The Paradox of Thrift

My take on the paradox of thrift:
It is correct that when people choose to save $100 it does deprive someone of $100 income, with savings remaining unchanged. The problem isn't that this is incorrect, but that it's irrelevant.
When someone forgoes spending $100 they're signalling a preference to the market, that the market is over-producing. By saving $100 the person tells the market that the total value of production is $100 less than it was before ($100 less value to the consumer).
The result of this is that the market reallocates resources to bring that $100 value back to where the consumer wants to spend again. The Keynesian view is that this means something is broken, that "aggregate demand" will continue to drop or stay down forever. It won't, it's how a healthy economy works. The Keynesian response is to print or borrow money to get the consumers spending the $100 instead of saving. The problem is that all the Keynesian has done is reduce the value of money by $100, not raise the value of production $100. The same problem persists.
There are a number of things that cause consumers to value production less, all of them exogenous. Things such as poor fiscal/monetary policy and technological shifts. All Keynesians are doing is glossing over the problem. The adjustment will happen eventually, they can't stop it.

Utilitarian Fallacy

Utilitarianism has a big flaw that most utilitarians I know gloss over. Just to clarify, though, I’m talking about universal or objective utilitarianism. The kind that is used to make public policy decisions, not the personal form of utilitarianism. You’ll see why in a second.

The whole point of utilitarianism is to maximise total utility, that is, “the most good for the most people.” Or, at least, some version of that. The goal is to increase the total good in the world. The flaw I’m talking about is the lack of an objective standard against which to measure.

It’s certainly a noble sounding objective, one that many people quote as their personal philosophy without having the ability to actually achieve it. Or, more truthfully, know they’ve achieved it. Two utilitarians looking at the same decision could have vastly different opinions of which path to take, both citing “the common good” as their goal, and it’s not possible to know which one, if any, is right. Consider this small example:

You have been asked to go to a movie with some friends. They have narrowed down the choice of movies to two and you get to be the tie breaker. The question is, how can you know which movie is the best choice without actually seeing both movies? The fact is, you can’t. Instead you make a best guess based on a number of heuristics (who directed it, who stars in it, which trailer was better, which seems like it would fit the group’s mood).

That’s a very simple example. Consider the complexities as the choice becomes larger. Should a firm lay off some workers? There are many factors to consider. Will the company survive long enough if they don’t? Is it better for the business to go under so other businesses can hire their workers? Would it be better to cut everyone’s salary? Which workers?

Some utilitarians may claim (and some actually have) that they can indeed measure these things and make the best decision for everyone involved. They’re wrong. What they can do is measure a couple of pieces of it. It’s the equivalent of looking for your lost wallet under the lamp post because the light is better. The reason that the decision cannot properly be measured is because the full cost and benefit will come in the future based upon factors which are themselves unknown. Utility measurement is about predicting the future, and none of us can do that.

That said, you can apply utilitarianism at the personal level, in your own decisions. When you, yourself, bear the costs or reap the rewards of a decision, then you have a fighting chance of making the right ones. We all make mistakes in our choices, but in the aggregate we do make more good choices than bad. Not only is there an incentive to make better decisions, but we have much less to measure.

It’s because of this that I think the true goal of utilitarianism (increasing total good) is served best when everyone looks after their own utility. In other words, individual freedom is actually the pinnacle of the utilitarian ideal. It’s not perfect, mind you, but it’s the best that finite humans can achieve.

State Religion

It’s not uncommon for anarchist/statist debates between atheists to devolve into one side calling the other’s beliefs “religion” in a classic poisoning of the well type fallacy. One such conversation recently boiled up on a sceptic forum I read, this time led off by the anarchist.

I usually try to avoid such tactics unless the statist “starts it” because I didn’t really think that anarchism or statism rise to the level of religion. But the more I’ve thought about it recently the more I’ve realised that I’m wrong, that statism does share one very important trait with religion. I’m not talking about such things as the effects of religion or the adherent’s devotion, those things are really external. I’m talking about the core component of religion, the belief in an entity that has supernatural powers.

I claim that statism does have such an entity and I will attempt to prove it logically.

