in his very last line, and I quote, “…the income generated by capital formation provides a source of additional savings.”

DA: And your point is?

SD: The same one Mises made, and Vickrey just admitted to. Nobody has money to save unless he works and earns money in the first place. In other words, the very fact our man Mr A, as we shall call him, has money to save today is because he has increased capital formation yesterday. Normally, he then reduces the capital formation somewhat, by spending that money and consuming, meaning eating up, part of the capital stock. But now that he saves, which is an act of not consuming, the bottom line is that he has increased the capital stock.

DA: Dave, you could have said it much simpler. Spending is consumption, eating up what is there. Saving, even if not invested in anything, is a benefit to the economy because it does not reduce the capital stock.

SD: Exactly. So that even if the saved money goes nowhere, investment, in the sense of an increase in the capital stock [= the whole point and goal of investment] has already happened,

DA: But what about the domino effect Vickrey talked about? Mr A saves means Mr B and a long line of people behind him all go hungry.

SD: They won’t go hungry. They will all just get new jobs. Here’s how it works. When Mr A saves, he is telling his vendor he no longer wants what the vendor was selling. The vendor then tells his supplier that he, too, no longer wants what the supplier is supplying. This message is transmitted all the way down the line. Of course, Mr A is not doing anything evil by not buying stuff he doesn’t want. It’s his money, right? He worked for it, and he thus is the boss over it, to do as he wishes.

As a result, people who used to work at making widget X that Mr A no longer wants will stop making it. Exactly the right thing to do. What will they do, now they are no longer making what Mr A wants? Get new jobs, making what he does want.

DA: But suppose he doesn’t want anything?

SD: Then they will work making what somebody else wants.

DA: But suppose nobody wants anything? Suppose everyone already has all they want, and there are no jobs at all left?

SD: What about the unemployed themselves? Don’t they want something? I thought they were hungry and needed food and stuff.

DA: But they don’t have any money.

SD: So they get jobs making stuff they need, and then with the salary they earn, they buy it.

DA: It seems so obvious now. Why didn’t Vickrey think of that?

SD: If I’m going to claim his Nobel Prize, I may as well read his mind while I’m at it.

I found the answer to this one in Kel Kelly’s beautiful [free] book, The Case For Legalizing Capitalism. Talking about Keynesians, he says:

They believe there is only a finite amount of work to be done. This argument is the same as saying that there are no more goods and services people want in their lives (i.e. as consumers we would have no more demand for the additional things we would make as workers). Keynesians believe that, given a static quantity of money, we only have so much we want to buy in physical terms and no more. No matter how cheap things are, we will not purchase any additional amounts of the things we buy because we always have enough of them. Keynesians therefore believe that we are capable of producing more than we can consume (the overproduction doctrine). But if one imagines a world in which everything is free it becomes clear that in fact we would all consume more of the things we want, given the ability to.

But for most of us living in the real world, if the price of most food, jewelry, or clothes, or anything that we need or want, was simply less expensive, most of us would consume more of these things. The same applies to employers “consuming” workers: if employers have a set amount of money they can spend on labor — which they do — with lower wages, more workers would be employed with that same amount of money (each earning less money). This is elementary to even most non-economists. All goods eventually get sold at some price. A purse that originally cost $300 at Macy’s might end up being sold at outlet malls for $30, but it gets sold at the price people are willing to pay for it.

DA: Now I’m all confused. What really goes on when somebody saves and doesn’t do anything with the money?

SD: Three things happen at once.

First, he officially is working for free. He earned the money that he is now saving in the first place by being productive, meaning increasing the capital stock, meaning making it possible for everyone to get wealthier. But he is not asking for any concrete thing in return, only mere money. Meaning he is leaving the goodies out there for other people to buy.

Second, he indicates to producers that the time has come to change things around, to use their capital to produce for the needs of a population with different wants. There may be temporary unemployment until everyone finds their new niche, but that’s always happening anyway. Fads come and go. One day clunky PCs are in, the next everyone wants iPads instead.

Third, he reduces the supply of money. This reduces prices and increases the purchasing power of everyone else. Not a bad thing at all.

Note that all this assumes the fellow does not even bother to invest his money. So that Vickrey’s whole speil about how he won’t invest it becomes irrelevant.

DA: I just emailed Stockholm. They are sending over a representative.

SD; Where’s my white tie and tails?