14 Jul 2012

Entrepreneur Hero Worship and Calculus

Economics, Krugman 42 Comments

How’s that for an obscure post title? I’m referring to Krugman’s accusation that right-wingers are hypocrites. (I hope you were sitting down for that one.) Their latest abomination refers to their claim that people with high incomes are engines of job creation and therefore we don’t want the government to drop the hammer on them. What’s the problem? Krugman argues that this standard right-wing line contradicts basic micro, if you think markets work:

The Romney fundraiser in the Hamptons continues to inspire much justified hilarity. Matt Yglesias has fun with whining rich people complaining that they are the engine of the economy, pointing out that quite a few of the whiners make their money in ways that arguably does very little for growth…

There is, however, an even broader critique of the whole keep taxes low on jobcreatorsenginesoftheeconomy [sic–RPM] thing — it doesn’t make sense even when the rich really earn their money….

So, imagine a Romney supporter named John Q. Wheelerdealer, who works 3000 hours a year and makes $30 million. And let’s suppose that he really does contribute that much to the economy, that his marginal product per hour — the amount he adds to national income by working an extra hour — really is $10,000. This is, by the way, standard textbook microeconomics: in a perfectly competitive economy, factors of production are supposedly paid precisely their marginal product.

Now suppose that President Obama has reduced Mr. Wheelerdealer to despair…So Wheelerdealer decides to go Galt. Well, actually just one-third Galt, reducing his working time to just 2000 hours a year so he can spend more time with his wife and mistress.

According to marginal productivity theory, this does in fact shrink the economy: Wheelerdealer adds $10,000 worth of production for every hour he works, so his semi-withdrawal reduces GDP by $10 million. Bad!

But what is the impact on the incomes of Americans other than Wheelerdealer? GDP is down by $10 million — but payments to Wheelerdealer are also down by $10 million. So the impact on the incomes of non-Wheelerdealer America is … zero. Enjoy your leisure, John!

OK, there’s a catch: Wheelerdealer pays taxes, and when he chooses to work less, he pays less taxes. So there is in fact a welfare loss to the rest of America, but it comes only through the fact that revenue falls.

So there’s a huge contradiction in the whole position of the self-regarding rich — a contradiction that I’m quite sure bothers them not at all. More champagne?

I get where Krugman is coming from here, but is this right? Is it really the case that standard micro suggests–in the absence of externalities and other frictions–that whether you live in a society of Thomas Edisons and the Beatles, or in a society of Billy Madisons and Herman’s Hermits, the only change you’d notice is in the amount of services the government could afford to provide you?

It seems to me this can’t be right, but I don’t know if Krugman is making a basic mistake, or whether there actually is a contradiction in standard micro (or at least the way we think about it). Three things come to mind:

(1) Even in the standard framework, if every factor gets paid its marginal product, it’s still the case that adding one more unit of factor X can raise the marginal productivity and hence the return to factor Y. E.g. it would be wrong to say, “Lots of people think workers are richer because of the introduction of more tools and equipment, but this is silly. The producers of hammers and forklifts get paid their marginal product, so obviously workers don’t see higher wages because of their existence.”

Now I remember vaguely from Kirzner’s history of economic thought class that this was a big deal back in the day, because you had to worry about whether the total incomes to factor owners in this approach would exhaust / exceed total output. But for sure, I think Krugman is glossing over this crucial part of the argument.

(2) What about consumer surplus? That doesn’t seem to be getting its due regard here. If Bill Gates had never existed, Krugman is arguing that the rest of us would have the same real income (except for lower government services). Even if that were true (which I’m not sure it is), we wouldn’t have the same utility right?

(3) Moving away from standard neoclassical models and into Austrian territory, one way of thinking about what entrepreneurs do is that they create new production functions. I.e. they use their brilliant minds to discover/create opportunities that previously didn’t exist. How in the world can we say that this insight forces us to say that either (a) the market fails or (b) entrepreneurs don’t shower benefits on others?

In any event, it is standard in Human Action for Mises to say that the capitalists/entrepreneurs reap the initial gains of their actions, but that eventually competition showers those blessings on the rest of humanity. I sort of understand the way in which Krugman could argue, “Ah, so you guys believe in market failure,” but that seems like a really odd way of putting things from an Austrian perspective.

