The late Nobel Prize Winner William Vickrey is not taking Dave’s campaign to steal his Nobel Prize lying down [excuse the pun]. Using his Ouija Board, Dave has talked with Vickrey.

WV: Go pester somebody else, you ghoul. Have you no respect for the dead?

SD: Bill, that article of yours, Fifteen Fatal Fallacies of Financial Fundamentalism, is doing a lot of damage here amongst the living. People actually believe that stuff.

WV: In that case, Dave, please show everyone its mistakes. I led a saintly life in my day, and encouraging economic disaster was my only sin. Had I known that the Good Lord Himself is an Austrian Economist, I would never have written that thing.

Respecting Vickrey’s plea from the Afterlife, Dave continues his discussion of Vickrey’s article. [Index: Part One, Part Two, Part Three, and thou starest at Part Four right here]. As always, he gets the italicized font, I get the normal one.

Here’s Vickrey:

Fallacy 3

Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income,…

If you tax someone, you take away his disposable income. But if you borrow, and I presume he means from abroad or else it’s just like taxing, you generate disposable income, says Vickrey. Think of it this way. If the govt is like a Vegas gambler gone broke, it won’t be able to tip the waiters and butlers and all the good citizens of Las Vegas. But if he borrows a few million bucks, there’s plenty of money to tip people with. And the wild lavish parties he organizes will bring money to the coffers of all the liquor stores, the restaurants, the casinos, everybody wins. What could possibly go wrong, asks Vickrey rhetorically?

Everything, replies Dave. And for two excellent reasons. First of all, somebody is going to have to repay that borrowed money back, and with interest. Meaning the very citizens who will supposedly get more more disposable income today are going to have less disposable income tomorrow, thank you very much for spending their money, govt.

Second, money isn’t everything. Even today, when they supposedly have more disposable income thanks to all the govt spending, they really have less. And why? Because the govt is using the borrowed money to buy everything up. Going back to the Vegas parable, all the liquor stores and supermarkets will be emptied for that big govt party, leaving the everyone else with no food and liquor.

…enhance the demand for the products of private industry,

Here he’s going along with the Keynesian assumption that artificially increasing demand is a good thing in and of itself. But it’s not. When a certain industry or business, call it Ajax Industries, suffers from lack of demand for its products, that means they have not lowered their prices enough to be able to sell their product. And why haven’t they? Because their costs of production are too high to allow for selling their product cheaply. Which means someone other business or industry, call it B Industries, is able to pay the high price for the resources needed, and still make a profit. In other words, people are so coveting what B makes that they are willing to pay a high price for it, but are not willing to pay that high price for what Ajax is making. Meaning the people want B, not Ajax. Obviously, Ajax has to cut down production and let the resources go to B. The consumer has stated his desire. Thus, artificially letting Ajax keep producing is denying the citizens of what they want, B.

And if it’s the whole economy that suffers from lack of demand, meaning there is generalized hoarding, we have shown that in that case, as well, what is really going on is that the public wants different products made.

…and make private investment more profitable.

His reasoning is that if the govt is buying from Ajax with all that borrowed money, that’s more profit for Ajax. But of course, the govt doesn’t buy from everyone, does it, certainly not equally. Sure, there will be more profits for Ajax, but less for B.

Really, Bill, this line is so dishonest.

As long as there are plenty of idle resources lying around,…

meaning stuff nobody wanted to be made in the first place,

…and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit)…

Why does he say supposedly? Give the govt new money to spend that it borrowed from somewhere, then of course prices will rise [or will not fall if they were due for a fall, which comes to the same thing], since demand has increased with that influx of money.

those with a prospect for profitable investment can be enabled to obtain financing.

The idea being that with the govt borrowing new money, some of it will find its way into the banks, who will lend it to those with a prospect for profitable investment.

But why didn’t the banks lend money to these prospects for profitable investment before the govt borrowing? Must be because in their professional estimation, those prospects were actually rather risky. So this whole scenario Vickrey describes is fiction.

Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “

The idea being that these prospects for profitable investment will succeed and make money hand over fist and will inevitably use the money for even more investment.

Supply creates its own demand” fails as soon as some of the income generated by the supply is saved,

William, have you forgotten so soon? We just refuted that last article.

WV: Heh heh, thought I could sneak that one by you.

but investment does create its own saving, and more.

Assuming the investment is not a foolish one. See above about the banks thinking it was a foolish one.

Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

In other words, having more borrowed cash in the economy can only do good, if only the guys in charge don’t mess up and reduce the amount of money by their ineptness.

Well, we have shown that crowding out will happen, and it will be the result of underlying economic reality. There are only so many resources to divvy up. When the govt borrows money and uses it to take those resources either for itself or for its buddies with unprofitable companies, that crowds out everyone else from getting hold of those resources.

Suddenly, Dave noticed eery lightning flashes and all the doors in his house started creaking. The Ouija board Planchette started moving rapidly on its own, untouched by human hands. Then a distinguished Nobel Prize winning voice filled the room.

WV: Smiling Dave! You have angered the spirit world.

SD: Eh?

WV: You forgot about one key argument.

SD: Go on.

WV: We are talking about an economy with idle resources. Nobody else is using them. When the govt borrows money and starts spending, it will use the money to get those idle resources going. No one will be crowded out of using them, because nobody wanted them in the first place. You have two seconds to reply, or else be blasted into smithereens by lightning bolts and creaky doors.

Smiling Dave was unperturbed. He laughed down from lazy eyelids and flicked a speak of dust from the wrist of his shirt sleeve.

SD: Those resources aren’t idle. They are in transit.

WV: What?

SD: Those resources have just left the companies the govt wants to hand them to, and are out there looking for a better place. After all, how do resources become idle in the first place? Because they were being used in unprofitable businesses, and got the boot. They were working for Ajax, and are now on their way to B, as above.

A deathly stillness fills the house.

WV: You know, I never thought of it that way.

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