Straw Man Ahoy!

A little while back, I read (and blogged) about David Henderson's reflections on left vs right, or liberal vs libertarian discussion. Henderson commented that, on balance, libertarians were much better than liberals at characterising the position of the other side. He's since gone on to write a lot about turing tests, which appear to be attempts by people to argue the position of somebody ideologically opposed to them. On reflection, the best response to that is something involving the words "stones", "throw" and "glass houses".  Particularly because libertarians are up there with the worst of us liberals at creating straw men of the other side of the argument, and today on Cafe Hayek there's another priceless example: Aggregate Healthiness.

My suspicion is that the analogy isn't lost on anyone who has ever studied economics or reads up on economic issues. Aggregate Healthiness is Aggregate Demand, and Gross Bodily Health (GBH) is Gross Domestic Product (GDP). Boudreaux is, of course, trying to mock his straw man Keynesian, who says: "Doesn't matter what government spends on, but government must spend if GDP falls - gotta keep AD up!"

Now, maybe that's the simplistic Keynesianism exhibited by newspaper hacks the world over, but I don't know of any genuine economists who would actually state such a thing. My suspicion is that the Boudreaux response would be: Well, you believe in the national accounts identity that yields AD, i.e. AD=C+I+G+NX, where NX is net exports, C is consumption, I is investment and G is government spending, and hence you must believe any type of G is useful in raising AD and hence GDP! We should even dig holes and bury banknotes, since paying people to do that will stimulate the economy!

Now of course, that could be done, and the amount of money in the economy would increase since people would be being paid to dig these holes. But the supply capacity of the economy would remain unchanged, and arguably would actually contract - since those folk might have done something productive instead of digging holes for the government.

The essential point is it would be the most blind and blinkered economist to assert that "it doesn’t matter" what is done to raise AD provided it is raised, just as it would be a crank doctor who did that. Yet, apparently, Boudreaux thinks he characterises Keynesian economists really well here.

Anybody who has any ounce of common sense would say that what the government spends its money on, if it engages in some counter-cyclical stimulus package on AD falling, matters: If it is digging holes then we're all in trouble. On the other hand, if it is investments which create the conditions for expanding investment and hence potentially consumption, then a stimulus package may well be successful.

However, again, the Hayekian in Boudreaux will say that it's impossible, absolutely impossible, that the government could possible think up any such investment that would actually be better than what the private sector could have done without the government intruding. That's mainly because Hayekians cannot fathom situations where the price mechanism in the market doesn't function properly, and hence where market outcomes are inefficient, and things can be done to improve the situation (the classic example being some form of Pigouvian tax/subsidy in the case of externalities). They do this mainly because they ignore the possibility of imperfect information in markets. However, I'm in danger of starting to mischaracterise Hayekian economists if I carry on much longer...