28 Nov 2017

Reductio Ad Absurdum on Keynes?

Economics 19 Comments

I got this email (with permission to reprint). I would have to think about it some more before offering my own reaction, but I’m curious to hear your thoughts first.

Message: I may have invented this reductio ad absurdum regarding Keynesianism. It starts predictably, but goes further than the usual construction.

Keynes says that taking money from Peter and paying Paul to build tanks improves the economy.

But since it’s the payment to Paul, and not the produced tank that is good for the economy, we can just take money from Peter and pay Paul to build tanks, then to disassemble them, and that improves the economy.

But since the tanks never get built, we can just take money from Peter and pay Paul for doing nothing and that improves the economy.

But there’s nothing special about the Peter, the individual, compared to Paul, the individual, in Keynes’ formulation, so we can take money from Peter and hand it right back to Peter, and that improves the economy.

But, since Peter only ends up with the money he started with, then we can just let Peter keep his money [and that] improves the economy. So doing nothing automatically makes the economy better.

–John Scott, Professor of Economics, University of North Georgia

19 Responses to “Reductio Ad Absurdum on Keynes?”

  1. David R Henderson says:

    My answer is that the author is right until the end. But then he falters. The Keynesian argument must be that Paul’s marginal propensity to consume is above Peter’s. Of course, we must also ignore the bad supply-side effects that come from forcibly taking from Peter. If these supply side effects outweigh the good demand side effects, then it’s better, even from the Keynesian perspective, to let Peter keep his money.

    • Daniel Kuehn says:

      Yes, this. Or of course propensity to invest.

  2. skylien says:

    No the reductio does no work, because Peter and Paul are not the same. Peter is a saver, and Paul is a spender. They are roles played by people, and could even be one and the same person.

    Like the government taking (borrowing) from Marc to pay Marc to build a tank! Since Marc reearns his own money, but still thinks he has saved the same amount as before (he owns a government bond now) he is rather inclined to spend the reearned money than to save the whole amount again…

    So basically the same what David R Henderson is saying..

  3. Chris says:

    I agree with the comments above. Keynes’s argument is about saving and investment. If you take from one saver and give it to another you don’t help solve the aggregate demand problem (and that’s exactly what taking from Peter and giving it right back to him does).

  4. Capt. J Parker says:

    There are at least a couple of problems with the argument. First, the statement: “Keynes says that taking money from Peter and paying Paul to build tanks improves the economy.” is wrong. Borrowing money from Peter to pay Paul or printing money to pay Paul may improve the economy. Taxing Peter in the current period to pay Paul in the current period won’t have much of a stimulus effect and Keynesians are well aware of this.

    Another problem with the argument is this:

    “it’s the payment to Paul, and not the produced tank that is good for the economy”,

    A payment to Paul will improve the economy only under certain circumstances. One such circumstance is when, as Dr. Henderson points “Paul’s marginal propensity to consume is above Peter’s” Of course there is no reason to assume this is true. If there are lots of Peters who have money taken from them and given to lots of Pauls there is a good reason to believe the collective marginal propensity to consume of the Peters is the same as that of the Pauls.

    Another circumstance under which a payment to Paul would improve the economy would one where Peter and Paul both have the same marginal propensity to consume but Paul, as a condition of receiving the payment would need to spend a portion of it procuring resources such as those required to build (and possibly then disassemble) tanks. In this circumstance it is true that it is not the production of a Tank per se that improves the economy but neither is it simply the transfer payment from Peter to Paul.

    • skylien says:

      I disagree with your second paragraph. By borrowing from Peter and giving to Paul (which could even be the same person as in my example above) the government creates the illusion (since at some point someone will be taxed directly or indirectly for that amount) of additional income generated for that person. Additional income will tend to make a person to spend or invest more (accept higher risks), and less likely to further increase his cash savings. At least that is how my brain is wired when I get more income than I had originally expected…

      The mistake is that you overlook that Peter is just a guy with cash savings and no addtional income, and Paul basically is the same guy but his savings are in government bonds and he gets additional income due to government spending. Those two people are separated by time, before government borrowing and afterwards. That is how the stimulus works. Making people believe they have more than they actually have. If that is a good idea is another question…

      So I think it would be better to call it: Taking from Peter at T0 and giving back to Peter at T1.

  5. Ryan Murphy says:

    yeah, that’ll show wage stickiness. take that.

    • R.L. Styne says:

      Yes, Ryan, it is totally impossible for someone to believe

      1) wages do not perfectly and instantaneously adjust to every change in supply/demand


      2) giving money to banks is not the same thing as putting it under a mattress


  6. Harold says:

    As the comments above show, this is what happens when you take an oversimplified version of an argument and then stretch it.