42 Responses to “Entrepreneur Hero Worship and Calculus”

  1. chandra duggirala says:


    I have read your blog for a while but I am frankly disappointed in your handling of this elementary blunder by Krugman. Any one living in the real world, even those with no understanding of economics would realise the absurdities in this column. What Krugman is saying is that entrepreneurs just take your money in voluntary exchange and you get nothing in return? Is this a zero sum game? How can anyone ignore the basic point that a voluntary exchange only takes place when two parties each get more than they pay for? If, on a given day, you value 5 dollars more than a good or service that costs 5 dollars, why would you exchange those 5 dollars for that good or service? On the flip side, why does the seller/producer give it to you for 5 dollars if it is worth more to him than 5 dollars? This exchange itself is proof that each party valeus what the other party has more than what they have. The surplus value created by the entrepreneur is shared between the seller and the buyer (seller-profit, buyer-consumer greater utility).

    Taken to it’s extension, the person getting 30 million dollars for 3000 hrs of work is providing the payer (or payers) more than 30 million dollars worth of value for those hours. How can this not be true? If it were not, why will the payer continue to pay him that much (barring rent seeking/asset capture/contractual violation etc)? How can a third party (in this case, Krugman) evaluate the utility and value that the payer is getting from the employee?

    Also, Krugman’s logic, extended, tells us that if you cannot buy a 10 dollar item that you want to buy, no big deal. The net loss to the economy is zero. This is plain nuts. Isn’t the purpose of wealth satisfaction of consumer wants? If you cannot do that (either due to government interference or taxation or regulation) are you not poorer? So, if a third party (government) takes your money, and you cannot spend it to satisfy your wants, and the third party spends it to satisfy their most urgent wants (which, if you are lucky, may slightly be in line with your own wants), you will be better off or richer? This has got to be the stupidest argument that I have ever heard. Even 5 year orlds should be able to inuitively grasp these concepts. Shame on new york times and krugman.

    • Dave says:

      Yeah I have to say that your response here is far more to the point than Robert Murphy’s. I was wondering about that myself, why he didn’t react stronger and clearer as this is possibly the stupidest thing I think Krugman has ever written.

  2. Tom E. Snyder says:

    The price of land is rent. The price of capital is interest. The price of labor is the wage. The price of the entrepreneur is profit (or loss). Krugman is treating the entrepreneur as labor and trying to judge his marginal product and his income as a wage. As usual, Krugman is confused or deliberately confusing.

    • Tel says:

      The example doesn’t even work for basic labour. Consider:

      According to marginal productivity theory, this does in fact shrink the economy: Wheelerdealer adds $10,000 worth of production for every hour he works, so his semi-withdrawal reduces GDP by $10 million. Bad!

      But what is the impact on the incomes of Americans other than Wheelerdealer? GDP is down by $10 million — but payments to Wheelerdealer are also down by $10 million. So the impact on the incomes of non-Wheelerdealer America is … zero. Enjoy your leisure, John!

      OK, let’s try that with Timothy Q Schmoo, who earns $20 an hour turning nuts in a garage. Timothy normally works 2000 hours a year earning a gross marginal wage of $40000 per year but this year Tim lost his job and now works zero hours and earns nothing at all.

      One job lost reduces GDP by $40000. Bad!

      By payments to Timothy Q Schmoo are also reduced by $40000, so the impact on the rest of America is … zero. Enjoy your leisure, Timbo!

      Since it works when one person loses their job, it must mean there is not impact when a million people lose their jobs. Frankly, I find that a rather absurd conclusion to come to.

  3. chandra duggirala says:

    Even for labor, the price is just where the demand for his specific labor (skills, knowledge etc) and supply intersect, meaning both the employer and the worker think that they are getting more than they give out. We can distinguish between various ways to leverge labor skills (selling them on market, entering into employment contract, forming a firm (entrepreneurship)), but the basic point is still valid. How can both parties not get what they value more than that they give out?

  4. CP says:

    Strange. How does a society become wealthier in Krugman’s model?

