Bob Higgs on Spirits, Fairies, Keynes, and Krugman

by Don Boudreaux on August 3, 2011

in Country Problems, Inventive intervention, State of Macro, Stimulus, The Crisis, The Economy, The Future

Bob Higgs’s response to Krugman’s haughty dismissal of those of us who believe in (what Krugman sarcastically calls) “the confidence fairy” is a must read.  So read it.

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Chris O'Leary August 3, 2011 at 3:42 pm

Steve Wynn believes in The Confidence Fairy, and I’m inclined to take his word over Krugman’s.

SheetWise August 4, 2011 at 10:59 pm

If you’re limited to only those two — that’s a great choice.

Jack Costello August 3, 2011 at 3:46 pm

‘The humor columnist of the New York Times, Paul Krugman’. Brilliant! Although I usually think his columns are more sad than they are funny.

kyle8 August 3, 2011 at 4:02 pm

I always felt his columns were more appropriate for the obituaries.

Methinks1776 August 3, 2011 at 4:25 pm

Nothing that morbid should ever be in the obituaries.

Don Boudreaux August 3, 2011 at 4:27 pm


Stephen A. Boyko August 4, 2011 at 10:52 am

Krugman’s humor, like his economic analyses, is dependent upon the timing of the error of omission.

John Sullivan August 3, 2011 at 4:18 pm

I think both sides are overplaying their hands. Just the other day I told my wife that I cancelled a round of golf because of some things she said to me about not helping out around the house so much. What I didn’t tell her was that my friends cancelled first.

If you read the wsj editorials, they tend to overplay the confidence card. All the corporations have tons of cash, but are afraid to invest it and hire new workers because of Administration policies, such as Obamacare and regulatory matters, etc. Now, anyone schooled in economic theory knows this is bullsh..t.

Producers don’t create the jobs; the consumers do, through their demand for goods and services. The wsj errs in arguing that the capitalists create jobs. Philosophically, it’s the same stupid mistake that Ayn Rand made in her writings on capitalism. but you could forgive her because she never really understood economics.

Everything begins and ends with the consumers. If large corporations are sitting on cash, it’s due to lack of consumer demand. Attention must be given to why there is such a lack of demand.

Should anyone dare to mention that the reason corporations have boat loads of cash is because of the political manipulation of interest rates that essentailly provide them with free funding, while at the same time the consumers who they need in order to make profits are making nothing on their 401K’s, and as a result must reduce their “animal spirits” for consumption in order to rebuild their balance sheets.

Methinks1776 August 3, 2011 at 4:35 pm


Let’s assume that consumers demand your product and you can produce it, but it will take a long term investment. The government then launches a campaign to increase every imaginable regulation. Regulations increase costs and may even prevent you from continuing production. Unfortunately, most of these dumb regs aren’t even written, so you can’t even estimate what your costs are going to be – which means you can’t estimate profits.

Do you invest under those circumstances? Not unless you want to go broke.

I produce a product for which there is plenty of demand. Unfortunately, the increased regs has made it not worth my while. I just recently closed down one of my firm’s operations because of increased regulatory uncertainty – and so have thousands of firms in my industry. The regs have increased, they will increase more and we can’t even estimate by how much. Given what we’ve seen, anything’s possible. Literally (except decreased regulation). Since I take an interest, I’ve talked to a lot of other people running businesses in other sectors completely unrelated to mine. Same story.

In a free market, consumers are king. In the sh*tfest we have now, government is king and it’s government that dictates whether businesses will be allowed to fill consumer demand.

Gordon Richens August 3, 2011 at 5:43 pm

I place my bets according to the advice of my personal confidence fairy. She hasn’t always been right, but on balance she has done good by me. Right now, she’s not so bullish the U.S economy.

John Sullivan August 3, 2011 at 5:59 pm

You might make sense if there was actual demand out there, but there isn’t. The government’s monetary policy are hurting the consumers.

The free funding to build plant expansions would offset the extra cost of government regs, and if there was actual demand, the costs of the regs would be built into the prices of the finished goods.

