The Swimming Pool Analogy ~ More Viral Disinformation

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks which will have to be nationalized and the State will take the road which will eventually lead to communism.”

Das Kapital — Karl Marx, 1867

opaMarch 8, 2009 — My students and I discuss economically relevant news items at the beginning of each of my classes. I challenge them to claim their share of daily-assignment A’s, two for each student per grading period, for staying informed. Lately, however, it seems as though everything in the news is economically relevant — so this isn’t much of a challenge, except for the fact that most come prepared with the same most news-worthy items each day. Whoever gets their hand up first wins.

One story that everyone seemed to miss last week was that Russia’s Ambassador to the United States, Sergey Ivanovich Kislyak, predicted that our economy will fail completely during 2010. I shared this with my students from whom I was pleased to note that none seemed overly concerned about the ambassador’s opinion. After all, Russia, we all know, still isn’t overly fond of us, jealous perhaps – their own recent experiment with capitalism having all but failed following their financial crisis in 1998. Entrepreneurism, political corruption and crime rushed into the economic vacuum left behind by the failure of the Soviet Union’s command economy.

Offering something for discussion not gleaned from the legitimate media, thus avoiding the competiton for her daily assignment A, one of my advanced placement students brought a copy of the following to class, a much circulated email message, subject: “THIS SAYS IT ALL.” I read the message to my class including Karl Marx’s nineteenth century prediction about the future of capitalism, which seems to be hauntingly applicable to our current crisis.

  ~~~~~~~~~~~~~~

 Shortly after class, an economics student approaches his economics professor and says, “I don’t understand this stimulus bill.  Can you explain it to me?”

The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.

At the agreed-upon time, the student showed at the professor’s house.  The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket.  Demonstrating with his own bucket, the professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.

The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, “Excuse me, but why are we doing this?”

The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad.  The student finally replied, “All we’re doing is wasting valuable time and effort on unproductive pursuits.  Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”

The professor put down his bucket and replied with a smile, “Congratulations.  You now understand the stimulus bill.”

~~~~~~~~~~~~~

After reading this to the class, I asked my students what they thought of it. Nobody offered an opinion, not at first. But I was patient, giving them a chance to think about it. Finally, one brave young fellow raised his hand and offered this, “I think the explanation is too simple… so simple that the author must think everybody else is stupid.”

Another student said, “Yes, and if economics was that simple we’d all be getting A’s.” In response to this, most of the class started laughing including me.

“Remember, class,” I said, “the John Maynard Keynes quote: ‘Economics is an easy subject at which few excel’.”

Then, the student who had brought the email to class sheepishly asked why the story’s professor was so wrong using a swimming pool as a metaphor for our economy.

“Unlike the professor in the story,” I said, “I will take the time and at least try to explain. Yes, this lesson on the Economic Recovery and Investment Act of 2009 is flawed on many levels.

First, our economy is not at all like a fluid swimming pool. Wealth does not flow freely from the deep end to the shallow. Wealth tends to flow from the shallow end to the deep where much of it tends to stay. At the beginning of the Bush/Cheney years, 80 percent of the water [wealth] in this nation belonged to 20 percent of its citizens, or just 20 percent of the pool. Now nearly 90 percent of it is in the deep end with much of it cashed away in U.S. Treasury Bonds, foreign numbered bank accounts and other investments that impede circulation. This is because the rich have a much lower propensity to consume and a higher propensity to save. Recall our lessons on the aggregate expenditures model. And, be not confused, saving is not the same thing as investing (http://www.finweb.com/financial-planning/finances-savings/saving-vs-investing.html), which is what many monetarist/supply-side economists would have us all believe. By the way, there aren’t very many serious supply-side economists left.

Second, we don’t have a private backyard pool any more. Our nation’s pool is connected to those in the back yards of all other nations.

Third, and there is little controversy over this among most economists now, government spending under the law will not be wasteful/unproductive activity. Infrastructure projects that this country badly needs done will get done. This will make us more efficient and reduce future costs (true investment)… plus, wages paid to get this work done will be spent and money spent eventually becomes someone else’s income — over and over again. Much of it will save state and federal governments’ unemployment and health care costs.

Finally, much of the water moved (government spending) will be used to nurture education and do research on alternative energy sources making us even more efficient and competitive in the future.

Viral disinformation like this swimming pool analogy making the rounds lately, I think, are poor attempts by those who oppose the current administration’s efforts to deal with the recession. They raise doubts and promote fear for political purposes and, as such, are disingenuous. It’s sad because what we need just now in the private sector is a sense of unity and confidence. But informed individuals, or at least those who have open inquisitive minds, won’t be suckered-in by simplistic appeals like this. We know that the world is not flat, and we know that laissez faire  economics is anarchy. An economy without structure and rules is like a jungle wherein only the fittest survive.  I must admit, however, the Karl Marx quote, does come pretty close to explaining what has happened to us owing to deregulation of the financial sector. Let’s all hope his forecast isn’t correct too. If foreigners decide to stop lending us money, it could come to that, heaven forbid!”

Please feel free to respond to this posting below with a comment, whether or not you agree.

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Published in: on March 8, 2009 at 3:20 pm  Comments (19)  

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  1. Hey Kent, that was a very good article/explanation. Could it be that it is too simple or that we are not willing to be rational. Where were all these naysayers over the last eight years? And this “talk radio” person who hopes this adminstration fails….what have we become? WOW! I cannot believe some of the stuff I am hearing.

    Keep up to good work.