  5. Yancey Ward says:

    Can’t one simply show Krugman is wrong with a simple two person economy? John grows potatoes and corn, and Bill grows onions and beans. Each consumes half of each item they grow and trade the rest with each other for the opposing halves. However, John decides to cut his work time in half and just consume potatoes and corn. According to Krugman, Bill cannot be worse off, but he is- he doesn’t get to consume any potatoes and corn, and we know he is worse off because he made the previous trades voluntarily.

  6. Phil Kearny says:

    Yes, decreasing consumer surplus seems to be (at least to me anyway) the biggest hole in Krugman’s column but in also in regard to Krugman’s claims on income levels, isn’t Krugman not working fully in the model he is trying to use? He is claiming income is marginal product but he is forgetting what causes incomes to approach the marginal product. “Perfect competition” is only approached in real life as the number of capitalists (the supply of wages) increases, bidding up wages. This obviously does not happen in Krugman’s scenario because Mr. Obama has decreased this supply by causing a number of capitalists (at least one: Mr. Wheelerdealer) to “go Galt.”

  7. William says:

    Karl Smith showed the error in line of argument 9 months ago:

    “If that sounds to abstract imagine the following claim: Every factor of production is paid its marginal product, including crude oil. So, if crude oil imports to America are restricted the impact on real wages and income for everyone in America would be precisely zero.

    That doesn’t sound right.”


    • Bob Murphy says:

      Great catch William, thanks.

    • Silas Barta says:

      Wow, much more concise than I would have been. Props.

      I would have just said that in the example, the rich guy (by supposition) provides $10 million of value to consumers. So obviously, his not providing that service (worth $10 million) would be a loss to the people who wanted to buy that stuff, and their loss would be equal to the difference in consumer surplus between what they got from him vs the surplus they would get in their next best use of that money (incl saving it).

      This whole method of looking at “number of dollars in pockets” rather than “value received” is wrong from the get-go, and yet Krugman seems to base his arguments on it.

  8. Carrie says:

    I know we’re supposed to focus on the economic principles here, but I’m finding that impossible to do with Krugman’s insidious attacks on actual producers. I can’t consider or address his economic ideas when the points his arguments are supposedly based on are filled with such slime.

    First, he associates second-handed politicians like Romney with producers like fictional hero John Galt.

    Next, he mocks the productiveness of a Galt by referring to such an individual as “John Q. Wheelerdealer.” To me the term “wheeler dealer” sounds like a dishonest used car salesman. So I looked it up in the online dictionary, and indeed, the slang expression refers to “one who advances one’s own interests by canny, aggressive, or unscrupulous behavior.” Of course, anyone who engages in such behavior is not a producer, but a brute who requires victims to maintain his status. He/she offers nothing of value.

    Next, Krugman claims that Galt decides to “go Galt” so he can spend more time with his wife and mistress. His reference to ‘Atlas Shrugged’ is a miserable failure, as it was Hank Rearden, not Galt, who had a wife and mistress! Also, Krugman completely misses the point of WHY a producer would withdraw his efforts from society. It is NOT to become a family man (or an adulterer). It is to be able to continue to produce without being robbed.

    Krugman continues, “So the impact on the incomes of non-Wheelerdealer America is … zero. Enjoy your leisure, John! Alas, with no more of Galt’s factories to work in, etc., the non-Wheelerdealer is out of a job, not being resourceful or productive enough to establish such an undertaking himself.

    No, Krugman is not seeking honest economic debate. His sinister motive is that he hates those of us who appreciate that [$10 million plus technological advances] minus [$10 million plus living in a cave] is greater than zero. Once you recognize that he’s a sinister snake, you’ll realize you’re better off not wasting time trying to amicably discuss his economic ideas.

    • Tel says:

      It’s been a while since anyone tried to amicably discuss Krugman’s ideas. Mostly it is just a competitive game to see who can be first to explain what Krugman got wrong. Standard tie-breaker rules apply when Krugman is wrong on multiple levels simultaneously.

      You are correct that his literal words said that Wheelerdealer does earn his money, but the emotive tone was trying to convey the exact opposite. If you were feeling generous you could give him a pass for creative use of sarcasm.

