Each year, our attention turns to the holidays… and to holiday consumer spending! We’re told repeatedly that, because consumer spending is 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth.

This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago. Malthus believed recessions were caused by “underconsumption” because there was a “general glut” of goods unsold. To recover from a recession and grow, we needed to stop all the saving and spend more to buy up all the goods on store shelves. Savers are like the miserly Ebenezer Scrooge. If you want a happy holiday, you’ve got to clear those shelves and give people a reason to produce more and create jobs. Or so Malthus thought.

John Maynard Keynes resurrected this approach and built on it with his influential “General Theory”, which now underpins much of our government policy and public discussion of spending and economic growth. Keynesians believe aggregate spending drives the economy and savings is a “leak” out of the flow of spending. Indeed, this economic philosophy underpins many people’s widespread obsession with retail sales each holiday season. Keynesian Macro Santa’s sack is filled with spending.

But there is another view on recessions, recoveries and growth.

Classical and Austrian economists such as Adam Smith, Jean-Baptiste Say and Friedrich Hayek viewed savings as the vital lifeblood of economic growth and production as the means by which we live better and consume more in the long term. Our savings aren’t simply taken out of the economic system, but become the source of capital that entrepreneurs use to create new goods and increase productivity. These economists believe this increased productivity is the key to a wealthier world. Before we consume, we must effectively produce what others value — at prices that cover the costs. This fundamental idea, that our demand for goods is enabled and constituted by our supply of other goods came to be known as the “Law of Markets” and later “Say’s Law”.  For classical and Austrian economics, recessions happen when producers make mistakes. They create goods that can’t be sold at a profit. These malinvestments tend to cluster in a recession as a result of systematic problems, such as disruptions in the financial system and often government interventions in the economy.

Recovery and growth in the classical and Austrian view is driven by restructuring production so that entrepreneurs discover again the best — i.e. the most valuable and sustainable — ways to serve customers. That process is led by new entrepreneurs and driven by savers who make capital available to fund new investments and new ventures. Sustainable saving and investment means creating more value for others while using fewer resources. This process lies at the core of healthy economic growth, including better job opportunities and a rising standard of living. If there are problems in the financial system such that our savings aren’t effectively being invested but sitting idle in bank vaults, or people are hoarding cash under their mattress in distress, a classical approach seeks to get the root of that problem and resolve the monetary problems with monetary solutions such as increasing the money supply to meet demand and other approaches. Using up more real resources through additional consumption in such a case is applying the wrong medicine to the disease.

Consuming is our end goal, but producing value must be the means to that end. That is to say, Macro Santa’s sack is filled with saving.

So which approach do you think is right? We favor the Smith-Say-Hayek approach to economic growth. Share your thoughts!

CREDITS

Executive Produced and Directed by John Papola

Produced by Lisa Versaci and Debra Davis

Written by John Papola, Adam Albright-Hanna and Jason Rink

Edited by John Papola and Josh Meyers

Post Producer Josh Meyers

Music by Layng Martine III

Cinematography by Wilson Wagoner

Production Design by John Robinson

Graphic Design by Jorge Gonzalez

Animation by Matty Young

Compositing by Thom Lynch

Sound Design by Marty Lester

Special Thanks to Russ Roberts, Steven Kates, Larry White, Steve Horwitz, James Adams and Steve Fritzinger.

Just (barely) in time for the holiday spending season, we’re pleased to announce the launch of our all new EconStore. You’ll find a set of fun, high-quality EconStories branded t-shirts and merchandise designed by our fans through a design contest we conducted this past summer. The proceeds from EconStore sales go directly into funding new EconStories video projects.

No gift says you care quite like a t-shirt featuring your favorite dead economists. So give aggregate demand a little helping hand and check out the EconStore.

Enter the contest at 99designs.com where you’ll get all the details and stay tuned for the upcoming launch of our EconStories merchandise store.

