Reifying a classification

In my previous post on how useless Keynesian economics is I wrote:

A Keynesian believes that economies are driven from the demand side and that recessions are due to a deficiency of demand. The cure for recessions are therefore increased public spending to increase the level of demand, raise the level of activity and return an economy to full employment. You know, from the equation Y=C+I+G etc, where more G leads to more Y and therefore more jobs. Introduced into economic theory in 1936, there has never been a single occasion when a Keynesian “stimulus” has led to a recovery. Not one, not ever.

The first comment was by 2dogs who wrote:

The problem with this is that it is a logic fallacy known as “reifying a classification”.

Y=C+I+G is merely a classification system, not some empirical result. One can create classifications to divide up the total transactions any number of different ways. The totals resulting are completely arbitrary; none of the classifications so created have a real existence in and of themselves. Suggesting that increasing the size of one classification will increase the overall total is mindless paper shuffling. I could just as easily create a different classification system that demonstrated the need to increase in the amount of money paid to me.

This, let me tell you, was a revelation. I have never heard of this particular form of fallacy nor has anyone ever before brought it to my attention. I often compare, and discuss in my text, the difference between the identity

Y ≡ C + I + G

which is the formula for calculating the National Accounts since it is essentially an accounting measure which is just true by definition, and this:

Y = C + I + G

which is the fundamental equation of modern macro, which says that an increase of any of the elements on the right side, such as an increase in government spending of any kind represented by G will lead to an automatic increase in output, represented by the letter Y. In fact, according to theory, Y will increase even more than whatever G is increased by because of supposed multiplier effects. The difference was highlighted by Duncan in a comment on the original article I cited.

Keynesian economics says that if you borrow $1m to dig a hole and $1m to fill it in you have ‘created’ $2m of ‘production’ and jobs.

In reality you have subtracted $2m from your wealth.

That is exactly right but requires a return to pre-Keynesian kinds of thinking. Why that is not obvious beyond argument I cannot work out. Nevertheless, the argument has now progressed so that even loss-making operations, or even activities that are wholly wasteful, can contribute to growth by adding to the number of jobs. Is it not obvious how stupid this is? No it’s not, and here’s part of the proof: With economic recovery far from assured, the PM’s nerve may be fraying by the ever unreliable Ross Gittens:

The plain truth is that the only way out of deep recessions is for governments to spend their way out….

Recessions always involve the private sector – businesses and households – contracting and the public sector expanding to take up the slack and get things moving again. In our particular circumstances, six years of weak wage growth and record household housing debt means consumers have little scope to start spending big.

This is economically illogical but such arguments are now almost universally held. And he even notices that we have already had six years of weak wages growth following the so-called stimulus packages that followed the GFC. It would never occur to him, nor to the millions of trained economists around the world, that real wages have fallen not in spite of the stimulus spending but because of them.

2 thoughts on “Reifying a classification

  1. Pingback: Reifying a classification - The Rabbit Hole

  2. Ross Gittens is a nutter. When the GFC hit he wrote about how “the FREE MARKET had failed”… what was free about it? Was it Bill Clinton’s 100 point plan introduced thru HUD in 1995 all specifically targeted to get more people into the subprime market? Clinton used all institutions at his disposal to start the largest snowball job. Bush went along with it cos it looked like eco growth.
    Hey Ross, … free market my a$$

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