The Fairies Have It

by Don Boudreaux on August 2, 2011

in Country Problems, State of Macro, The Economy

Here’s a letter to the New York Times:

Paul Krugman’s frequently made case for more government spending rests unapologetically on Keynesian economics.  So what are we to make of Mr. Krugman’s advice – offered to counter those who insist that the regulatory, fiscal, and monetary policies of the past few years are diminishing investors’ confidence in the economy – to “Pay no attention to those who invoke the confidence fairy” (“The President Surrenders,” Aug. 1)?

A key component of Keynesian theory is what Lord Keynes himself famously called “animal spirits” – mysterious phantoms that, although invisible and non-quantifiable, dramatically affect the level of economic activity by messing with investors’ minds.

By advocating a theory that relies heavily on disembodied imps called “animal spirits,” Mr. Krugman has no business denying the existence of “the confidence fairy.”

Donald J. Boudreaux

In fact, I do believe that animal spirits play some role – just as I believe in the “confidence fairy.”  (If anything, the “confidence fairy” is a tad more plausible given that she/he/it is alleged to cause responses in predictable and rational ways to regime uncertainty, while animal spirits are just plain irrational.)

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Slappy McFee August 2, 2011 at 5:22 pm

I am so glad to finally hear/read someone say this Don:

“while animal spirits are just plain irrational”

It always seemed to be a better argument for tinkering in the ‘market’, as most people are assumed too stupid-just give them some money, than it did to just let the ‘market’ be.

Let the rational win over the emotional — but then again, would the NFL be as entertaining if we weren’t so emotionally wedded to it?

*Side note, CafeHayek needs a fantasy football league (no fees/prizes of course as I am sure that would invalidate some clause in your contract with GMU)

Stephan August 2, 2011 at 5:44 pm

Good sign that the US media seems to ignore these silly letters. There’s still some hope for the US media!

Demosthenes August 2, 2011 at 7:35 pm

Not for you, though, according to your own terms.


Bill August 2, 2011 at 6:04 pm

While Keynesians have rejected the “regime uncertainty” notion in favor of “lack of aggregate demand” as an explanation for the slow recovery and lack of strong hiring, I note these same folks have not been hesitant to blame those in congress advocating reductions in federal spending for “creating uncertainty” and contributing to a slow recovery.

Craig August 2, 2011 at 6:11 pm

Henry Hazlitt on Keynes ["The Failure Of The New Economics"]:

“Lord Keynes has a low opinion of the average businessman and seems particularly incensed over the role which business confidence plays in the decisions to invest or not to invest. According to Keynes, the “positive activities” of men depend upon a “spontaneous optimism” and not on “mathematical calculation.”

It seems that Lord Krugman has studied the master closely.

Mark August 2, 2011 at 6:59 pm

I thought this letter was actually published in the NY Times?

When I hit the link the only picture I saw was the confidence fairy, animal spirits fairy, shifty eye fairy or what ever fairy you wan’t to call him.

In truth it’s fairy dome that leads to Krugman confidence fairy anyway.

Sam Grove August 2, 2011 at 7:00 pm

How about negative regime certainty?

When people are confident of negative results, they will endeavor to avoid losses.

Mesa Econoguy August 2, 2011 at 7:03 pm

The market confidence fairy just took a major dump on the Keynesian apologists today, including Krugman, their leader.

Invisible Backhand August 2, 2011 at 7:15 pm

I don’t understand…has Don B. not kept up with Krugman’s column’s? Animal spirits clearly means crowd psychology, as does the confidence fairy.

Kevin August 2, 2011 at 10:01 pm

Yeah that’s the inconsistency Don’s talking about. Too bad you don’t understand, you having articulated it and all.

Joe Cushing August 5, 2011 at 11:33 am

I’ve noticed that the comments on this blog are nasty and personal compaired to comments on Econlog. The two blogs are about the same but the commenters use more attacks here and more logic there. I like the comments there better.

vidyohs August 2, 2011 at 7:25 pm

We have at present in the USA some 307,212,000 invisible hands. They create wealth, the create markets, they guide the market(s), they close down inefficient markets, they profit efficient markets, and they do that whether they know it or not. But, nobody ever said that all 307,212.000 of them were intelligent, rational, or practical, a lot of them are looney lefties and believe devoutly in the fairy wealth creation theory.

Stone Glasgow August 2, 2011 at 7:45 pm

If they are not rational, someone rational should be making their decisions for them, right? If they are dumb, shouldn’t a smart guy be telling him how to live his life? Gosh, if all of us could just find someone really smart and rational, we could give him all of our money and let him spend it for us and tell us when to eat and sleep and go to the bathroom, and then we’d all be really happy and safe. Like when daddy reads bedtime stories for us and checks the closet for monsters.

vidyohs August 2, 2011 at 9:33 pm

The looney left has found him, they call him Obama.

muirgeo August 2, 2011 at 7:37 pm

Here is the difference between what the neoliberals claim and what Krugman and the Keynesians claim. Krugman can point to a formula for demand and when things like wages and consumer spendign go up and the trade deficit imporves we will predcatably see an immprovement in the econmy.