Then dig deeper by checking out the following links featuring economists and thinkers from across the spectrum.

Is the Great Recession Over?

Business Cycle Dating Committee, National Bureau of Economic Research, September 20, 2010

Did World War II End the Great Depression?

“Wartime Prosperity? A Reassessment of the Wartime Economy of the 1940s,” by Robert Higgs, Journal of Economic History, March 1992

“Higgs on the Great Depression,” EconTalk podcast, December 15, 2008

“Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Returned After the War,” by Robert Higgs, The Independent Review (Spring 1997)

“What Was Wrong in Forecasts of Postwar Depression?” by W.S. Woytinsky, Journal of Political Economy, Vol. 55, No. 2 (April 1947) pp. 142-151. (Requires access to Jstor)

“The Reconversion Period: Reflections of a Forecaster,” by Everett E. Hagen, Review of Economics and Statistics, Vol. 29, No. 2 (May1947), pp. 95-101 (Requires access to Jstor)

“The Great Depression of 1946” by Richard K. Vedder and Lowell Gallaway

 ”The U.S. Postwar Miracle” by David R. Henderson

Assessment of the Stimulus Package of 2009

“How the Great Recession Was Brought to an End,” by Alan Blinder and Mark Zandi

“Obama Gives Keynes His First Real-World Test,” Adam Davidson and Alex Blumberg, Planet Money, NPR, January 29, 2009

“Fazzari on Stimulus and Keynes,” EconTalk podcast, January 24, 2011

“What’s Wrong with Keynes,” by Russ Roberts at Cafe Hayek, December 8, 2010

The Pretence of Knowledge,” by F.A. Hayek, Nobel Prize Lecture, December 11, 1974

“About Tsunamis as Stimulus, by John Papola at But What the Hell Do I Know, March 11, 2011

“What to Do,” by Paul Krugman, New York Review of Books, December 18, 2008

“Macroeconomic Effects from Government Purchases and Taxes,” by Robert Barro and Charles Redlick, July 14, 2010

“The Challenge of Creating Jobs in the Aftermath of the “Great Recession,” Testimony before the Joint Economic Committee by Joseph Stiglitz and Russ Roberts, Dec 10, 2009

“The Stimulus Package: Like the Housing Bubble Only Better,” Brad DeLong and Tyler Cowen, April 2009

Debate Between Brad Delong and Michele Boldrin on the Stimulus, UC Davis Campus, March 2009

“The Recalculation Story: A Summary,” by Arnold Kling, EconLog, July 24, 2010

Kling on Patterns of Sustainable Specialization and Trade, EconTalk podcast, February 7, 2011

“The Failure of Keynesian Politics”

Econometrics and the Nature of Bias

“Let’s Take the Con Out of Econometrics” by Edward E. Leamer

EconTalk with Russ Roberts and Robin Hansen on Truth and Economics

The Financial Crisis: Too Little Government or Too Much?

Capitalist Fools, by Joseph Stiglitz, Vanity Fair, January 2009

“Gambling with Other People’s Money: How Perverted Incentives Caused the Financial Crisis,” By Russ Roberts, Mercatus Center, April 28, 2010.

Keynes and Keynesianism

“How I Became a Keynesian: Second Thoughts in the Middle of a Crisis,” by Richard Posner, The New Republic, September 23, 2009

Review by Paul Krugman of Robert Skidelsky’s Keynes: The Return of the Master

“The relevance of Keynes,”Robert Skidelsky, Cambridge Journal of Economics, Vol. 35, issue 1, pp. 1-13, January 17, 2011

Hayek on Money

Larry White on Hayek and Money, EconTalk Podcast, February 1, 2010

A letter from Hayek and Lionel Robins with commentary by Mario Rizzo on the role of monetary policy during a deflation.

Who Plan for Whom?