      I must admit, I do find it a bit difficult to believe that someone can really personally create $10k of value per hour in an economy. However, I believe that the reason this situation happens is that many industries are not particularly competitive so just maybe two or three companies rise to the top and the others are trashed. That’s certainly what happened in the computer industry. Or rather I should say, these industries are “cut-throat” competitive on a winner take all basis; as opposed to the common economic view of “equilibrium” competitive where more successful businesses also drive up their own prices and thus create opportunities for less successful businesses (negative feedback, etc).

      People often cite Bill Gates and Steve Jobs as the two entrepreneurs that were absolutely necessary for us to have computers. Without them we would apparently be using typewriters or so the story goes. In fact, as someone who lived through it, I can tell you there were lots and lots of entrepreneurs in the computer industry and a small number were just a whole lot more successful than the others. If Bill Gates and Steve Jobs never existed, we would be using something made by Clive Sinclair, or Amiga, or Atari, or IBM, or Sun Microsystems, or maybe even Xerox (the guys who actually invented the point-and-click user interface that both Bill Gates and Steve Jobs borrowed) or someone else again.

      Point is that if one entrepreneur vanishes then he/she can quickly be replaced by another upstart wanting to take their place. However, what Krugman is trying to do here is turn public anger against the whole class of entrepreneurs and shift the power of innovation to government committees and loyal party members. If that happens then no one can pop up to take their place. Stagnation sets in and everyone fights over the shrinking pie.

    • Bob Murphy says:

      Carrie I think you might be giving Krugman too much credit. I don’t think he was saying Galt had a mistress, I think he was taking a generic swipe at all rich people.

  9. Bharat says:

    Whoops, guess the consumers just didn’t notice the 10,000 fewer i-pods in the market when Steve Jobs decided to stop working so much due to Obama’s high taxes.

    I mean, honestly, how was the lower amount of gov. revenue the only catch he noticed?

  10. Yancey Ward says:

    I think you have to realize something- Krugman is writing for his fans, who are not very bright.

    • Peter says:

      “factors of production are supposedly paid precisely their marginal product.”

      So security guards at Walgreen’s are paid precisely the capitalized value of the inventory. That’s why I like Krugman — always something to learn.

      I think you’re right that consumer surpluses are the key here. If Wheelerdealer goes part-Galt, Wheelerdumber picks up the slack but is (logically) everybody’s second-best supplier.

      • Tel says:

        If one guy drops out then another picks up the slack. In many industries the best and second best are only different by a few hairs anyway.

        However, if you wage class war, you don’t get the second best, nor the third best, you probably don’t get anywhere near that because whatever hurts Wheelerdealer also hurts all the others. Go far enough down this track and criminality becomes a safer and more efficient way to make a living.

  11. shagdrum says:

    Am I wrong or does Krugman seem to be assuming a zero sum economy?

  12. kavram says:

    “GDP is down by $10 million — but payments to Wheelerdealer are also down by $10 million. So the impact on the incomes of non-Wheelerdealer America is … zero. Enjoy your leisure, John!”

    The problem is that that $10 million will now go towards its second-best use, rather than its most efficient (“Wheelerdealer’s” labor). Nominal GDP won’t necessarily fall, but all else equal less valuable goods/services will be available to consumers.

    Since he referenced GDP, he’s kind of jumping between microeconomics and macroeconomics to prove his point, but the real confusion between the nominal and the real. Krugman has this spending=income axiom locked in his head (he repeats it probably dozens of times in his new book), with the implication that living standards can’t fall as long as the amount of money in circulation is fixed.

    • Maurizio says:

      “the real confusion is between the nominal and the real”

      I agree, it’s that simple. I am surprised no one else put it like you did.

  13. Dean T. Sandin says:

    I wonder if people in third world countries realize that food shortages aren’t bad for them, because they get to keep the money they wanted to spend on food.

    • Bob Murphy says:

      DTS gets the award for brevity. I will probably quote this in my follow-up (with attribution).

      • integral says:

        Nothing like a little famine to lighten the mood, Bob.

  14. strat says:

    The point Krugman is tryoing to make is that in micro equilibrium, an individuals production is offset by that individuals consumption.

    Thus if we time travelled and killed bill gates, we wouldn’t have Microsoft, but we would have all the things Bill gates consumed. and in equilibrium these are equal (monetarily.)