And besides, the regulatory environment for most industries, not all, isn’t much different today than when things were booming in 2005.

The present monetary policy is supportive of debtors at the expense of savers. Until it is reversed, expect continued stagnation.

I own a business too. I employ over 50 workers. If the demand were there, I’d consider an expansion of operations.

I’m not arguing against your opinion regarding the negative effects of economic intervention as much as I am saying that it isn’t the main reason why economic expansion isn’t occuring. The fact that the recession wiped out the balance sheets of the consumers coupled with a monetary policy that is amortizing the losses of the large financial insitutions along with their corporate clients on their shoulders.

After a decade or so of malinvestment in real estate wiping out hundreds of billions worth of net worth of individuals, you’re overplaying the confidence card when you try to blame the slow pace of the recovery on some regulations that you are poltically opposed to, such as Obamacare, while ignoring the most egregious of regulations that are actually harming the consumers and extending their rate of financial recovery–which is our monetary policy.

Entrepreneurs tend to be self righteous, which makes them think that they’re doing society a favor by hiring people, as if they are God, creating employment for the masses. Nothing can be further from the truth.

lastly, this has all happened before where we had recessions and the corporations waited until demand picked back up. The plant expansions always happened without the regulations being reduced. Your entire argument will go down the toilet when we recover and things are back to normal. Regulations will remain but the corporations will expand their production to meet the rising demand. Forgotten will the the phony excuses as to why they didn’t expand earlier than they did, and you will forget too.

Methinks1776 August 3, 2011 at 6:12 pm

So, let me get this straight – you’re just asserting that there’s no demand for anything and that the regulatory environment is no different from 2005 before Obamacare and Dudd-Frank and the 400 (and counting) new regs in the mortgage market, etc. Demand for everything has uniformly disappeared. We’re a different kind of man now who doesn’t want or need anything. Gotcha. Genius insight.

I don’t know a single industry that isn’t affected by Obamacare and I don’t know a single industry that won’t be affected by Dudd-Frank (all industries need financing, dude). But, I guess you do. I guess for your own politically motivated purposes you assume they exist. I wasn’t talking about politics, I was taking about costs. Regardless of where you are politically, costs are costs and uncertainty about them is a killer, buddy (not that certainty spells investment. certainty that your costs will exceed revenue is not likely to make you run out and invest).

I suggest you don’t babble on about overplaying your hand as long as you continue to blame everything on monetary policy and make idiotic proclamations about the self-righteousness of entrepreneurs. It’s pretty clear you don’t know any.

John Sullivan August 3, 2011 at 7:14 pm

Obamacare hasn’t gone into effect yet.

I am an entrepreneur. I don’t create demand, I respond to it. The consumers create the jobs and they also decide what the labor rates will be and what the prices of the goods made will be. If you can’t adjust your costs to their demands, you’ll go out of business. I know my roll. I don’t create wealth by hiring people. I create it by saving my customers money.

The issues here are intertwined. Regulations negatively affect consumer demand. I am not arguing against that. It is being asserted here that even though there is no general demand to justify expansions of operations at companies, that if the companies decided to expand nonetheless, that somehow the demand would be created and the jobs that they hired would be secure. This is utter economic nonesense!

The expansion of a plant must always follow demand, it never creates or precedes it. A plant expansion can never provide a continuous stimulus, through the hiring of labor and materials for the expansion, that would continue without the demand for the products that would be made there. Many plant expansions bankrupt companies because they miscalculate demand.

The WSJ, I mentioned, often opined as if expansions, per se, created jobs, when they don’t. Companies will never expand operations merely because regulations might be reduced or eliminated if the general demand for their products won’t justify the investment.

Again, I am not arguing against the debilitating effects of onerous regulation. I am an anti-statist to the core. I am arguing against what I believe to be an econmic fallacy related to cause and effect.

Please, my detractors, open Mises and study his chapters on how, no matter what the regulatory conditions are, all production is a response to consumer demand. It never creates demand.

