Supply or Demand? Static or Dynamic? Photo or Video? This is adapted fron an essay by Steve Conover, and the original is on his web page, at: http://web2.airmail.net/scsr/ Look under "Growth", and Keynes' Big Mistake. 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's usually missed completely by anyone employing 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? Steve Hi, Consider someone examining a photo of a bicyclist. They would conclude that the system is extremely unstable. And it is; just try to remain on a bike while it is not moving. But a moving bicycle is very stable: the stability comes from the motion. -- ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 From George Avery : BTW, I think "Equilibrium" is a bad term for the concept economists use it to describe. An equilibrium can only occur in a static system, and results in a low-energy, high entropy, static state, which would be an absolute disaster for an economy. The physical sciences use the term "steady state" to describe stable phenomena in open systems, which an economy certainly is. A feature of a steady-state system is that it can adapt to changes in the environment, which is similar to your moving equilibria idea. A steady state maintains activity in a meta-stable manner, through the use of external resource inputs ("energy") to compensate for entropy, which in the information-theory definition, basically defines an economy. AND: Subject: Re: Keynes' Biggest Mistake: The Snapshot Fallacy Date: Sun, 31 Aug 1997 06:35:18 GMT From: OldNasty@mindspring.com (Grinch) Organization: Happy Skeptics of America Newsgroups: sci.econ References: 1 scsr@airmail.net (Steve Conover, Sr.) wrote: >Friends in sci.econ: >Below is an essay I've drafted for inclusion in a website I am >assembling (not up yet). . . >I would appreciate any comments you might have on this essay. >The snapshot fallacy will be a common thread in the website. >Thanks, >--Steve >------------------------------------------- >The Snapshot Fallacy Excellent point. Your "snapshot fallacy" is all about us in political/economic arguments, everywhere. You can put countless examples on your Web page. >Keynes' Big Mistake Here though, I think you are being very unfair to JMK. Keynes was neither so naive nor so pessimistic as you portray him. And I suspect that if you read his essay "Economic Possibilities For Our Grandchildren", you'll acquit him of any charge of committing the "snapshot fallacy". Keynes wrote this essay during the Depression to counter the "bad attack of economic pessimism" that was about at the time by placing the period's troubles in a long-term perspective. In it he pointed out that since 1700 the western nations had been accumulating wealth undreamed of during all of prior human history, "during which time there was no very great change in the standard of living in the civilized centers of the earth, just ups and downs amid visitations of plague, famine and war for 4,000 years." Keynes then compared these millennia of stagnation to the immense growth in wealth and human welfare that had been realized just since 1700 in the western nations, compiling an impressive list of statistics to show 1,000-fold growth in the wealth of England, the tripling of life expectancy in England and America, and so on. "At some epoch before the dawn of history there might have been some era of progress comparable to that in which we live. But in recorded history there is nothing of the kind." But his big point was that this process of dramatic growth was continuing *even during the Depression*. He noted that technical progress and innovation continued unabated after 1929, and that because it is productivity that determines wealth over the long run, the world would return to its long-term growth rate. "We are suffering from the growing pains of youth, the difficulties of adjusting to rapid change, not from the rheumatics of old age". Keynes noted that if long-term economic growth continued at *any* positive rate, then due to the power of compound interest the world would attain immense wealth in a finite period of time -- a very short time by historical standards. "The power of compound interest is such as to stagger the imagination". He then predicted that growth would continue at an average 2% annual rate, with the result that the problems of economics as we know it -- the problems of scarcity and want -- would be solved in perhaps three generations. The Depression? "This is only a phase of temporary maladjustment. All it means in the long run is that *mankind is solving its economic problem.* [Keynes's emphasis]... "I draw the conclusion that, assuming no major wars or great growth in population, the economic problem may be solved or within sight of a solution within 100 years. This means that the economic problem is not, if we look into the future, the permanent problem of the human race. "This is startling because if we instead look into the past we find that the economic problem -- the struggle for subsistence -- has always been the most pressing problem not only of the human race but of the entire biological kingdom from the beginnings of life" Does this sound like a guy trapped in short-term thinking? I find this essay an impressive counter to JMK's often-quoted quip "In the long run we are all dead". Yet in 20 years I've never heard it cited or quoted by anyone in any political/economic discussion, except once by Patrick Moynihan (who's an interesting fellow himself). Maybe you should add an essay to your Web page along the lines of "pessimism sells, optimism gets ignored." If you are interested, you can find "Grandchildren" and a bunch of other interesting essays in Keynes's' "Essays in Persuasion", a paperback available in most any bookstore that carries economics books, or from Amazon.com. (Lots of great quotes in it for use in argument or on a Web page). >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 >>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. You're way off base here, JMK never said any such thing. Beware committing a logical fallacy yourself by engaging in a "straw-man" argument -- attributing to someone else something he never said so you can refute him. :-) Concerning underconsumption leading to lack of demand, in his "General Theory" Keynes said: (1) Propensity to consume is less than 100%. It must be or there would be no savings or investment. Nothing controversial about that. (2) Propensity to consume/save can vary by situation and circumstance. Obviously true, if you look at examples in different times and places. (3) Under *particular conditions* it is possible for consumers to spend "too little" and save "too much". To explain the Depression he posited that consumers had developed an excess preference for liquidity that caused them to hold too much cash -- a "liquidity trap" Why would they do this? Because with world currencies depreciating 30% or more they could attain a positive return in perfect safety by holding cash while reading about stock market collapses, bank failures, corporate bankruptcies and the political deterioration leading to World War II. This was the controversial idea, because classical economics said all saving went straight into investment (and thus got spent through another route), while Keynes said some would go into the liquidity trap (and mattresses) until consumers regained their confidence in the market. So total demand would come up short until then. Subsequent analysis generally hasn't been kind to the liquidity trap, but it was an entirely plausible and worthy notion given the circumstances of the day. The idea of "satiety" had nothing at all to do with it. (Satiety in a Depression?) The whole "satiety" idea, which gets mentioned often enough, seems to be a gross exaggeration of a speculation Keynes threw into the General Theory (and he threw in a lot of them). In discussing the consumption function he ran out a whole list of factors that *might* affect it -- one of which was the possibility that an increase in income might lead people to save a larger percentage of their income. Again, an entirely plausible idea to put forth for investigation in the absence of any evidence on the point. But not in any way fundamental to the General Theory. In 1946, Simon Kuznets got headed towards his Nobel prize by compiling the data that proved the marginal propensity to save does *not* rise with income, and the marginal propensity to consume does not fall with income. End of story, except that the idea that they do went into the political-economic folklore anyhow. Today, anyone can see that the savings rate doesn't increase with income. Average US income is triple what it was 40 years ago, income distribution is much wider, the rich are much richer and there are many more of them -- and yet the savings rate has fallen to an all-time low. Still, you hear the stuff about "income has to be redistributed to maintain demand" all the time, and the exaggerated "satiety" version of the story too often. But don't blame it on Keynes. Regards --- "If economists could get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!" -- J. M. Keynes.