    I think the problem with this, is that when bill gates developed Microsoft people were more than willing to buy it, thus bill gates “adds” more than he receives (that is consumer surplus is positive, which is not zero in equilibrium, marginal profit is.) He then overbids for an item, i.e. pays more for that item, which absent his purchase, would have sold for less thus producer surplus is increased. Thus he benefits society twice despite spending all of his income.

    The trick is to not focus on “money in” and “money out,” but on the motivations for a transaction, and think : if we banned transactions with bill gates (i.e. everyone who bought Microsoft and everyone who sold something to bill now didint) there expected utility would be strictly worse off, and that is proven in micro, by maximisation assumptions. It would be similar to enforcing a quota, just not in nominal terms but in logical terms “everyone but bill,” which would create a dead weight loss, in the markets that bill transacted.

    • Bob Murphy says:

      strat, I think you are totally right in your comments here. I’m in the middle of working out a long post spelling this out using a mathematical model (!).

  15. Eric Baseball says:

    Getting back to the basics, isn’t the other party to the transaction buying Wheelerdealer’s labor because it is the other party’s most satisfying alternative? If that alternative is removed, the other party’s satisfaction is necessarily diminished as that party must choose a less-preferred alternative. If a lot of people are withdrawing from the market, then a lot of mutually beneficial transactions are not taking place. Consumers have to go to less preferred alternatives. On the whole, overall satisfaction is reduced.

    Anything that takes away alternatives that some people would choose in a free market makes us worse off, does it not?

    • MamMoTh says:

      How come you also speak English on your planet? Or are you using an automatic translator?

  16. Sean says:

    Presumably Americans through the market paid Mr. Wheelerdealer the $10,000 per hour because they preferred giving him that money for what he produced over using that money for some alternate use. Krugman is simply assuming that in all possible worlds (to borrow from philosophy) all uses of the $10, 000 are of equal value between and within those possible worlds. This implies that there are no benefits to choosing one thing over another. This also implies that there can be no profit and no loss. (I am not an economist and apologize if my attempted analysis fails). Perhaps Krugman also believes that it makes no difference if I spend $10,000 on something I enjoy rather than on something I detest, since either way I spent $10,000.

    • visose says:

      As Sean, I am no economist, but the first thing that came to my mind was exactly what Sean posted. Are we getting something wrong?

  17. George F. Smith says:

    Excellent replies, all. I’ve been an admirer of Atlas Shrugged for many years but I didn’t catch some of the things Krugman was implying, Carrie. Also, CP – how DOES Krugman’s world get wealthier? Maybe RPM can post an answer. Would love to know how Krugman thinks government will produce iPhones and broccoli. Wealth seems to be a given in Krugman’s world, something to redistribute because of incurable market failures. But I’m sure I’m being unfair to Dr. K.

  18. skylien says:

    It’s nearly as if they are acting in concert:

    President Obama: “If You’ve Got A Business – You Didn’t Build That. Somebody Else Made That Happen”


  19. Ash says:

    Isn’t Krugman forgetting about his old friend AD in his exposition? Specifically, AD=A+c(1-t)Y? Meaning any decrease in income would lead to decrease demand. Unless, of course, he thinks marginal propensity to consume is 0 and therefore all consumption is autonomous.

    • Ash says:

      I should highlight that my point stands even if taxes–which Krugman claims as the ‘only’ source of welfare losses–were 0. That is, even if taxes were 0, *and* governments were budget constrained, there would still be a net loss to society with a loss in income. Remember that A=C+cTR+I+G+NX (where TR is government transfer payments). So for Krugman’s argument to stand, a $10 million reduction in income would have no effect in investment or net exports, or that a decrease in those two would have no welfare effects.

  20. Major_Freedom says:

    The fundamental error Krugman is making is a result of his inability to think outside the Keynesian worldview. He cannot help but believe that “spending” (or what he calls “incomes”) is the driver of employment.

    The thinking goes, if one person’s “spending” is reduced, then there is no negative implication for wage earners if we can identify a corresponding increase in “spending” somewhere else. As long as there is unchanged “spending”, then there is allegedly no reason for a fall in wage payments. As with all Keynesians, Krugman believes savings and capital literally comes out of nowhere as long as “spending” is sufficiently high enough.

