In Keynesian Economics, G Stands for Gun

Magic Formulas

Gary North’s article Four Mental Images That Immunize Sensible People — But Not Economists — Against Keynesian Economics is quoted below:

—<Quote begins>—

Academic economists love formulas. This is their great vulnerability. Unlike formulas in physics, economists’ formulas conceal profound conceptual errors that simple mental images reveal as utter nonsense.



The account of Keynesian economics on Wikipedia is a good place to begin. Here, we read of the textbook Keynesian formula:

In scientific notation, the Keynesian Formula consists of the following make-up:

C + I + G + X – M = Y(GDP)

which means:

Consumption + Investment + Government Spending + Exports – Imports
= Gross Domestic Product

This is standard stuff. Start here.

Spending is the heart of Keynesian economics — aggregate spending. Consumption (C) is a series of society-wide individual allocation decisions. Investment (I) is a series of society-wide individual allocation decisions. Exports (X) are a series of society-wide individual allocation decisions. It is the same for imports.

Government spending is an allocation decision of a different kind. “See this gun? See where it is pointed? Hand over your wallet.”

The student can see that total spending is based on all the letters of the formula. C, I, X, and M all begin with the original owners of resources. But G does not begin with the original owners. G begins with the new owner after multiple transactions with the gun.

G does not create. G confiscates. G cannot spend anything that it did not extract from consumers or investors.

C, I, X, and M are based on production. They are creative forces. G is based on confiscation. It is not a creative force. Everything spent by G comes at the expense of C, I, X, or M . When G spends, it does so at the expense of the others.

A bright student is smart enough to figure out what most people do when constantly threatened with robbers with guns, even if the robbers carry badges. They will not put all of their money in their wallets. They will hide some of their currency. They will not spend it. People who carry badges and guns call this currency hoarding. This is a Very Bad Thing, we are assured.


Here is where Keynes came to the rescue of governments everywhere. He has the government offer to write IOU’s that pay interest. “Put away the guns. Write IOU’s.”

Only very clever students will ask these two obvious questions:

1. Where will the government get the money to pay off the loans with interest?

2. Where will people get the money to lend to the government?

The politicians’ answers to the first question is easy: (1) we will hire more men with badges and guns; (2) we will write more IOU’s. But these are not answers. They are variations of kick the can.

Then Keynes added this: “print more money.” He specifically taught that real wages would fall along with purchasing power in times of price inflation. Labor union members would accept these lower wages, he taught. This would lead to greater employment: lower wages mean more labor demanded. He implicitly assumed that labor union members are stupid, and so are the economists they hire to negotiate.

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Keynes did indeed take the average man as a fool.

“Indexing for inflation? Never heard of it.”

Naturally, today’s governments, looking to strip the population of their wealth (especially the old and savers), are looking to de-index their welfare payments, while keeping the tax haul fully indexed to inflation.

Beware of Vicious Dog: Inflation exceeding COLAs.

The monthly Social Security payments are adjusted for inflation via annual “Cost of Living Adjustments.” These annual adjustments are based on a formula that uses the “Consumer Price Index for All Urban Wage Earners and Clerical Workers” (CPI-W) in July, August, and September. The Bureau of Labor Statistics will release the CPI for September on October 13. The COLA for 2021 will be set after that. So, just guessing here, based on CPI-W in July (0.96%) and August (1.40%), and the upward trajectory it has been on in recent months, this COLA adjustment for 2021 may be in the 1.3% range.

Actual costs of living for retirees – or really for anyone – are going to increase far faster, depending on where they live, how they live, and where they spend much of their money. Even if the actual cost of living increases by only 1 percentage point faster than the annual COLA every year, after 10 years, 20 years, or 30 years, you’re talking about a serious deterioration in purchasing power of the Social Security payments. Inflation will eat more than retirees’ lunch.

Status of the Social Security Trust Fund, Fiscal 2020: Beware of Vicious Dog by Wolf Richter

“Don’t trust the Masters.”

True Images

To return to North:

—<Quote begins>—


Here is the Wiki entry for government spending.

Government spending or government expenditure consists of government purchases, which can be financed by seigniorage, taxes, or government borrowing. It is considered to be one of the major components of gross domestic product.

John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption.

Here, I suggest the following. Ask the question again: “How does the government get the money out of the lenders’ wallets or bank accounts without reducing their spending?”

Keep mentioning the wallet. People understand wallets. They do not really understand formulas. Keep mentioning the printing press. They understand counterfeiting.

The student should always have a mental image of a gun, a wallet, an IOU, and a printing press. A formula does not convey knowledge effectively. A mental picture does. People forget formulas faster than they forget mental pictures.

The heart of Keynesian economics is here: the attribution of autonomous economic productivity to the agency with the gun. Somehow, government can increase aggregate spending (1) without producing anything new and (2) without reducing spending somewhere else in the economy. Keynes never explained how this is possible. Neither have his disciples.

Here is the heart of the Keynesian error: “G can be increased without subtracting from C, I, X, and M.” It is easy to show this from the formula. But it’s still a formula. Try to turn the formula into a mental image.

Tell the student, “When you see G, think ‘gun.'” This mental image undermines the authority of the formula.

A grifter is a con man who uses fake promises as a way to scam victims. If more students knew what a grifter is, you could say: “When you see G, think ‘gun,’ ‘grifter,’ and ‘graft.'”

The student thinks, “This can’t be all there is to Keynesian economics.” But it is. He thinks, “Someone would have pointed this out in 1936 if this were all there is to it.” Hardly anyone did. The few who did were not believed after 1948, the year Paul Samuelson’s Economics textbook was published.

How could this be the case? Because of what George Orwell observed in 1946, the same year that Keynes died. “To see what is in front of one’s nose needs a constant struggle.”

Be the child at the parade, crying out: “The emperor has no clothes.” Start with the simplest explanation — visual — at the heart of Keynes’ colossal error. Don’t let go.

Start with the gun, the wallet, the IOU, and the printing press. The formula is merely window dressing for economists.

For more information, come here:

—<Quote Ends>—

Economics want to ape the image of the hard sciences. But all those economic formulas are just a show to build their ego while pulling the wool over the eyes of the Inferiors.

Peter Drucker told me once, “There are two ways of teaching: the Greek way and the rabbinic way.” The Greek way, he explained, is based on analysis and breaking down a subject into its logical outline sequence (I A, B, C; II A, B, C). The rabbinic way always begins, “Let me tell you a story.” — Bob Buford

As quoted in Gary North’s The Rabbi and the Professor: How to Get Your Idea Across

Let’s pull off the wool from over our eyes, and the eyes of our brothers.

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