    Paying people to dig holes is essentially doing nothing, and this argument adds nothing to that old argument. Keynes said:

    “”If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

    Book 3, Chapter 10, Section 6 pg.129 “The General Theory..”

  7. Harold says:

    Looking again at your email, I see he is a professor of economics, and here I am accusing him of over-simplification. Appeal to false authority is a logical fallacy, but appeal to genuine authority is not, and professor of economics is genuine authority in the realm of economics.

    It still seems to me that this stems from an oversimplification and a fairly obvious one at that- I don’t believe Keynes said taking money from Peter to give to Paul would help the economy, unless Paul was currently unemployed or some such caveat.

    However, to avoid falling into the Dunning Kruger trap I am prepared to listen to explanations of why this passage is more than just a sort of joke, or to hear that it is simply a joke.

    • Tel says:

      Appeal to false authority is a logical fallacy, but appeal to genuine authority is not.

      What logical method do you use to decide which authority counts as “true” ?

      • Harold says:

        “What logical method do you use to decide which authority counts as “true” ?”

        Well, I said genuine, not true. But it is an interesting point. The key is to identify what area the person is an authority in and see if the pronouncement falls within this area.

        In brief, you can be expert in areas of knowledge and hence be able to assert to a greater degree than a non-expert what is true or not in your domain.

        Crucially I am not suggesting that the claim must be right because the author is an authority. My claim is much weaker – that it is unlikely that a person with authority will have made a simplistic error in his area of expertise that is obvious to a non-expert. It is not very unlikely- at least in a casual email rather than say, a published paper. Everyone makes mistakes.

        What is a genuine authority? When talking about basic stuff, any professor of a subject is an authority on that subject. So a physics prof is an authority on basic physics – the stuff that might be taught at high school. On more complex stuff, a plasma physics prof is not an authority on QED, for example.

        An expert astrologer, say, is an authority on astrological interpretations according to their teachings. They are not an expert in assessing whether those interpretations have any basis in reality. So if an “expert” astrologer claims that according to their astrological teachings a person born at a particular time and place should have characteristics X and Y, then their opinion on this carries weight. If a non expert says no, according to astrological teachings you follow they should have characteristics A and B, we give more weight to the expert. However, the important caveat is that neither is an expert on whether people born at this time and place actually do have these characteristics, Neither is an authority on the accuracy of the predictions or pronouncements. We therefore do not need to take either as an authority on the truth of whether this person is likely to actually have these characteristics.

        A bible scholar is an expert on the bible, not on the veracity of the bible. If they claim that John 6:22 says XYZ, I give that pronouncement weight. If they say that such and such an interpretation is reasonable because it is consistent with other parts of the bible use the same word or words, then OK, I give that weight. If they say it must be true, then they are outside their area of expertise, which is the bible, not the truth of the bible, so they are not an authority in that.

        Doctors are experts and have authority in their area of expertise. If a doctor studying diabetes claims that increased sugar leads to increased diabetes, then we should take this seriously. However, doctors are not experts in economics or sociology. If the doctor then says we should combat diabetes by putting a tax on sugar, they are not an authority in that area.

        If a climate scientists says CO2 is a greenhouse gas and warms the world, that has authority. If said climate scientist says the best way to combat this is say cap and trade on carbon, then they are outside their area of expertise.

        Argument from authority, or false authority has a long and contentious history, being argued as a fallacy and a valid argument by different people at different times. What we can all agree on is that argument from false authority is a fallacy.

        • Anonymous says:

          The Indigenous Environmental Network claims that a specific version of cap and trade known as REDD was used as an excuse to violently evict Sengwer people and torch their homes.

          Since the effects of environmental pr unenvironmental practices on indigenous people is presumably within the area of expertise of the Indigenous Environmental Network, this should probably be taken seriously.

          Kevin Bales claims that climate change and slavery are linked, and that we ought to help mitigate the problem of climate change by fighting slavery and vice versa. He traveled to a number of countries to become an expert on the topic and published a book about it, Blood and Earth, so he should probably be taken seriously.

          • Harold says:

            Writing a book does not qualify one as an expert. Many a dreadful tome has been penned by the ignorant. However, professor at a reputable university does. We should take seriously claims by Kevin Bales within his area of expertise. That does not mean he is right, but it should be taken seriously.

            As for the Indigenous Environmental Network, the network I don’t think can be an expert. It may or may not consist of individuals who are experts, but showing an interest and producing a lot of stuff does not qualify. I have no idea if the authors are experts or not.