To answer the next critic below, with regards to the invention of products that create a demand for them, the new invention, such as some of the new Apple Products, did not create the wealth upon which the demand is based. You are confusing desire with demand.

Everybody might want a product, but demand consists of having the wealth required to buy it. If there is no wealth in a society for cell phones, none will be sold there. Of course, there would be desire for them, but no demand.

Apple did not invent products that created a demand. The ‘demand’ or wealth, was pre-existing. It may have been a demand that people previously had allotted to something else they desired, so when they bought the Apple product, they chose not to buy something else with their money.

Producers respond to demand. Every product competes with every other product for the total demand of the consumers, which is the aggregate of what they have available for consumption. When the housing market crashed, hardest hit were the RV industry and SunRooms. Why would remodeling market sunrooms suffer when retrofit windows didn’t? Both typically boom when new construction dies down. The answer lies in the fact that every product competes with every other product. When things slowed down, SunRooms didn’t make the cut.

Apple didn’t create the demand for their prodcuts; they took it from someone else.

Methinks1776 August 3, 2011 at 7:56 pm

Obamacare hasn’t gone into effect yet.

That little nugget and your previous nonsense compel me to ask you the obvious question: Are you a successful entrepreneur? My bet is “no”.

Economiser August 3, 2011 at 9:33 pm


You’re using the word “demand” to mean a whole hodgepodge of different things.

New products take *resources* from other uses. If a new product is successful, it will invariably draw upon resources that previously were put to other (less productive) uses. For example, the smashing success of iPads takes raw materials, manufacturing capabilities, engineering talent, and many other resources away from other uses. Apple can afford to command those resources because of consumer demand; that is, consumers are willing to trade value (usually in the form of dollars) to Apple that are worth more than Apple’s inputs. This of course takes away from other things the consumers could buy. You can call that whole thing “demand” if you like, but that’s not how you were using the word earlier.

We’re back through the looking glass:

“‘There’s glory for you!’

‘I don’t know what you mean by “glory”,’ Alice said.

Humpty Dumpty smiled contemptuously. ‘Of course you don’t — till I tell you. I meant “there’s a nice knock-down argument for you!”‘

‘But “glory” doesn’t mean “a nice knock-down argument”,’ Alice objected.

‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

SheetWise August 4, 2011 at 11:23 pm

We’ve focused our expansion plans on strategic outsourcing, where we can identify our needs, protect our information, and control our costs. This means slicing and dicing to the point where mom and pop (or parent and child) is the only economically feasible unit to contract with. These are the only contractors left who are actually free — and always have been free of regulation.

The downturn in hiring has nothing to do with businesses desire to hire — it’s simply a reaction to the fact that government regulations increasingly equate employment with adoption. I want to hire people and give them a paycheck — I do not want to adopt them. I do not want to be responsible for issues such as medical health, mental health, substance abuse, family planning/leave/etc., I simply want to hire them. The only way I can do that today is to hire an independent contractor who is exempt, and whose family is also exempt — and they’re exempt because FREE people have a right to make a living, and the government will never pass any law that prevents them from doing so. The government only passes laws to protect “employees” — which are the modern day slaves. We don’t hire slaves any longer — they’re too expensive.

Krishnan August 3, 2011 at 5:36 pm

Ah yes … you believe that the consumers created the demand for the iPOD and the iPAD and other devices that Apple makes – all Apple had to do was to make them. Right, got it.

Energy use is increasing … coal remains the only really viable option for the near future – and so one can imagine that those with the money will surely invest in power plants to meet consumer demand for energy … but they are not – because of the war on power producers by the EPA – and that translates into a war against everyone that supplies the power industry … no, the WSJ is not overplaying it’s hand – What the Obama administration has done is to show it’s hand – Businesses are evil and should be stopped. Gasoline consumption is evil and must be curtailed. Energy consumption is evil because it creates CO2 and so must be curtailed – and on and on and on … Obama coming out and every so often lashing out at corporations and “jets” and whatnot is also a signal of what he really wants. The US Chamber of Commerce understood that Obama is Anti-Business – He does not want the US economy to grow and create jobs – because that would mean more energy consumption (including gasoline) …

Jeffrey Immelt is on Obama’s side because he is a crony – GE makes billions making whatever Obama thinks is “green” – even as GE consumes MORE energy overall while making and selling what they make. Obama and Reid always want to remove tax subsidies for “gas companies” because they are evil – and yet they release oil from the strategic reserve hoping to keep prices down … Purely political

Obama is an enemy of the US system and businesses. People running businesses, know that they have to pony up to him or they know he will throw the weight of the Federal Government against them – they are operating under implied tyranny.