    The problem with this view of course becomes immediately apparent as soon as we leave politics and enter economic science. Economic science tells us that wage payments come from one and only one source: saving. In order for wages to exist, those who would pay wages must engage in a specific form of spending, which makes all other spending impossible by virtue of the law of non-contradiction (which manifests itself in the economic law of opportunity costs). They have to NOT spend money on consumption, or capital goods. That means “spending” is not enough. It is not enough to just point to a replacement “spending” to offset the drop in “spending” by “rich people”. We have to ask whether or not the offsetting “spending” is of the same specific type, namely, the payment of wages.

    What Krugman and all other Keynesians don’t fully grasp is the law of opportunity costs. They believe consumption spending is the same thing as paying wages. They don’t understand that consumption spending is in competition with all other types of spending, including capital goods spending, and wage payment spending. Similarly, wage payments are in competition with capital goods and consumer goods spending, and capital goods spending is in competition with wage payment spending and consumer goods spending. In short, whatever one spends $1.00 on, it is a necessary implication that they don’t spend that $1.00 on anything else.

    The truth of this is easy to see if we just imagine what would happen to a specific form of “spending”, for example the payment of wages, if everyone, rich and poor, took 100% of their nominal incomes (e.g. revenues, wages, etc, that is, every dollar one receives), and spent the entirety of it on their own consumption (or the consumption of others to the extent they support them). Since the Keynesian theory says “spending” is what drives employment, Keynesian theory tells us that there are no negative implications for employment. Indeed, because we stipulated that people are spending 100% of their incomes, the absurdity of Keynesian “logic” leads us to concluding that because “savings leakage”, i.e. “cash hoarding”, drops to zero, Keynesian theory actually predicts a net positive implication for employment!

    Of course if one doesn’t have a hole in one’s head, one can quite easily grasp that the above situation would in reality be quite disastrous for wage earners, since the demand for labor would actually collapse to zero! How can any wage payments be made if everyone is “spending” on consumption? The fact is they can’t. But Keynesians cannot understand this because of their circular “spending” nonsense, which argues one kind of “spending” is as good as any other when it comes to implications on employment.

    The Keynesian focus on aggregates is why they can’t distinguish between different types of spending. They don’t see money as a tool of economic calculation. They see money as some sort of homogeneous “fluid” that “greases the engine.”


    Consider a wealthy person who employs 1,000 people. Suppose he “spends” $100,000,000 a year on wage payments (average annual salary for workers is $100,000). Suppose the state taxes this person such that he then “spends” only half of what he used to spend on wages. Keynesians believe there will be no negative implication for wage earners if “someone” (the state perhaps?) “spends” an offsetting $100,000,000. As long as “national income” does not fall, then Krugman believes this rich person cannot claim he is responsible for 1,000 jobs. After all, rich people aren’t the only people who “spend” money right? If there is an offsetting $100 million “spending”, by consumers, or the benevolent wonderful amazing never poor spending government, then there is no reduction in “national income”, and thus there will allegedly be no reduction in wage payments (since “spending” allegedly drives employment).

    Using economic science however, we can know that if the offsetting $100 million “spending” is composed of consumption spending, or government subsidies to welfare recipients and corporations, or any other spending besides the payment of wages in the market, then we can know that there is a negative implication for wage earners, since the replacement “spending” is NOT wage spending specifically.

    Krugman seems to be unable to look past the politics and emotions, past the jealousy and pride, past the rich and poor alleged “class” conflict, and look solely at the economics of it. He seems unable to separate his emotional feelings towards rich people (i.e. himself), and the economic role they happen to play in the division of labor. One does not have to lick the boots of, or cowtow under, “producers/wealthy/capitalists/wheelerdealers” to know that taxing them will result in a net negative implication wage payments if the offsetting “spending” type is anything other than the payment of wages specifically.


    Most important of all is the following conclusion that puts the final nail in the Keynesian coffin: Keynesians believe that since we cannot know for certain what someone would have spent a $1.00 on had it not been taxed (since such a world is an unobservable counter-factual), this is often used (subconsciously or not) by the Keynesians to argue in favor of government “spending”, because after all, wealthy people and those pesky Austrians are far too optimistic when they say that the taxed incomes “might have gone to wages.” Those silly people are ignoring the more likely possibility that part of the wealthy people’s incomes might be “hoarded” as cash! Especially in a depression!

