Monday, March 8, 2010

the gun, the wallet, the IOU, and the printing press

From Gary North at

Four images provide the conceptual tools to refute Keynesian economics: the gun, the wallet, the IOU, and the printing press...remember this principle of effective communication: "It is easier to forget a formula than a mental image."

Academic economists love formulas. This is their great vulnerability. Unlike formulas in physics, economists' formulas conceal profound conceptual errors that simple mental images reveal as utter nonsense. The average person can readily comprehend these errors through the use of simple mental images...

In scientific notation, the Keynesian Formula: C + I + G + (X – M) = GDP
which means: Consumption + Investment + Government Spending + Exports Imports = Gross Domestic Product.

Spending is the heart of Keynesian economics...[C, I, X, and M are] a series of society-wide individual allocation decisions....Government spending is an allocation decision of a different kind. "See this gun? See where it is pointed? Hand over your wallet."...

C, I, X, and M are based on production. They are creative forces. G is based on confiscation. It is not a creative force. Everything spent by G comes at the expense of C, I, X, or M. When G spends, it does so at the expense of the others...

Here is where Keynes came to the rescue of governments everywhere. He has the government offer to write IOU's that pay interest. "Put away the guns. Write IOU's."

[This leads to] two obvious questions: (1) Where will the government get the money to pay off the loans with interest? (2) Where will people get the money to lend to the government?

The politicians' answers... (1) we will hire more men with badges and guns; (2) we will write more IOU's. But these are not answers. They are variations of kick the can.

Then Keynes added this: "print more money."...[But this leads to inflation, etc.]

Keep mentioning the wallet. People understand wallets. They do not really understand formulas. Keep mentioning the printing press. They understand counterfeiting...


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