Arnold Kling  

Scholarly Beliefs and Folk Beliefs

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In my latest essay, I meditate on the topic.


Regardless of the state of scholarly belief about Keynes, folk Keynesianism is dominant. For example, most people believe that we should worry about whether "the consumer" will spend freely. Everyone fears that if consumers tighten their belts then this will "weaken" the economy. This concern with the mood of consumers is not in the original Keynes. Instead, Keynes himself focused more on business investment as a determinant of economic fluctuations.

The idea that the economy needs consumer profligacy is not nearly as entrenched among scholars as it is among journalists, politicians, and other citizens. In fact, there is a strong case to be made that we would be better off if we had less consumer spending and more saving.


I probably spoke too strongly. The "paradox of thrift" is in fact part of the original Keynes. So it is not quite fair to say that concern with consumer spending is purely an artifact of folk Keynesianism.


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COMMENTS (11 to date)
eric writes:

His achievement was a rationalization of the policies already practiced and the "conventional wisdom" he ironically mocked. What he really did was to write an apology for the prevailing policies of governments, no wonder it was an instant classic.

David W writes:

My nomination for harmful folk-economic belief- greedy capitalists caused the Great Depression, heroic FDR saved capitalism from itself.

Excellent essay, thanks. I think you may have been a little unfair to Herman's Hermits, though.

Bill Stepp writes:

One of the mantras in the financial press is that the consumer is 2/3 of the economy.
Is this true, or is it an urban legend with no basis in fact?

Lord writes:

His achievement was in facing the way the world worked and not the way people believed it should work.

Dewey Munson writes:
Is it better to be a clear thinker or not

Who defines a clear thinker? I presume that clear thinkers are those who agree with and support your ideas?

What percent of the population knows Keynes?

Craig writes:

I too am tired of the shibboleth that the American economy is dependent on consumers. I'd think that it's dependent on workers.

If we're all working, we'll spend our income somewhere, somehow, some way. Who knows? We might even save it -- and that would be bad too I suppose.

spencer writes:

The consumer accounts for 2/3s of the economy.

Ok, we do not measure gdp or output directly.

what we do is measure consumption and adjust that for changes in trade and inventories to indirectly estimate gdp or output.

So as a consequence of the way we calculate GDP
people say the consumer accounts for 2/3s of the economy. But actually, they account for 2/3s of consumption , but 0% of production. Things like chemicals, semis, oil, etc., account for production, but we just do not measure it that way.

One of the reasons the accounts are done this way is that they were first created after the depression when the main economic, policy concern was inadequate consumption so that is what policy makers wanted to focus on.

Roger M writes:

Is the consumer 2/3 of the economy? Depends on how you count. They get that figure by breaking down the GDP. The GDP claims to avoid "double counting" by counting just the valued added at each stage of production. But as Prof George Reisman demonstrates in his book, "Capitalism," the GDP measures net output, not gross. The BEA agreed with Reisman and now includes a figure called GO, for Gross Output, alongside GDP. Using GO, consumer spending is less than half of the economy.

David Friedman writes:

I believe the "paradox of thrift" fallacy goes back at least to "The Fable of the Bees" by Mandeville. Are there earlier versions?

Kasey Kane writes:

Nice piece.

Two comments:

As Josh Lyman said: Don't know Herman's Hermit's it's hard enough to get on the charts.
James Glassman. Dow 36,000. Made me smile.

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