    Here is how we can demolish that assertion: We can point to standard of living arguments. We can point to capital accumulation, productivity of labor arguments. Thus, EVEN IF we assume for the sake of argument that for every $1.00 saved, only $0.01 goes to the payment of wages in the market, it would STILL be a net negative implication for wage earners if the entire $1.00 is taxed and spent by the government instead. How is this seemingly crazy claim true? It is true by virtue of economic constraints I initially spoke about. The $1.00 that is taxed and spent by government, as even the Keynesian is compelled to admit, results in a $0.01 reduction in wage payments at that time. It doesn’t matter if this $0.01 of wage spending is offset by $0.01 of non-wage payment “spending.” Even if the reduction of $0.01 in wages is offset by $1.00 in sure “spending” by the government, it is still a net negative for wage earners in the market. It does wage earners no good that others are spending money on their own consumption. The demand for commodities is not a demand for labor. A $1.00 spent by a consumer on consumption (e.g. what the government does) means $1.00 is not spent on anything else. This is what Keynesians refuse to understand because they equivocate all “spending”. $10 trillion in “spending” over the course of one year that is composed solely of consumer spending on whatever can be produced without the help of capital goods or labor, is supposedly just as positive for wage earners as $10 trillion in “spending” which contains wage payment spending and capital goods spending specifically.

    Unless and until Keynesians learn to distinguish between different types of spending, they will never grasp why “wealthy people”, i.e. those who PAY wages in addition to consumer goods sellers, are indeed those responsible for wage payments.

    Anyone who does not themselves employ a worker is someone who does not bring about a single penny of wages to workers. I don’t pay wages when I buy consumer goods. I don’t pay wages when I pay taxes. This desperate desire on the part of consumptionists to believe they are helping “their class” by spending money on themselves, are deluded by the “circular flow of income” gobbledygook.

  21. Scott Angell says:

    I think a general answer is best — Wheelerdealer partially withdrew from the division of labor, therefore the total production structure becomes less efficient. Specialization and trade fall, the overall structure is less productive, and the remaining participants experience lower real incomes as a result. Krugman is doing bean-counting instead of economics.

    I don’t think it is really all that useful to go into specifics if the scenario is as general as that. You don’t really know exactly what Wheelerdealer is up to (i.e., his role in the economy) so it is hard to be that much more specific.

    • Major_Freedom says:

      You summed it up.

    • Silas Barta says:

      But … but … I can’t represent “the total production structure becoming less efficient” in terms of aggregate demand! Therefore, that phenomenon is irrelevant!

  22. W. Peden says:

    Bob Murphy,

    I agree with the post except for one line-

    “In any event, it is standard in Human Action for Mises to say that the capitalists/entrepreneurs reap the initial gains of their actions, but that eventually competition showers those blessings on the rest of humanity.”

    – that seems nearly right, but aren’t the initial gains of investment felt by those who receive wages rather than those who reap profits? E.g. an oil rig first benefits the various workers in research/planning, then in construction, then in operation, and then finally the capitalist MIGHT get some profit. My source for this insight is The Politically Incorrect Guide to Capitalism, by some person called Robert P. Murphy.

    (IIRC, Mises got this right in Human Action.)

  23. marris says:

    I’m a bit amused and disgusted by how Krugman has taken a fairly innocent comment “Is there a VIP entrace? We’re VIPS” and written so many words about it.

    Isn’t it common to have “regular tickets” and “VIP tickets” to events? I see them all the time at concerts, food festivals, movie screenings, etc and they often have their own entrace. It also sometimes means you get special stuff, like a chance to meet the band or whatever.

    Given that the Romney campaign probably labels it’s big contributor tickets as VIP tickets, why not ask if there’s a special entrace for such tickets? What does the Obama campaign label these tickets? “First among equals”?

    Krugman’s indignation is basically hot air.

  24. Jeffrey Knoll says:

    If the person stops working, then the overall supply of goods and services will be reduced. This will shift the economy’s supply curve to the left. This will result in higher prices due to less quantity available. Thus, the amount of money remains the same, but it buys less and this makes people less well off.

Leave a Reply