Yes, I do believe our BIGGEST problem is the occupant of the White House today. Yes, Bush’s TARP was stupid – but he was not explicitly anti-business. Yes, Republicans can be as stupid as Democrats, but today, Democrats are more of the problem.

Economiser August 3, 2011 at 6:27 pm

If “demand” is king, why is the US the richest country in the world? Do American consumers “demand” more than European consumers or Asian consumers? Those African consumers must really hate to have stuff!

And why do we only have computers and smartphones and self-parking cars today in 2011? Our silly grandparents must not have demanded such items!

Ben Hughes August 3, 2011 at 8:03 pm

It’s hard to take seriously someone accusing others of “overplaying their hands” and then go on to make such blanket proclamations as:
* “the reason corporations have boat loads of cash is because of the political manipulation of interest rates”
* “anyone schooled in economic theory knows this is bullsh..t.”
* “Producers don’t create the jobs; the consumers do”

The last point makes just about as much sense as saying, in the context of car purchases, “buyers don’t create car purchases, sellers do”. It may be wrong, or right, or more likely it’s entirely beside the point.

A job is a transaction between a buyer (companies) and a seller (person selling their labor). People routinely confuse transactions/contracts with the assets themselves, and this is just one of many examples.

Ben Hughes August 3, 2011 at 8:07 pm

To be clear, the producer-consumer relationship is somewhat tangential between the relationship of producers and their factors of production, but the point of confusing transactions themselves with the goods/services involved in the transaction still stands.

JoshINHB August 3, 2011 at 10:51 pm

If large corporations are sitting on cash, it’s due to lack of consumer demand.

What was the demand for I Phones in 2005 & 2006, when apple invested billions in their development before they existed?

Ben Hughes August 4, 2011 at 1:07 am

Not to mention the product/service of virtually every SV start-up. All of those companies are producing products and services pushing the envelope and searching for a sustainable business model, merely hoping that consumers will “demand” what they build.

But as Economiser already pointed out, “demand” is a tricky word…

Greg Webb August 3, 2011 at 4:21 pm

Nicely written article by Bob Higgs! I think much of what John Maynard Keynes wrote has been exaggerated and misapplied by the Keynesian economists and corrupt politicians.

Don Boudreaux August 3, 2011 at 4:25 pm

It’s a telling fact that, 75 years after it’s publication, Keynes’s General Theory remains mysterious. From the beginning there raged debates over what the book means. (Joan Robinson famously exclaimed that she and her comrades had trouble explaining to Keynes what his ‘revolution’ was all about.)

Those debates still go on, resolutionless.

That a man known for his clear writing is the author of a book whose meaning remains cloudy three-quarters of a century after its publication speaks volumes about just how clearly Keynes was thinking when he wrote the monstrosity.

Methinks1776 August 3, 2011 at 4:39 pm


My understanding is that he wrote it, but did not mean for it to be a policy piece. He then got wrapped up in the second world war and didn’t comment much about it. Of course, he died in the year following the end of the war. A lot of the muddled writing went unclarified by Keynes – and we’ll never know if it’s because he wasn’t all that clear on it or if he just never had the time to give it the attention it so badly needed. As always, I’m digging back decades in my memory when it comes to Keynes. Does that sound right to you?

Don Boudreaux August 3, 2011 at 4:46 pm

Hayek in several places accuses Keynes of having been overly concerned with affecting the policies of his day. So, if Hayek is correct, then Keynes’s did in fact mean for the General Theory to be a policy piece.

But it’s possible that Hayek’s read on Keynes was mistaken.

