Two Keynesian Economists Were Walking Down the Street

Two Keynesian economists were walking down the street when they came across a recent canine dropping.

They paused and Economist 1 turned to Economist 2 and offered him $50,000 to taste the droppings.  Economist 2 considered the risks, rewards, cost and benefits and decided that he would do it.  So he tasted the droppings, money was exchanged and they keep walking.

Some 100 meters further down the road, the economists encountered another canine dropping.  This time, Economist 2 offered Economist 1 $50,000 to taste the droppings.  Economist 1 considered the risks, rewards, cost and benefits and decided that he would do it.  So he tasted the droppings, money was exchanged and they keep walking.

As they walked further, the economists paused.  Economist 2 turned to Economist 1 and said – we have both just tasted dog droppings, but neither of us is any better off.  To which Economist 1 briskly replied,perhaps, but the economy has just grown by $100,000.

The moral of the story?

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36 Responses to Two Keynesian Economists Were Walking Down the Street

  1. Ƶĩppʯ (ȊꞪꞨV)

    Very accurate.

  2. stackja

    The moral of the story? Dog’s breakfast?

  3. RobK

    They are both richer for the experience. Many a child does exactly that, also for no monetary gain but much purer motives.

  4. Ray

    Cute but totally misrepresents Keynes.

    Keynes believed there was a diminishing return to capital and so there was a risk of a savings glut and hence lower consumption. His prescription was for public works spending to absorb this savings glut and and so maintain production. Keynes never suggested redistribution of either wealth or income which is what you anecdote implies. Indeed, Keynes was very much opposed to governments running cyclical deficits on recurrent expenditure, which is why he suggested that any temporary increase in spending to address a savings glut should be managed through public works.

    The common misunderstanding of Keynesian economics stems largely from the fact that John Kicks wrote a book to interpret the General Theory in terms of neoclassical economics. As a result, the view of Keynesian economics shared by most people today is of Hicks’ neoclassical synthesis rather than Keynesian.

    Keynes’ mistake was not in his solution to a savings glut, since there is nothing wrong with the notion of using public works to absorb a savings glut. The problem is that such savings gluts are exceedingly rare and transient at best which means that they will almost inevitably be over before any government can respond. In fact, the distortions created by excessive government intervention are likely to do far more damage than they solve over time.

    Of course, neither Keynesian nor neoclassical synthesis are used by mainstream economists today. Both were well and truly discredited by the new classical revolution sparked by the Lucas critique, Friedman, Schwartz and others.

    Unfortunately, new classical economics failed to explain the real world which enabled new Keynesian economics to emerge. This new Keynesian economics had little foundation in economic theory and so the two branches merged to give us the new neoclassical synthesis which is the mainstream of modern economics.

    Whilst there may be much in the new neoclassical synthesis that is wrong, there is nothing in the theory which supports the redistribution of ether wealth or income. What this means, is that many economists may believe in redistribution but the economics itself does not support this, at least as far as the mainstream is concerned.

    Naturally there remain a number of heterodox economists out there who support outlandish ideologies, such as a few Marxists, Sraffians and New Keynsians etc. There are also a few very dopey economists who go the other way and persist with discredited ideas from the right, such as the Austrian school. However, orthodox economics, and this includes Keynes, new classical and the latest new neoclassical synthesis does not support redistribution.

    Thus we may chuckle at such amusing anecdotes, but this does not represent the problem and never did.

  5. Ray

    My apologies it was John Hicks not John Kicks.

  6. RobK

    Moral?….you can get away with not paying GST if there’s no paperwork?
    Umm…if you cut out the middleman you can eat shit for free?
    Umm…lucky they didn’t step in it?
    Umm…if you don’t know shit, don’t talk economics?

  7. Bad Samaritan

    A gringo is walking through an alleyway in a Mexican border town in the early 1900s when Pancho Villa confronts him with a loaded revolver. “Drop your pants Gringo!” which he does….”now a shit” which, after much straining, he does….”now eat that shit, Gringo” which, after plenty of protesting, he does. Pancho finds this so hilarious that whilst he’s laughing, he accidentally drops the gun, and then the Gringo grabs it and reverses the entire process until the famous revolutionary ends up with his own poop on his lips.

    Alas the Gringo then also has a fit of laughter, and again drops the gun which Pancho retrieves, and despite great fear from the Gringo…he puts it in his belt and says “Even I appreciate a Gringo with humour” and he rides away in wild fits of roaring laughter, slapping his sombrero against his horse’s flanks.