“The Question I Ponder: Who Plans (and Spends) for Whom? – by John Papola

Background on the Cornermen in the Fight of the Century

“Jean-Baptiste Say” from the Concise Encyclopedia of Economics

“Thomas Robert Malthus” from the Concise Encyclopedia of Economics

“John R. Hicks,” from the Concise Encyclopedia of Economics

“Ludwig Von Mises,” from the Concise Encyclopedia of Economics

“Boettke on Mises,” EconTalk podcast, December 27, 2010

“Caldwell on Hayek,” EconTalk podcast, January 10, 2010

Thomas Malthus vs. Jean-Baptiste Say, a precursor to Keynes vs. Hayek

Understanding Say’s Law of Markets by Steven Horwitz

Say’s Law of Markets: An Austrian Appreciation also by Steven Horwitz

The “General Glut” of Thomas Robert Malthus by J. Bradford DeLong

General Glut summary via Wikipedia

For more information on John Maynard Keynes and F.A. Hayek, see “Get the Story Behind Fear the Boom and Bust.”

CLICK HERE to subscribe and download them all.

“Fight of the Century” Lyrics

Written by John Papola and Russ Roberts

KEYNES

Here we are… peace out! great recession
thanks to me, as you see, we’re not in a depression
Recovery, destiny if you follow my lesson
Lord Keynes, here I come, line up for the procession

HAYEK
We brought out the shovels and we’re still in a ditch…
And still digging. don’t you think that it’s time for a switch…
From that hair of the dog. Friend, the party is over.
The long run is here. It’s time to get sober!

KEYNES
Are you kidding? my cure works perfectly fine…
have a look, the great recession ended back in ’09.
I deserve credit. Things would have been worse
All the estimates prove it—I’ll quote chapter and verse

HAYEK
Econometricians, they’re ever so pious
Are they doing real science or confirming their bias?
Their “Keynesian” models are tidy and neat
But that top down approach is a fatal conceit

REFRAIN
Which way should we choose?
more bottom up or more top down
…the fight continues…
Keynes and Hayek’s second round

it’s time to weigh in…
more from the top or from the ground
…lets listen to the greats
Keynes and Hayek throwing down

KEYNES
We could have done better, had we only spent more
Too bad that only happens when there’s a World War
You can carp all you want about stats and regression
Do you deny World War II cut short the Depression?

HAYEK
Wow. One data point and you’re jumping for joy
the Last time I checked, wars only destroy
There was no multiplier, consumption just shrank
As we used scarce resources for every new tank

Pretty perverse to call that prosperity
Rationed meat, Rationed butter… a life of austerity
When that war spending ended your friends cried disaster
yet the economy thrived and grew faster

KEYNES
You too only see what you want to see
The spending on war clearly goosed GDP
Unemployment was over, almost down to zero
That’s why I’m the master, that’s why I’m the hero

HAYEK
Creating employment’s a straightforward craft
When the nation’s at war, and there’s a draft
If every worker was staffed in the army and fleet
We’d have full employment and nothing to eat

REFRAIN REPEATS

HAYEK
jobs are a means, not the ends in themselves
people work to live better, to put food on the shelves
real growth means production of what people demand
That’s entrepreneurship not your central plan

KEYNES
My solution is simple and easy to handle..
its spending that matters, why’s that such a scandal?
The money sloshes through the pipes and the sluices
revitalizing the economy’s juices

it’s just like an engine that’s stalled and gone dark
To bring it to life, we need a quick spark
Spending’s the life blood that gets the flow going
Where it goes doesn’t matter, just get spending flowing

HAYEK
You see slack in some sectors as a “general glut”
But some sectors are healthy, only some in a rut
So spending’s not free – that’s the heart of the matter
too much is wasted as cronies get fatter.

The economy’s not a car, there’s no engine to stall
no expert can fix it, there’s no “it” at all.
The economy’s us, we don’t need a mechanic
Put away the wrenches, the economy’s organic

REFRAIN REPEATS

KEYNES
so what would you do to help those unemployed?
this is the question you seem to avoid
when we’re in a mess, would you just have us wait?
Doing nothing until markets equilibrate?