Jack Costello August 3, 2011 at 7:43 pm

With regards to how people interpret Keynes, and how this can differ from what Keynes may have actually meant, I think this quote from Krugman reminds us of how things are so often seen in the eye of the beholder, ‘What did Keynes really intend to be the message of the General theory? My answer is, thats a question for the biographers and intellectual historians. I won’t quite say I don’t care, but it’s surely not the most important thing…What matters is what we make of Keynes, not what he ”really” meant’.*


Greg Webb August 3, 2011 at 5:08 pm

Don, the General Theory is definitely not an easy read, and its lack of clarity gives politicians cover for engaging in their favorite pastime — spending other peoples’ money.

Methinks1776 August 3, 2011 at 6:13 pm


Do you honestly think any politician has ever heard of JMK?

Greg Webb August 3, 2011 at 6:38 pm

Yes. I think that the press aides to politicians list John Maynard Keynes as one of the talking points to use in order to explain why they voted for unwise and excessive spending.

James Reade August 3, 2011 at 4:29 pm

Remarkable. Don Boudreaux accuses someone else of sarcasm. Pot… calling… kettle…?

Don Boudreaux August 3, 2011 at 4:31 pm

I’ve never denied that I frequently use sarcasm.

Russ Nelson August 3, 2011 at 9:06 pm

Yeah, right!

Joshua August 3, 2011 at 5:11 pm

Lookit, what republicans want is cuts. This isn’t about good economics, it’s about a political want. For rich people. The whole idea about creating a sense of “confidence” is just political sound bites that sell this idea of austerity being a good thing for the economy. Most economists do not feel that cuts would be helpful in the short term. How did austerity work out in Britian? Resession.

This confidence idea should be lumped in with trickle down and a rising tide and the “job creators” as voodoo economics, that is to say not economics at all, but rather politics.

I feel insulted too, that the “job creators” are basicaly using a veiled threat about “ill take my ball or my capital and go home if i don’t get my way”.

Don Boudreaux August 3, 2011 at 5:14 pm

If it’s their capital, aren’t they entitled to do with it whatever they choose?

Gordon Richens August 3, 2011 at 5:52 pm

For many people, the idea that people with wealth have choices is outlandish. The only way to convince them (and it is by no means a sure way) is for the wealthy to exercise their freedom to choose.

Methinks1776 August 3, 2011 at 6:19 pm

Eh, Joshy, it’s pretty simple. Increase the risk for businesses and a lot of projects aren’t worth doing. As in – no longer economic. As in – no longer a positive NPV.

Nobody is withholding because they want to piss off the monkeys at the swamp zoo. We’re all trying to make as much money as possible. Do you suppose human nature changes because politicians bloviate? Do you suppose people running businesses will suddenly forgo profit to upset random idiots in The Swamp?

I suggest it is you who is ignorant of economics and guilty of waxing political.

Economiser August 3, 2011 at 6:37 pm

Far too many people make it through life without ever understanding how private business works, and therefore how the economy works. I’d like to see every child have the opportunity to run a small business; perhaps as part of a high school curriculum. I’m sure it would open a lot of eyes.

Methinks1776 August 3, 2011 at 8:02 pm

The speed with which government is shutting down lemonade stands ensures that such experience will never be gained.

Running a business is really not very different from making any decision in life. It ain’t that complicated. We make investments of time and money every day and when we decide to invest those things, we assess how much will be gained from this investment. You don’t even need to be able to do financial analysis to understand that when costs go up, the benefits may no longer be worth it. I have a housekeeper who has never been to school in her entire life who understands this. Why can’t people with college degrees?

Economiser August 3, 2011 at 9:23 pm

It’s not that complicated, but I expect many people would see it differently if they were responsible for the budget. Most working Americans are employed by someone else. They go to work, do their thing, and get a paycheck every two weeks. It’s easy to miss how their individual productivity contributes to the company’s bottom line and its continued existence. These are the people who feel entitled to a job.