Don will not tell you what factors have to change to improve the economy…. but when the economy does improve he will point to the confidence fairies gaining new faith and explaining the recovery.

Obama has been more like Hoover than FDR. He has NOT raised taxes, he has NOT enacted tariffs or other massive regualtions and he has not launched any massive new spending programs OTHER than the stimulus which is now waning along with waning PCE, GDP and Hiring….

Now we are going to cut spending as Neoliberals might recommend, tax raises are OFF the table. One would think the confidence fairies should be sprinkling their dust all over the economy …but the coming down turn will be one more massive data set showing the bankrupt ideas that the neoliberals hold.

WE … the Demand Siders WILL carry the day… WE will continue to crush the neoliberal false idols and WE the people of America will continue to suffer until the next FDR comes along. I will be very unhappy proving you all wrong…. but you already have been and the rest will simply be piling on.

Stone Glasgow August 2, 2011 at 7:40 pm

This whole blog is about the factors that, if changed, would improve the economy and quality of life for everyone on earth.

muirgeo August 3, 2011 at 2:48 am

This whole blog is about beliefs and faith not grounded in anything in the real world.

Trade is “freer”, unions are down, taxes are far lower, finance and banks are deregulated…. how’s is it going? Does reality matter?

Your guys cry regime uncertainty to explain our situation because you can’t explain it with any sensible relation to policy and youu have NO solutions to improve our situation. The closet thing we’ve seen you claim is the Tea Party non sense to cut spending. It looks like you will get your way and the economy after those cuts will show you how wrong you are while your guys look for more excuses to explain away the realties of you dangerous bankrupt ideas.

Ghengis Khak August 3, 2011 at 1:46 am

“Obama has been more like Hoover than FDR. He has NOT raised taxes, he has NOT enacted tariffs or other massive regualtions and he has not launched any massive new spending programs OTHER than the stimulus…”

Two of these points are very easily refuted, a la the Smoot-Hawley Tarrif Act of 1930 and a quick note that federal spending increased 57% on an annual basis during Hoover’s term.

The other two points are confusing.

So you really want any kind of massive regulation and are prepared to contend that it will be good for the economy? Shouldn’t you at least go through the pretense of trying to argue that there was some big market failure that needed “fixing”? My idea for massive regulation that is sure to help the economy — outlaw motorized farming equipment.

Lastly, as a “demand sider” how are raising taxes a good thing for economy? Don’t you want G and C in the GDP calculation to both be maximized for short-term economic prosperity?

Dan J August 3, 2011 at 2:14 am

Indeed, unemployment can be solved within one year. Outlaw motorized farming equipment and require use of spoons to till soil. The wheelbarrow and all mechanized machinery shall be banned for construction projects.

Josh S August 3, 2011 at 12:42 pm

I’m always surprised when anyone responds to you. Hey, I just surprised myself!

Demosthenes August 2, 2011 at 8:12 pm

“I will be very unhappy proving you all wrong….”

Attempting impossibilities usually does make people unhappy.

Perhaps you should attempt something else instead?

rbd August 2, 2011 at 8:18 pm

Forgive me, I’m not a professional economist, but does Krugman and others rely too heavily upon GDP as a economic indicator. The Krugmanites worship GDP, but what about other economic indicators like unemployment. We’ve been above 9% for several months straight despite massive gov’t stimulus efforts.

vikingvista August 2, 2011 at 11:03 pm

That depends. If the GDP numbers were horrible and the unemployment numbers were good, then unemployment would be the indicator that matters. Unless there had been several years of government austerity instead of maniacal spending. Then the bad numbers would be the important ones.

Chucklehead August 3, 2011 at 1:25 am

“The Keynesian myth must continue at all costs. It is the source of government power and spending. It is the source of economist income and prestige. It is the foundation supporting the myth of government.”
Monty Pelerin

Daniel Kuehn August 3, 2011 at 7:09 am

Animal spirits are irrational? You consider a reevaluation of the likely future payoffs of an investment after a massive financial crisis and a large decline in asset values “irrational”? Investor expectations are in many ways self-fulfilling, which is precisely the source of bubbles. But self-fulfillment processes are not “irrational” at a microeconomic level. That’s the whole point – microeconomic order and rationality does not always imply macroeconomic order.

Lionel from France August 3, 2011 at 8:07 am

“Animal spirits”: For Keynesians, human decisions appear to be primarily and permanently irrational! What I find irrational is that idea.

kyle8 August 3, 2011 at 2:42 pm

Both terms are simple explanations of the zeitgeist of feelings surrounding a market at a given time. Whether confident or wary. Those, in turn are caused due to a little known fact, Business people have eyes and ears. They can see what direction things are headed, and they take action accordingly.

Kirby August 4, 2011 at 11:23 am

However, the average voter….. naaah.

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