HAYEK
I don’t want to do nothing, there’s plenty to do
The question I ponder is who plans for whom?
Do I plan for myself or leave it to you?
I want plans by the many, not by the few.

Let’s not repeat what created our troubles
I want real growth not a series of bubbles
Stop bailing out loser, let prices work
If we don’t try to steer them they won’t go berserk

KEYNES
Come on, Are you kidding? Don’t Wall Street’s gyrations
Challenge your world view of self-regulation?
Even you must admit that the lesson we’ve learned
Is more oversight’s needed or else we’ll get burned

HAYEK
Oversight? The government’s long been in bed
With those Wall Street execs and the firms that they’ve bled
Capitalism’s about profit and loss
you bail out the losers there’s no end to the cost

the lesson I’ve learned? It’s how little we know,
the world is complex, not some circular flow
the economy’s not a class you can master in college
to think otherwise is the pretense of knowledge

REFRAIN REPEATS

KEYNES
You get on your high horse and you’re off to the races
I look at the world on a case by case basis
When people are suffering I roll up my sleeves
And do what I can to cure our disease

The future’s uncertain, our outlooks are frail
Thats why free markets are so prone to fail
In a volatile world we need more discretion
So state intervention can counter depression

HAYEK
People aren’t chessmen you move on a board
at your whim–their dreams and desires ignored
With political incentives, discretion’s a joke
Those dials you’re twisting… just mirrors and smoke

We need stable rules and real market prices
so prosperity emerges and cuts short the crisis
give us a chance so we can discover
the most valuable ways to serve one another

FINAL REFRAIN
Which way should we choose?
more bottom up or more top down
the fight continues…
Keynes and Hayek’s second round

it’s time to weigh in…
more from the top or from the ground
…lets listen to the greats
Keynes and Hayek throwing down

You can dive deeper into the ideas debated here when you Get the Story behind “Fight of the Century”.

The ideas presented in this new installment of Keynes vs. Hayek represent the clash of philosophy and methodology that has been going back and forth for much more than a century and we expect it to continue for another. We look forward to your comments and feedback and remember that, through it all, Keynes and Hayek remained mutual admirers and friends.

In the meantime, why not enjoy “Fear the Boom and Bust” one more time!

Day 1 Shoot (April 16, 2011) – “The Congressional Hearing” – A cast of Congresspeople, Bank Heads, Fed and Treasury Officials. Featured roles include: “Committee Chair”, “Co-Chair”, “Congressman”, “Congresswoman”, and 10 “Banksters” including Ben Bernanke and Tim Geitner. The cast of characters on Day 1 will also need to be present at “The Boxing Match” shoot on Day 2. We’re looking for people to fill these roles in the 40-60 year-old range. We’re also looking for 50 extras who are in the 40-60 year-old range to attend the hearing.

Day 2 Shoot (April 17, 2011) – “The Boxing Match”- A large cast of 100 extras in the crowd cheering and watching the fight go down. Other featured roles include: “The Boxing Ref”, “The Announcer”, “Ludwig Von Mises”, “Jean Baptiste Say”, “Thomas Malthus”, “John R. Hicks”, “Ring Girls”, and all the “Congresspeople” and “Bank Heads” from Day 1. Age range 18-70 year-olds. If you are interested in any of the named character roles you need to look the part*. All the economist roles are on the older side. That said, if you feel that you look a lot like any of the characters, go ahead and send me a pic at: lisa@emergentorder.com.

Transportation accommodations provided. From New York City to shoot location and back. Bus departure location T.B.D.

This event requires a commitment of 10-12 hours of your time on the days you sign up to attend. Call times T.B.D.

*Requesting a character role does not guarantee you’ll get the part.

PLEASE REGISTER ONLINE.