Deficits, the National Debt, and Economic Growth: What many politicians don't want you to know.
Debt is the wrong enemy.  Growth is our forgotten friend.
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"Keynes was wrong in thinking that people's needs were basically fixed and absolute - that they were capable of eventually being met, at which point demand would be satiated."
--Paul Zane Pilzer

 

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Keynes' Biggest Mistake

Look in any reference book on logical thought and writing, and you'll usually find a list of logical fallacies -- common mistakes which should be avoided, if one is attempting to support or refute an argument logically.

I think I've discovered a logical fallacy that isn't on anybody's official list. I call it the snapshot fallacy. Take a snapshot, examine it for things one likes or doesn't like, then draw conclusions about what should be different to make things better. The fallacy is this: A snapshot is a poor substitute for a movie. Life, history, the economy, the ecology, politics, warfare, invention, innovation, experimentation, and even the weather are much more easily understood in movies rather than snapshots.

The snapshot fallacy can blind us to important cause-effect relationships. In economics, for example, the process of wealth creation is one of the most important determinants of economic and social welfare. But it's a process that, in my experience, is usually missed completely by those who are committing the snapshot fallacy.

Here's an example. John Maynard Keynes, the brilliant and famous economist of the early 1900's, was a demand-sider, whose theory analyzed the demand for, and supply of, goods and services of his day. One of his conclusions, still debated vigorously to this day, was this: Demand is king; demand drives the economy; demand swings cause boom and bust. A population with sufficient buying power drives the economy from the demand side, so the objective is to ensure that the population has a steady, sufficient amount of buying power. If the nation could control demand swings via government intervention on behalf of the demand side, the boom/bust cycles could be dampened if not eliminated.

Another of Keynes' conclusions (…and this could be his biggest mistake) was this: Demand would eventually be satiated. In other words, consumers would eventually acquire all they wanted or needed. They'd all have enough iceboxes, sulfa drugs, cloth diapers, steel roller skates, Victrolas, Morse-code telegraphs, mechanical adding machines, Pullman dining cars, fireside chats, macadam roads, M1 rifles, carburetors, vacuum tubes, outhouses, carbon paper, crank-driven telephones, Studebakers, Radio Flyers, big band music, ticker-tape machines, white-wall tires, coal-fired home furnaces, pier-and-beam houses, newsreels, monocles, filling stations, fountain pens, tin cans, Sears catalogs, x-ray machines, family-owned grocery stores, beat-the-heat electric fans, Amos 'n Andy radio shows, Monopoly board games, lead-pipe plumbing, Baby Ruth candy bars, daytime baseball games, and coast-to-coast transportation that only took three days. What more could anybody possibly want or need? Keynes was concerned about this, and concluded that, after demand was satiated, government policies of massive income redistribution would have to be adopted to maintain full employment -- i.e., to ensure that the demand side had buying power.

But Keynes was wrong, because he committed the snapshot fallacy. That is what I consider to be Keynes' biggest mistake.

The snapshot fallacy misses the important -- possibly all-important -- dynamics of the supply side. Creative individuals with sufficient financial power change the way the world works. They direct movies. Japanese entrepreneur Soichiro Honda said, "We do not make something because the demand, the market is there. With our technology, we can create demand, we can create the market." Honda's phenomenal supply-side success story is now a Legend -- pun intended -- in the automobile industry.

Moreover, the Honda success story has to be highly embarrassing for Keynesian demand-siders such as John Kenneth Galbraith, who chose the same automobile industry as the paragon of an impenetrable, competition-proof oligopoly, deserving of government control to protect those of us on the demand side. Soichiro Honda has demonstrated, not theorized, the power of the supply side -- the power not only to bust up oligopolies through higher-quality, lower-priced new products (thereby protecting consumers), but also to bust up snapshot-fallacy demand side theories. (By the way: Thanks, but no thanks, Mr. Galbraith, for the theory that I need to be "protected" from those "greedy" corporations. I side with Henry David Thoreau, who said, " If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life.")

Change can only be observed and analyzed over time. Change is a movie, not a snapshot. Keynes saw the snapshot, but he missed the movie. Too bad; the economic growth movie is by far the best movie I've ever seen. (You missed a good one, Keynes. You, too, Galbraith.)

Movies yield a much better understanding of life than snapshots, don't you agree?


"The perpetual error of demand economics [is] the vision of human beings essentially as mouths, not minds - as 'consumers' of goods and services, but not producers of them, as users of jobs but not as creators of new work."
--George Gilder

"The primary economic conflict, I think, is between people whose interests are with already well-established economic activities, and those whose interests are with the emergence of new economic activities. This is a conflict that can never be put to rest except by economic stagnation."
--Jane Jacobs

End of this article
Last update of this page: June 24, 2001
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