Keynes v. Hayek: a modern tale
Alcohol jugs and capital goods
When Neo was a child, he wondered about many, many things. Did his helium balloons eventually reach aliens on a foreign planet? Did Buddhist-majority countries celebrate when GDP fell? Were animals afraid to associate themselves with the human race?
With time, his wonders became less vivid and more mundane.
And thus one day he wondered to himself:
“Where do investments come from?”
He walked into a place that was guaranteed to provide answers: the bar. His friend Sam sat beside him.
“Brother Sam! Where do investments come from?” asked Neo.
Sam put down his jug.
“Where do you think, you regular shlubb?” Sam asked mockingly.
“Savings. People save money today so that they can invest it tomorrow. Right?”
Sam cackled like a witch. He then scratched his belly. Neo frowned. What was this maniac laughing about this time?
“It’s not savings, shlubb. Investments come from debt!” cried Sam, and some spit mixed with alcohol hit Neo’s face.
“Wait… what?
Isn’t someone’s debt somebody else’s savings?” asked Neo.
Sam shook his head.
“What are you, a prehistoric object?!” exclaimed Sam.
Neo scratched his head.
Sam cleared his throat and turned to the bartender. He asked for another jug.
Now, with two jugs in front of him, he began speaking:
“With your income, you can buy one jug. With borrowed money, you can buy two! With saved money, you’ll get plain old water. What do you choose?”
“Water… it’s healthy,” replied Neo.
Sam grimaced, grabbed the jug, and swung it towards Neo’s face. Neo dodged.
“ONE MORE!” yelled Sam.
He continued:
“Any decent aggregate-demand-contributing-non-menace-to-society person would buy two jugs. Consume more!
The system wants you to spend all of your hard-earned money. And on top of that, it wants you to borrow more money and spend it, too. Sometimes, that spending is to build new stuff. Like a house, or a company. That, my child, is investment driven by debt. And there’s no limit to the debt. Borrow however much you want!”
Neo turned to the bartender and asked for a glass of water. The bartender looked disgusted.
“Tonic’s all you’ll get,” muttered the bartender.
Neo started, pointing to his tonic;
“You’d have folks offering a thousand dollars for just one of these tonics if the borrowing had no cap! What do you think I am, stupid?”
Sam chuckled. He responded:
“If I can get more and more people to borrow at the same pace that new jugs are produced… price doesn’t move at all. Basic demand and supply, idiot!”
This time, it was Neo’s turn to chuckle.
"Let me get this straight. You’re telling me…
You know exactly how many jugs are coming out every day; how many more jugs will come out tomorrow; how many folks will get into debt; how much debt each person will get into; you’re telling me that you know every single tiny detail to arrive at that sweet spot where everything’s superb and people are living their best lives?”
Sam’s face suddenly turned serious.
“No, I don’t know every single detail. I’m no meticulous, god-like societal engineer. I just guess, and pray that the consequences only show when it’s the next guy’s turn to do the job,”
Neo dropped his glass of water, and it hit the floor to shatter into a hundred pieces. He stood up. He’d thought this was all a joke; that it would all lead back to the simple mechanism that savings were, simply and truly, the source of investments. But Sam wasn’t joking. No, the man was not only drunk; he was dead serious.
Sam cackled, once he cried again, as he drowned in his beer:
“REMEMBER, boy, we’re all dead in the long run!”
This piece is satirical and puts forth concepts that have been simplified. It is in no way financial advice.
Some additional context below:
Long run is a misleading guide to current affairs. In the long run, we are all dead.
- John Maynard Keynes
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
- Friedrich A. Hayek
Even Keynes would’ve likely called the state of our current monetary system extremist. And Hayek… Hayek would’ve been very sad.
Some content was inspired by Calvin and Hobbes.
You can find me on Twitter @ramwithouthorns!
Nice touch...Keynes calls current state extreme and Hayek's sad.