    A moment later, enterring the main street, where the peasants are in total panic at the arrival of Villas men, a frantic local runs up to the gringo and says “Are you a crazy Gringo? Villa is in town! He hates Americans even worse than he hates everyone else. Escape while you have the chance. ” and then, following a pause “You do know who this Pancho Villa is, do you not?”….to which the American replies….

    “Know who he is? Ha…..I’ve just been having lunch with him!”

  8. RobK

    Or perhaps the corollary of my last one:
    When you know shit you can be an economist?

  9. Rabz

    keynes has been proven to be wrong (time and time again) on 97% of the subjects on which he ventured his worthless opinion.

    The blog administrators here are doing the Lord’s work discrediting his foul legacy.

    Steyn also had the vile stupid collectivist mongrel pegged.

  10. RobK

    Oh, I know, I know……
    Just because you know shit, doesn’t mean you are a good economist?

  11. Entropy

    So, Ray, what you call a savings glut, given you see it as transient, would be better called an investment realignment?
    At heart most of modern economics is big government economists pissed people want to do things with their money the authoritarian economists dont want them to.

    There is plenty wrong with “the notion of using public works to absorb a savings glut.” As the government is directing funds to uses that are not linked to the best use of that money. Inevitably it is pissed against the wall and mainly benefits the holy trinity of big government, big unions and big business, ultimately paid for down the track by everyone else. Public works spending should never be done on the fly, it needs careful planning with an eye to long term growth and proctivity gains, not dealing with a transient issue.
    If this so called savings glut (clearly, people aren’t spending like, or putting it where their betters think they should) is transient, the gap between this transient problem and the eventual public works spending inevitably creates more problems than it solves, problems that clearly hang around a lot longer than the transient glut.

    One last thing, how is a transaction between two chaps who get their jollies off (aka utility maximised) watching the other eat shit, a redistribution? I don’t see any government involvement directing some of that income to others. They weren’t even taxed in this story.

  12. Up The Workers!

    The moral of the story?

    If we elect a Labor(sic) / Brown Movement Misgovernment, there will be an equality of dog droppings for ALL the peasants to dine on, and also a considerable pecuniary benefit for the Misgovernment finances (and pollie salaries, pollie pensions, pollie superannuation, pollie lurks, pollie perks, pollie schemes and pollie scams) when the Dog Dropping Tax is implemented to ‘save the planet’.

  13. Michel Lasouris

    All rather juvenile isn’t it?

  14. Up The Workers!

    Alternative moral of the story…

    According to learned economists, those civic-minded people who invariably scoop up their dog’s droppings in a plastic bag, are the ruination of the Australian economy, and henceforth should be shot on sight!

  15. Phill

    Good thing they didn’t step in it.

  16. Louis Hissink

    The savings glut occurs when entrepreneurs are not borrowing to fund their business models on the basis that they can’t see any profit to be made in satisfying demand(s). There is never a deficiency in demand, only in production.

  17. Robber Baron

    Sparticus, you forgot the disclaimer.

    “The names Martin Parkinson and Ken Henry have been removed from this story for legal purposes.”

  18. Michel Lasouris

    No, Make that Peurile…..

  19. Shy Ted

    Economist 2 is really, really, really dumb. He’s $50k up and he gives it away for a taste of a turd.

  20. Muddy

    At the risk of being laughed at for my economic ignorance, which I freely admit, how has the economy grown when 2 x $50,000 has simply been exchanged between two individuals? Neither has made a profit, so where is the growth?

  21. I am Spartacus

    GDP = C + I + G + X – M.

    No accounting for quality of spend (steak vs burger) or source of funds (income or debt). Just spend spend spend. If does not matter on what you spend – pink bats, NBN, politician holidays and helicopter joyrides. If you spend more than you earn, let the next generation pick up the tab.

  22. I don’t know if it distorts economic theory, but since $100k in sales was racked up, that is turnover and that is calculated as economic activity in terms of GDP, is it not?

    Surely this does illustrate that any crap can be counted as economic activity, even meaningless exchanges of paper efficiency reports by auditors, for e.g., which is the whole point of government interventions “to do something”.

    Whatever, it made me laugh my head off.

  23. Ray

    Actually no increase in economic activity occurred. There were two transactions. In transaction A, economist 1 transferred $50,000 to economist 2. If we assume that all of this would have been consumed, then the consumption of economist 1 fell by $50,000 and that of economist 2 rose by $50,000. No net change in consumption.