Josh August 3, 2011 at 11:32 pm

There’s always another election around the corner. What does “certainty” mean any way? The tea party could axe medicare, and then next election cycle, the democrats could sweep the house and enact a brand new entitlement altogether.

The banks dropped the ball. they were over leveraged, under equitized, irrisponsible and dangerous. They are rightly being re regulated, which will make the economy stronger in the long run.

Bottom line is that household ballance sheets are in a shambles. That is the root of ALL the issues that surround this. The dream of your home being a reliable savings vehicle for retirement is dead. One in ten able bodied americans cant find work, cant pay taxes. We were supposed to be in recovery at this point, hows that for uncertainty.

Government gives itself far too much credit for any effect it has on the private side, and vice versa I believe. If anything, government can be blamed in that it didn’t mandate enough resiliancy in the financial system. This was a classic business cycle super bubble and financial crisis, not due to a rising tide of socialism in the nation.

Methinks1776 August 4, 2011 at 7:17 am

The banks dropped the ball. they were over leveraged, under equitized, irrisponsible and dangerous.

The banks were all in compliance with Basil II. Yet, it was banks, not the much less regulated hedge funds, that blew up the financial system. Regulation sure protects you, doesn’t it? Government is great. We need more of it so we can return to the important things in life – subsistence farming.

jjoxman August 4, 2011 at 7:53 am

That’s right – when Amaranth lost $5 billion in 2005 (or was it 2006) it barely caused a ripple!

Banks do a buttload more lobbying than hedge funds, though, so they can be more assured of bailouts than hedge funds.

Dan H August 4, 2011 at 8:03 am

“..not due to a rising tide of socialism in the nation.”

So an easy money policy and government mandates to lend to low-income people on the basis that “everyone has a ‘right’ to a home” is not socialism? Maybe not by strict definition, but the intention is exactly the same: redistribution of wealth through government policy.

txslr August 4, 2011 at 3:45 pm

Please explain why the banks have all pretty much been able to pay back their TARP money with interest, but Fannie and Freddie are still losing money hand-over-fist. If it was bank greed and irresponsibility that caused the problem, shouldn’t the banks have taken the big hits?

SheetWise August 7, 2011 at 6:37 am

There are people who profit by originating loans, and there are those who hold loans. The best way of making money during the good years was to originate, package, and sell. When the music stopped, and there was no trading, everybody was stuck with what they held in their portfolio — even if holding was not their business. Fannie and Freddie are in the business of holding, and (by design) they hold the worst paper in the market.

Josh August 4, 2011 at 9:59 am

lending is not giving. Besides, those already on the property ladder only gained in property value due to incresed demand and incresed credit. The cost to tax payers was very low, a win win, except it was a mirage. It was the most free market way to “help” the working class.

Clever attempt methinks, but im not buying. Wall st loobyists and cronies loosened regulations for decades before this implosion. The foxes ran the henhouse and regulators didn’t keep up to financial innovation. Glass Stegal repealed etcetera. One of America’s biggest industries is now retrenching because it was built partly on sand, and its collateral was worth less than many believed. Canada’s banking system (6 major banks with very conservative lending standards) is proving to be wisely regulated. When you have the power to bring demand from 30 years in the future into today by financing one mcmansion you have almost equivalent power to the fed. When you can lend with other peoples money you have a conflict of interest. Audit the banks.

Dan H August 4, 2011 at 10:42 am

“Audit the banks”

As publically traded institutions, I can assure you the banks are audited routinely and with more scrutiny than a hot chick going through airport security.

How about auditing the Fed?

Greg Webb August 4, 2011 at 12:04 pm

I wholeheartedly agree. The Federal Reserve should be audited once a year until it is abolished.

vikingvista August 4, 2011 at 8:26 pm

Let’s skip the audit and go straight to the autopsy.

brotio August 4, 2011 at 10:35 pm


Economiser August 4, 2011 at 12:54 pm

> Besides, those already on the property ladder only gained in property value due to incresed demand and incresed credit.

What about those saving to buy a house? Or those who wanted to upgrade to a bigger house? Don’t ignore the costs of the easy money government policy.

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