First, almost everyone believes that there are certain things that people should never do. For example, very few people would claim that they have the right to imprison their neighbours for non-violent behaviour. This extends to threatening to imprison them. I’m sure plenty of people have fantasised about locking away that bozo who took the parking spot they were waiting for, but they wouldn’t claim to have the right.

So, if you’re still with me you know you can’t just take your neighbour Bob and lock him in your basement for a few days. This applies to contracts as well. I can’t contract with my other neighbour, Tim, to grab Bob and lock him up. The contract doesn’t grant any rights to Tim that neither he nor I have outside of the contract. And if Tim did imprison Bob, it couldn’t be blamed on the contract. The contract isn’t capable of locking up Bob, it is nothing more than an acknowledged agreement between me and Tim. Even if we wrote the contract down, it still doesn’t exist as anything more than a mutual understanding.

Even if Tim and I got together and called our contract a government, it still wouldn’t grant either of us the right to imprison Tim. If we did form this “government” and started imprisoning people it wouldn’t be an act of our government, since it doesn’t exist, it would be the act of two individual people. This holds true whether is 3 people or a billion that form the government. The acts of the individuals are their acts alone. The government exists only as a mutual understanding of the parties, and it doesn’t have any rights or power of its own to confer on any individuals.

You response to this will fall into one of the following categories.

1. You agree wholeheartedly, and you think that government is just a gang of people throwing their weight around. You’re some form of anarchist.


2. You agree with the part about individuals not having the right to hurt others, but you think that government does have the right. If so then you believe that the government has some form of existence which is separate from individuals. This government is not only a separate entity, but it has rights above and beyond the individuals, i.e. supernatural. You believe in the church.


3. You agree about individual rights, but you think that government is “more than the sum of its parts” and people in government get extra rights because of this. This is just a rationalisation of #2.


4. You disagree about individuals having the right to imprison people, but just think that people need to be forced to allow only a small set of them exercise this power. You aren’t in the church of the state, but you are a believer in “might makes right” and probably insult others for holding this same belief.


5. You believe that individuals don’t have the right to hurt each other, but when working together collectively, they do. Also a rationalisation of #2.


6. You think that as a practical matter people in government need this extra power in order to keep society working. This is just a specific case of #4.


7. You think you do have the right to imprison people. You’re a sociopath.


8. Other. Your specific reaction is either a special case of #2 and #4.

The conclusion from all of this is that you belong to one of the following belief systems:

• The state doesn’t exist and is invalid.


• Might makes right, and that’s reality, love it or leave it.


• Government is supernatural. It’s like the “soul” in that it is an energy or force above and beyond the body. With it a group of people have more rights and powers than they would have without it. You give deference to this entity. Unlike the god in the Judeo-Christian tradition, however, it’s not perfect. It’s more like a god from Greek mythology in that you acknowledge its flaws but don’t deny its power.


• You’re insane.

Most people, I believe, would read this and say that they do accept government but don’t believe in might makes right and are insulted by the idea of government being a supernatural entity. The only trouble is that they cannot contradict this with logic, only denial.

Stimulus Stimulants

An economy, like the human body, needs a balance to run properly. If something gets out of balance, then the body will work toward getting back to equilibrium.

With wakefulness and sleep the body needs a good balance. The only way to know where the balance lies is to listen to the body as it tells you. The same is true with an economy, there must be a proper balance of spending and savings. The economy will likewise tell you where that balance is by adjusting prices, employment, inflation, and other factors. When the public is concerned about spending and decide to save more, the economy is signalling its fatigue and letting you know it’s time to “sleep” or start saving.

Unfortunately, current thinking in government circles (and thus most of the population) is that the only thing important in the economy is spending. Thus we see these ridiculous stimulus packages like Australia is giving out in December with the explicit instructions to go out and spend. This is like avoiding sleep by taking meth. It may appear to work for a while, but that sleep debt isn’t going away and the body is going to get back into balance, painfully if necessary.

Crime and Punishment

One thing to keep in mind when discussing government is that all crimes have the exact same punishment: Imprisonment. All crimes, no matter how small. Some crimes have the option of paying a bribe to stay out of jail, but that doesn’t change the fact that prison is the only punishment meted out by government. It doesn’t matter what the crime is and if anyone was hurt, you break any law you go to jail.

