Tibor R. Machan (http://www.weblogbahamas.com)
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 study 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 economics.
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 less 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!
October 2, 2009
We are delighted to present Lessons in Freedom, essays by Dr. Tibor Machan, for your pleasure.
Dr. Machan holds the R. C. Hoiles Chair in Business Ethics & Free Enterprise at Chapman University's Argyros School of B&E.
Visit his web site here…
