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Steven Horwitz
In a series of newspaper columns last year, Don Boudreaux compared the economy to a giant jigsaw puzzle with billions of pieces that can fit together in numerous combinations only a small number of which produce a meaningful pattern or picture. We learn which combos work because they "beep"? every time we get one "right"? and those beeps give us pleasure. I like that metaphor and I want to make use of it to talk about Austrians, Keynesians and stimulus spending.
Imagine that we do what Don describes and start constructing this jigsaw puzzle, but rather than the beeps reflecting combinations that create meaningful patterns, imagine that the beep mechanism is suffering from a computer virus that leads it to commit both Type I and Type II errors. The result is that we end up creating a puzzle that sees no meaningful image emerge (whether one characterizes the pattern as "out there"? or emergent isn't essential to my point). Suppose further that we eventually use up all of the pieces and discover we have wasted our time because there is no meaningful picture to be found.
What happens next? For one thing, we have to spend some time pulling the puzzle apart as what we've created produced no meaningful picture. Then we'd want to fix the bug in the beeping mechanism. And then we'd want to get back to the task of building a puzzle that did create a meaningful pattern. Of course this extension of Boudreaux's metaphor is designed to mimic the Austrian theory of the business cycle, though somewhat imperfectly.
Now suppose we are in the process of dismantling the old puzzle. Suppose further that as we pull pieces apart, we have to wait for a beep to inform us that doing so was a good "pulling apart."? Once we know we have correctly dismantled, we can try to "re-fit"? those pieces into the puzzle. As we engage in this process, there will be a bunch of pieces that are sitting around waiting to be "re-fit"? into the puzzle, ideally generating a true beep and helping create a meaningful picture when re-fit correctly. Of course if we've really fixed the beep mechanism, these "pieces in waiting"? will grow at first as we do more dismantling than reconstructing, then shrink as those reverse.
So while the Austrian puzzle observers nod approvingly as the dismantling and reconstruction continues slowly but effective onward as puzzle makers learn from the beeps, along comes their friend the Keynesian. The Keynesian bemoans the fact that there are so many puzzle pieces sitting "in waiting."? He says "wouldn't things be better if we just starting putting those pieces into the puzzle in any old way? Even if we don't get a meaningful pattern, at least we'd use up all the pieces. After all, isn't that how you know you've reached the goal of a finished puzzle?"?
The Austrians respond by saying "No, the point isn't to just use all the pieces. That's easy to do, but it's not the challenge of this kind of jigsaw puzzle. The challenge here is to produce a meaningful pattern without having a picture on the box, and which might not require all of the pieces to be used, because the meaningfulness of that pattern derives from the way in which the organization of the pieces matches what puzzle demanders want in a picture even though they cannot articulate it ahead of time."?
Now it's true that puzzle pieces are not human beings, but the underlying contrast of visions here seems to me to capture the debate. The argument for stimulus spending by Keynesians amounts to saying we need to activate idle resources either without thinking about whether the puzzle pieces actually fit together or, more subtly, not thinking about, or not caring about, whether they produce a meaningful pattern. The point is just to make sure they are being "used."?
The former (not thinking about whether they fit) reflects a problematic view of capital (capital as play-dough, rather than legos), and the latter is a deeper issue about what constitutes economic welfare, particularly in the long-run. The Austrian emphasis on the meaningfulness of the pattern is a reflection of our insistence that it's all, ultimately, about microeconomic coordination and that aggregates such as GDP or even unemployment are not the central issue for judging success. By recognizing that sustainable growth only comes when the puzzle pieces actually fit together and make a meaningful pattern, Austrians have a way to criticize the stimulus crowd's insistence on the importance of making use of idle resources. The point of an economy is not to have every person and machine working but to deliver what consumers want "â?? i.e., to make a meaningful pattern.