            • Anonymous says:

              The level of research that went in to writing the book Blood Earth is more the point than the fact that he wrote the book. Blood and Earth gives examples in the Congo, Ghana, Bangladesh, Brazil where slavery and climate-change-causing ecocide intersect. India and Pakistan are briefly mentioned as well. Kevin Bales has traveled to all of these places and found examples, interviewed many people with knowledge of the topic (including slaves and local abolitionists), and worked with other experts to help get a sense of the scope of the problem.

              Kevin Bales has been studying contemporary slavery since 1999 or earlier. (1999 is the date he published his first book on the topic of contemporary slavery, having previously traveled to a number of countries to find examples.)

              Writers at the Indigenous Environmental Network have a certain level of expertise about REDD and its effects on indigenous people mostly because they’ve been paying attention to that subject. They do have a strong pro-indigenous, pro-environmental bias, but that does not mean they are wrong about factual details such as homes being torched.

              • Harold says:

                You will note that I did say Kevin Bales is an expert in his area and should be granted “authority” in his area of expertise. This authority does not derive from his having written a book, as any fool can write a book and many do so. His authority as far as I am concerned derives from his position as professor at University of Nottingham with a great many peer reviewed publications.

                An author of a book may well be an expert without such an academic position. The problem for the casual reader is how can we know? An ametuer can produce a scholarly work of great value but a great many amateurs produce “works” that are worthless.

                Ultimately all works should be judged by their content and not by the reputation or credentials of the author. However, due to the vast number of publications on offer we need a heuristic to decide which ones we should spend time assessing. The filter of “recognised expert” that has manged to publish in peer reviewed journals is a good starting point for matters that are covered by such journals.

                I am not suggesting that REDD are wrong about factual details, but that REDD is an organisation and as such is not an expert. I am thinking aloud here, because I just declared that institutions such as University of Nottingham are able to “grant ” expert status to individuals. However, a publication authored by “The university of Nottingham” rather than an individual or group of named authors would not carry the same weight.

                I guess it comes down to a level of fuzziness.

              • Anonymous says:

                Presumably, the University of Nottingham decided to recognize Kevin Bales as an expert on the topic of contemporary slavery based on the substantial amount of time he has spent doing interviews and other detailed research on the topic of contemporary slavery and networking with others who also research contemporary slavery.

                A casual reader might consider the great number of specific examples given in Kevin Bales’ books on slavery. Based on the examples, the reader can consider to what extent the evidence supports the conclusions Kevin Bales reaches. Like many authors, Kevin Bales also provides a large number of references which can checked for further information. For example, he mentions similarities between current patterns of slavery in the Congo and types of enslavement used in the American South after the Civil War. He cites a book by Douglas A. Blackmon,
                Slavery by Another Name: The Re-Enslavement of Black Americans from the Civil War to World War II, which goes into much greater depth on this historical matter. It is possible to go and read Blackmon’s book, or to watch a documentary based on his book online.
                So we can see that while Kevin Bales does not focus on historical slavery, he is keeping up with the work of historians such a Douglas Blackmon and using their work to enhance his understanding of contemporary slavery.

                For that matter, we can also compare Kevin Bales’ work to that of others who have also researched slavery, even if he does not cite them. While there do appear to be some disagreements between various people researching slavery, there is also a great deal which confirms many of the things Kevin Bales says. For example, many of the things Kevin Bales discusses in the book Disposable People regarding brick slavery in Pakistan is confirmed by an Al Jazeera documentary on the same subject.

                If reading his books and other works in order of publication, it is possible to see how his views changed over time. Presumably, more recent works contain more accurate information on matters such as estimates of the number of people currently trapped in slavery.

                The Indigenous Environmental Network may not be as scholarly as Kevin Bales, but they have been doing research that is often neglected by more mainstream people. Many mainstream researchers neglect to consider in depth the effects of environmental changes and policies on thirdworlders and indigenous people, instead preferring to focus on mainstream firstworld society. Thus the Indigenous Environmental Network provides a perspective often absent from mainstream discourse.

  8. Bob Roddis says:

    The initial, fundamental and fatal problem with Keynesianism and all statist economics is that there is no evidentiary, empirical or historical basis to claim that “the economy” lacks or requires “momentum” or some sort of “external” force to get “it” moving. Or that it “moves”. Or that “it” needs “stimulus”.

    Daniel Kuehn demonstrated that it was government monetary and “fiscal” shenanigans in funding the US joining the WWI slaughterfest that distorted the price, investment and capital structure leading to the 1920 depression when the artificial “stimulus” was ended. Who could have predicted that?


  9. Toby says:

    The premise is false. It’s not the re-distribution that improves the economy. It’s the consequences of the re-distribution that improves the economy. The economy went from producing a lot to a little and redistribution can make it from producing a little to a lot by raising aggregate demand. Otherwise the marginal propensity to consume or invest are irrelevant too.

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