Friday, October 02, 2009

My Economic Vindication

Tibor R. Machan

When I was an undergraduate at Claremont Men's (now McKenna) College back
in the early 1960s, I took introductory economics from the now late
Professor Proctor Thomson, one of the less well-known Chicago Boys,
economists who studied under the late Milton Friedman and his colleagues at
the University of Chicago. He was a fascinating teacher and worked very
hard at explaining to us the mysteries of contemporary neo-classical

One of his lessons I recall well dealt with the concept of marginal
utility. He illustrated it by his own coffee drinking, pointing out that
the first cup for him was far more important than the next, and the next
was more important than the one that followed, etc. "More important" meant
pretty much the same thing as "of greater utility," utility in economics
being something entirely subjective, determined by the individual consumer
of goods and services, with no possibility of what was referred to as
"interpersonal utility comparison," which is to say of comparing one
person's preference with those of others. (I was a bit skeptical about
this myself since I thought my own preference for a painkiller when I have
a powerful headache might indeed be more important than your preference
for an M&M. Though this doesn’t by any means imply that I may take your
M&M away so I could get a painkiller!)

Another lesson that Professor Thomson tried to teach us had to do with
what was then considered to be a powerful concept of the famous British
economist, John Maynard Keynes, namely, the multiplier. This is the idea
that when the government injects funds into the economy, those funds
actually turn out to multiply and thus amount to greater economic value
(stimulus) than what they initially amounted to as taxes collected or
money borrowed. This is one reason that contemporary champions of
Keynesian economics such as Princeton University's Nobel Laureate in
economic science--and very influential columnist for The New York
Times--Paul Krugman are enthusiastic supporters of government stimulus
packages, so much so that they are critical of President Obama for not
injecting even more such stimulus into the economy (via public works,
borrowing, and such projects as clunkers for new cars).

When I was being instructed in the workings of the multiplier way back
then, I was a skeptic. I could not grasp how something could come from
nothing--if one injects $5 billion by way of government spending, how
could one get $7 billion worth of economic run for one's money? Never
mind that the entire scheme seemed thoroughly immoral to me--taking from
Peter to beef up the economic welfare of Paul just doesn't square with
admonitions such as "Do not steal."

But most economists--especially macroeconomists who focused on the total
economic system of the country and even the globe--were not very
interested in morality back then and few are interested in it now, come to
think of it. Yet even as a part of pure, value-free science the
multiplier just baffled me. You rob Peter of $5 and hand it to Paul and
it becomes $6 or $7. How is that possible? Especially when those who
administer the process will take their own bit from the original
amount--politicians and bureaucrats certainly don't do their part in all
this without compensation and are also prone to waste a lot of resources!

Professor Thomson nearly flunked me--I got a gentleman's C--in the course,
despite my having grasped well enough most of the rest of micro and
macroeconomics he taught us. (He was memorable, by the way, for
encouraging debates in class--I recall having many arguments with one
classmate who was an avid socialist!) He thought, however, that I had
this blind spot and didn't want to reward it, while I thought I would be
betraying my own loyalty to the metaphysics of Aristotle who thought
something couldn't come from nothing (as opposed to the modern philosopher
David Hume, who believed that if we could imagine it, at least it is
conceivable that something would emerge from nothing).

Well, I read this piece in the October 1 issue of The Wall Street Journal,
by Harvard Professor Robert J. Barro and recent graduate Charles J.
Redlick in which lo and behold the multiplier is debunked, good and hard.
According to the authors "The available empirical evidence does not
support the idea that spending multipliers typically exceed one, and thus
spending stimulus programs will likely raise GDP by less than the increase
in government spending." Moreover, they add, "there is empirical support
for the proposition that tax rate reductions will increase real GDP."

I must say I feel vindicated!

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