Fear the Boom and Bust — an Economics Lesson

Ordinarily, I don’t think much of video on the web.  Writing is usually a more concise way to get a view across.  But video can be more effective if it gets past the genre of “talking heads,” in which case, one is usually better off reading a transcript.  Consider the State of the Union message as an example: regardless of who is president, would you rather spend an hour on it, of five minutes?  And, it would be five minutes where you are not distracted by the crowd, and can dissect things rationally.  I pick reading.

There are places where video can be useful, but it has to be well thought out.  I first saw the above video over at “The Big Picture,” which has enough readership to kick up a video’s viewings.  I thought it was clever, representing the economist’s views in a short catchy way, and capturing their philosophies  as well.  The next day, I showed it to three of my boys — they thought it was interesting, and mentioned it the next night at dinner.  My wife, incredulous at the idea of an economics rap video, then watched it the next night with all of the kids, while I cleaned up the dinner dishes.

Then the surprise happened.  “Dad, what are animal spirits?”  “Are animal spirits the bull and the bear?”

Interesting.  The video prompted questions from the children for me to answer.  I’ve written on Animal Spirits before, at least twice.  Animal spirits attributes irrational risk taking and avoidance to businessmen, as if they are irrational animals.

I told my children that businessmen are generally rational, and they make their decisions off of their own balance sheets, and the general willingness of the market to spend, which is related to balance sheets in aggregate.

The contrasts of the video are considerable:

  • Keynes is known, Hayek is unknown.  Desk clerk immediately knows Keynes.
  • The two men are hybrid in what they portray.  To some degree they represent the schools of thought that each was a leader of, and to degree the men themselves.
  • Hayek reaches into the hotel room drawer, and rather than finding the Bible, finds the General Theory. Similarly, Keynes says, “I am the agenda.”  This is a statement of the dominance of Keynesian thought in modern macroeconomics.  Keynes was important, but not as dominant while he lived.
  • Hayek assumes they will go via the subway.  Keynes hires a limo.  Keynes is worldly wise, having a great time, and Hayek is uncomfortable.  Keynes has alcohol; if Hayek is having alcohol, he is sipping it through a thin straw.
  • Alcohol is an allusion through the whole piece.  Stimulus is just more of “the hair of the dog that bit you.”  The boom is a good time where we drink freely, and the bust is where we deal with our hangover.  It was no surprise to see that the Bartenders were named “Ben” and “Tim” and that they were serving up alcohol for as long as the patrons would survive.  Even the pyramiding of the glasses had meaning — building up to a stuporous, unsustainable level.
  • Keynes holds money as he begins his rap, and throws it midway through.  It is an aspect of how incentives from the government or central bank can lead behavior for a time.
  • Keynes ends his rap with “We’re all Keynesians now.”  Keynes himself did not live to hear that comment uttered by Friedman in the ’70s.
  • Keynes and Hayek had different views on spending and savings.  On spending, Keynes didn’t think what money was spent on mattered, only that it was spent.  Hayek felt that intelligent spending would grow the economy more.  On savings, Keynes was negative, whereas Hayek said that moderate savings were valuable, and would facilitate future investment.
  • As for animal spirits, businessmen only get bold when they have sufficient free capital to act.  When interest rates are artificially low some businessmen invest, trusting that good times will continue.  Alas, those good times never last; avoid long commitments when times are good.
  • There are liquidity traps, but they occur when banking systems are broken due to misregulation.
  • “In the long run we are all dead.”  Well, Keynes, way to care for our progeny.  You had no kids, for a variety of reasons, but some of us care for how our children, and the nation that we love will do after we have died.

The video portrays a Goliath and David situation.  Keynes is dominant, and totally assured of his position in the world.  Hayek is less certain of himself, but certain in his message.

My wife and my kids have a better understanding of the current economic situation now than they did before the video came out.  I am grateful that the video was made.