It puts the lie to the idea that the punishment should fit the crime.

Cold Calculus

Utilitarianism and voluntaryism are quite often seen as being in opposition with each other. I don't think that it is necessarily so, which is a topic for another day, but the common view is that they are.

A thought experiment comes up quite often when discussing utilitarianism and I'd like to look more closely at it. This is the experiment: Suppose that a train is bearing down on a group of four people stuck on the tracks. It is certain that they will die if the train hits them, however it is possible to obstruct the train by pushing someone in front of it. Is it right to sacrifice the one person in order to save the four?

The utilitarian answer would typically be yes, since saving the lives of four is serving the greater good. My voluntaryist answer is no, and hopefully I can explain why. First, let's assume away all of the problems with the experiment such as why it's not an option for me to push myself in the train's path and a lack of perfect knowledge (can we really be certain the train will be stopped? Are the four people there by choice? Is the one life a potential Ghandi and the four potential Hitlers? etc.) Even without all of those flaws, I can't see myself ever choosing the kill the one.

My reasoning is both simple and complex. The reason I couldn't make that choice is because it wasn't my decision to put the four on a collision course with the train, but it would be my decision to sacrifice the one. I cannot through my own actions bring an innocent to harm, even if it means ending the harm to other innocents. Let's face it, the whole situation is tragic and that can't be corrected, and I can't possibly weigh the good done to the four against the evil done to the one, I don't think the scales are even compatible let alone measurable. The calculus is far to cold for me to make.

Also, once one is able to rationalize this decision, it becomes much easier to rationalize decisions that are much more grey. This sounds like a slippery slope argument, and I've never been fond of them, but it's more nuanced than that. Everyone has to draw a line in the sand somewhere, and to me this line is much more clear and easy to avoid crossing than pretty much anywhere else it could be drawn. It is unambiguous and not arbitrary. Once you start basing your line on the relative value of people and situations, it gets messy really quick and too easy to draw that line in the wrong place.

The thought experiment aside, the real world isn't going to present such clear cut scenarios. There will always be a great deal of uncertainty as a part of every decision. The utilitarian line in the sand requires a level of knowledge which is just not attainable, and it also requires a person free from biasing emotions. I am both without perfect knowledge and affected by my emotions, and that makes the clear line in the sand all that much more important.

If the person on the plaform chooses to sacrifice himself for the four, then I would be willing to assist him in stopping the train, but I won't be forcing him to do it. I always know on which side of the line I'm standing, and that's better than guessing that I've got it right.

Closing the Gap

Russ Roberts’ latest EconTalk (the best podcast on the webs) is an interview with Richard Epstein about happiness, inequality, and envy. It’s a great listen, and it gave me some insight. I had read some of the research on happiness and have seen that happiness is correlated more with relative wealth (how much more your less you have than others around you) than it does with how much wealth you have at all. Epstein brought up something that I hadn’t considered before, even though it’s very obvious. Happiness correlates with inequality in everything, not just wealth. Physical appearance, athletic ability, intelligence, power, whatever.

This leads naturally to happiness actually being a function of status. I’m sure that there’s an evolutionary basis in there somewhere worth studying, but right now I’m interested in the effects. Since people are less happy with bigger status gaps between themselves and others, they will be interested in closing that gap. There are two ways to close the gap: Either get some more of what you’re “missing” or remove some of what “they” have. If your neighbour has a nice car, you can either spend the effort to earn the money to buy one yourself or you can key his. It’s pretty obvious which one of these is the more moral option, but it’s also obvious which one is easier.

It’s preferable to have a society which encourages the first and discourages the second, otherwise we end up in Harrison Bergeron’s world. I’m afraid, though, that democracy tends to encourage the latter. Not strongly, not obviously, and not personally, but the process of voting on things that will effect your neighbour makes an easy process seem easier. Taxation, for example, isn’t just about getting money to help lift the poor, but it’s also about holding down the rich. In that regard the equivalent of keying your neighbour’s car because it’s nicer than yours.

Since there will always be more people with lower status than higher, democracy will tend to create a society which tries to pull down the rich rather than pull up the poor. Not all at once, but slowly and by degrees. Happiness and envy are very powerful motivations, and democracy makes it too easy to give in to envy to increase happiness.