Trying to jam all the pieces in where they don't fit will not create sustainable growth because it does not create a meaningful pattern. It's only going to necessitate pulling apart and re-fitting later. You don't "solve"? the puzzle by using all of the pieces; you solve it by using as many pieces as necessary to generate a meaningful pattern and picture. Getting such a pattern to emerge requires the decentralized coordination generated by the microeconomic discovery process, and that process is obscured when our focus is only on aggregates and getting resources into use. In words that have now come to supersede the orginal: "too much aggregation ignores human action and motivation."?
Stimulus spending advocates seem to treat the jigsaw puzzle of the economy as if the goal is to use all the pieces, without much concern about whether they fit together properly or if the combinations make a meaningful pattern. For Austrian critics, the fit of the pieces and the pattern they create is what ultimately matter.
I'd be interested in hearing whether this analogy works and how it might be extended.
(I thank my wonderful dinner companions last night, Young Back Choi, Doug Rasmussen, and Gary Mongiovi, along with some outstanding Korean food, for getting me thinking about these issues this way and Art Carden for some quick feedback on the idea.)
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In fact, the Keynesians have to burn up (expend) pieces already organized in the puzzle in order to mobilize those pieces on the sidelines.
And while they are pushing all of the unused pieces willy-nilly onto the solved puzzle, it becomes costlier to re-organize already solved puzzle pieces that get bumbed out of their place -- you've got to spend time moving the dumped pieces out of the way, and it costs time to locate all of the pieces now bumped out of place.
One of Hayek's points again Keynesian demand pumping is that in the process of pumping, valuable resources must be diverted from more preferred/more valuable uses to less preferred/less valuable uses, bidding up prices for goods and processes that are more valuable/more preferred, and thereby actually reducing the general wealth.
This seems to be an argument against crude Keynesianism rather than a case against the idea that there's a wedge between the market interest rate and the marginal efficiency of capital. But maybe that's just me.
I hereby strongly concur that the way capital and other factors of production work together in specialized patterns matters a great deal.
Your analogy misses the idea that stimulus inevitably moves already established pieces in the puzzle to do things that would otherwise be meaningless.
Further, especially given obama's 'stimulus,' the act of stimulus forever changes the picture. For example, Obama gave permanent and significant increases to education and 'green' energy. Those are not temporary puzzle movements. They remain until someone actively takes them off the board again.
This analogy fails. "We" don't put puzzle together as one exercise. Billions of actors do their pieces. There are no beeps that'll satisfy some economist, imaginary or real. Daniel Kuehn, as always, is pissing in the wind when he suggests that Keynesians are capable of putting the puzzle together through economic stimulus.
No sandre - the argument is that when the pieces are turned upside down (price signals distorted by liquidity preference) we should turn them right side up again and let decentralized agents get back to specializing and exchanging.
What is it's not obvious if the pieces are upside down? What if the stimulus actually inverts pieces that were OK?
Further, what if the market actors realize they can't proceed until the political actors are finished rearranging pieces?
The peices are capital, and the puzzle is put together by millions of people. The beep is a reward -- humans act based on reward. So the analogy is apt.
Of course, the problem is too that the number of pieces is also growing. And it matters which ones grow and which ones do not. This is of course a complicating factor, but it's one that matters.
Another analogy would be that of a growing organism. We want our organism to grow, but it has to grow in a healthy manner. One can grow by becoming overweight or by getting a tumor. Both are kinds of growth. Thus, when Krugman argued after the tech bubble burst that the U.S. government should create a housing bubble, he essentially argued that the solution for the weight loss of the organism from pneumonia was for it to get cancer. Yes, the organism grew in size, but it was not healthy growth, to say the least. The tumor must be removed, and the patient will be very thin and unhealthy as a result. So what should we do? Well, we know that a tumor made the organism gain wait in the past, so let's fill it full of carcinogens until it grows a tumor again.
That is what Keynesian stimulus is: carcinogens designed to make the organism gain weight by giving it cancer.
Seriously, where's the malpractice lawyers wehn you need them?
Nice article, thanks for the information.
Keynesians are FOR....NEXT while Austrians are DO UNTIL...LOOP
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