    In transaction B, economist 2 transferred $50,000 to economist 1. Again assuming that all of this would have been consumed, the consumption of economist 2 fell by $50,000 and that of economist 1 rose by $50,000. Once more there was no net change in consumption.

    To imply that there was any change in economic activity is to demonstrate a profound lack of understanding of economics.

  24. Paul

    Did they pay income tax on their earnings?
    I thought not.

  25. Wozzup

    As my economics lecturer once pointed out if I hop in a car and drive from Adelaide to Sydney that will have a positive net benefit for GDP. If I hop in the same car drive to Sydney and smash the car into a tree on the way it will increase GDP by even more. Funny old world, ain’t it.

    While we are on the subject of economists walking along the road, I will recount the story of two other economists doing just that. One of the the economists happens to be an efficient markets theorist. As they walk his mate looks down at his feet and says to the efficient markets guy “Hey mate look at that , it’s a one hundred dollar bill.” His friend, the efficient markets guy refuses to look saying “Nah it couldn’t be, someone would have found it already”. Yep, for sure its a funny old world even for economists. Some would say especially if you are an economist. And I guess it explains why many economists are not themselves rich – but many “chancers”, unconstrained by theory but wise in the ways of the world, are.

  26. bobby b

    Once they each pay income tax on their $50k paycheck, this will be just like every interaction I’ve ever had with government:

    I have less money than when I started, and a bad taste in my mouth.

  27. To imply that there was any change in economic activity is to demonstrate a profound lack of understanding of economics.

    Ray, congratulations on winning this year’s entirely missing the point award.

  28. Lutz

    Ray, would you please give us one example of a savings glut. I could not find an instance.

  29. Lutz

    Secondly, for the government to spend money they can only print it or take it away from the population.

  30. JC

    Lutz
    #2515888, posted on October 5, 2017 at 10:48 pm

    Ray, would you please give us one example of a savings glut. I could not find an instance.

    It’s really stupid economics and I can’t believe anyone would be taken in by this horse shit about a savings glut. During recession you have demand for cash or cash equivalents. Keynesian doofuses call this a savings glut.

  31. entropy

    A savings glut means that people aren’t using their money the way their betters think they should.

  32. Ray

    This may come as a shock to those Cats who appear to have an IQ barely registering two digits, which would seem to be quite a few given the comments above, but saying “Keynes believed ” does not imply that I believe.

    To set the record straight, I am not a Keynesian and have never been a Keynesian. However, that does not prevent me from reading the General Theory or to understand what Keynes actually said, as opposed to what the weight of public opinion is convinced he said. There is no doubt that Keynes was an incredibly intelligent man who wielded enormous influence during his own lifetime and generations after that. Yet much of what he wrote was simply wrong.

    If we are going to understand the mistakes of Keynesian economics, then we must identify what those mistakes really are, rather than tear down our own straw man creation.

    To be specific, Keynes was wrong on savings gluts. Not that savings gluts cannot occur, they certainly can and I recall one in my lifetime, it commenced on 15 September 2008 with the collapse of Lehmans. Of course that savings glut was temporary and lasted only a few months, perhaps you could say it ended as early as December 2008 when OBB was able to finalize the first global corporate bond issuance following the collapse.

    Where Keynes got savings gluts wrong is the cause. He believed that a savings glut resulted from a diminishing return to capital, whereas the 2008 crisis emerged from systemic failure of the financial system.

    Keynes also suggested that public works programs be used to offset the production shortfall created by a savings glut. This is obvious, if an extended savings glut did occur due to a diminishing return to capital, then a government public works program is the best way to address this issue. However, accepting this proposition does not imply agreement with the overall prescription of Keynes. Given that savings gluts will inevitably be transient in nature, then it is impossible to believe that governments could respond in sufficient time to redress any production shortfall, making any intervention distortionary.

    In short, I do not agree with Keynes in terms of the cause or response to a savings glut.

    The problem here is that too many readers of this site have an insufficient level of understanding of these arguments and so are inclined to resort to irrational and unreasoned ideological positions without bothering to engage what little grey mater they have available.

  33. Ray, refer to Adam, you got no Censor Yuma.

  34. sdfc

    Where Keynes got savings gluts wrong is the cause. He believed that a savings glut resulted from a diminishing return to capital, whereas the 2008 crisis emerged from systemic failure of the financial system.

    As far as Keynes was concerned expectations drove the decisions between saving and investment, which are essentially the same thing.

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