  2. First off to Nancy Coleman, if you dislike Rush. Dont listen to him. Bush hate was rampant over the last 8 years. Annoyingly rampant. Likewise those who ‘hate’ Obama will become increasingly annoying. Obviously, neither extreme is rational or acceptable. I cannot believe what I hear either. Those who openly call Bush a @#%@#^ tard and accuse him of starting the war for his own purposes turn around and become offended when someone says anything against Obama. We all need to live with each other and each others opinions. When Rush says he wants to see Obama assassinated or something similar then; by all means, become offended.

    Now unto the post. I agree, the analogy is too simple. I had not seen the pool email going around. Though I still do not see how the stimulus will help us indefinitely. We need to invest in infrastructure – yes – but more so in providing people jobs (beyond the few months painting government fenses).

    Research and Education is a great way to go but I have to wonder how efficiently the Government will spend the money. Our educational system spent an average of $8,700 per student in 2005 whereas Finland, who has one of the top educational systems in the world, only spent $6,630 per student (converted from 5200 Euro). In addition, Finland provides lunch for all of its students. Money isnt the issue with education so I’m not sure why we could pour more into a failing system.

    Perhaps its better for us all to think of the stimulus bill as a piece of a puzzle – rather than the death of us all or as the bright light we have been waiting for. The system needs reform, it needs efficiency not money. At the same time, as you have mentioned in your blogs, money spent will go into the pockets of consumers and thus will keep things going. Neither extreme really works.

    I dont think anyone has figured out the ‘answer’ to any of our economic issues and unless we all start to think beyond the stimulus bill and outside the box I dont think we’ll find an answer in time.

  3. Hate, Squiggle, I think is too harsh a word to use in response to Nancy’s comment. Further, I doubt very much whether she has ever devoted any time listing to Rush. She was merely responding to what he has reportedly said — wishing our new President, and by extension, our nation’s failure. I do agree with you, however, that both political extremes are guilty of excessful rhetoric. We must be able to coexist, perchance to find some common ground in efforts to restore prosperity and ensure security for ourselves and our posterity.

    Opa

  4. Like yourself, I’ll start with a quote.

    “Without calculation, economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word … All economic change, therefore, would involve operations the value of which could neither be predicted beforehand nor ascertained after they had taken place. Everything would be a leap in the dark. Socialism is the renunciation of rational economy.” — Ludwig von Mises

    I believe your points of contention on this story are wrong. Yes, it is a simple story but the point of the story is to be simple for advrage people to understand.

    I believe the “swimming pool” in this analogy refers to the money supply and government spending not to other economic factors. In that alone it is adequate. Wealth like water does pool in the deep end where it does say. I believe you fail to see the analogy is in reference to the fact that government giving always involves government taking. Saying that the rich are prone to spending and the poor are not is subscribing to the belief that consumers can be the cause of economic recessions. It’s much more likely that the business cycle is caused by government lowering interests rates beyond what the market would have to accelerate the economy thus creating the bubble and not by consumer actions. You confuse consumer actions as the cause and not the result. To believe otherwise is silly, because it would ignore the fact that people already were spending just about every dime they had, the personal saving rate already was at a record low going into this recession. The true cause is an artificial shortage of supply and over production caused by the ease of credit, not consumer actions.

    When you try to say that government spending is true investment you fail to see that if these energy efficient technologies were actually viable then we wouldn’t need government to invest into them at all. The private sector would be investing in them today, the very fact that the private sector is not investing in them should tell us that the government is promoting non efficient technology, economically speaking. They just couldn’t be economically viable. As for infrastructure people will always find areas to improve upon, at what point do “we”, strike that, does government decide we have enough bridges and they begin building bridges to nowhere? When do we decide the roads are smooth enough and further road construction becomes little more than busy work?

    Mises prediction of socialism appears to be accurate in that socialism does not have a price mechanism of any kind. You yourself neglect to see that government has not a clue what individuals need. There is no price system with government handouts so it’s impossible to make those handouts efficient. You seem only concerned with what is seen and neglect to see what is not seen. You see government spending.. you do not see government taking. You see job creation, you do not see job loss. You fail to look long, and you fail to consider all parties involved.. this is why you believe the analogy is wrong.

    The swimming pool story may be simple.. but it is your class that is what is dangerous. Feel free to continue teaching fallacies like government economic spending will always result in a bountiful economy (Why didn’t Bush’s record deficit spending produce a healthy economy? hmm?). While you are at it you can teach other famous fallacies like machines cost peoples jobs, and that military spending in WWII got us out of the depression. Perhaps then your students will leave your class believing. 1) that the government should run the economy (although they can’t know what the right thing to do is). 2) That chainsaws should be outlawed because more people can be employed as lumberjacks when they only use axes. 3) That we should destroy our homes and property because that creates demand (confusing need and demand) and demand creates jobs.

    “In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.” — Henry Hazlitt

    I think the pool idea actually makes more sense than your arguments against it. I don’t think you teach economics.. I think you teach socialist philosophy. I believe the person who brought you this e-mail probably has better economic sense in the classical tradition than you do.

    – Jaydee

  5. Thank you for your opinion, sir. But among serious economists these days, it is very much in the minority — surely you know this. We’ve tried the supply-side again and again in this country and it has consistently led us to ruin.

    The “classical” view of economics made sense when Adam Smith wrote his classic, The Wealth of Nations, since, in the 18th Century, production necessitated employment. Say, another famous economist of that time, may have been right in his view that supply creates its own demand. But that was then; times have changed. We have automated and off-shored ourselves into a new, more efficient dynamic. Now supply follows demand — always. This is because the private sector has no motivation to produce in the absence of demand. Firms will do only what is profitable in the near term, at least until economic prospects improve. So, there is a time for expansionary policies, both monetary and fiscal, and there is a time for contractionary policies, and now is not the time to be worried about balancing budgets. That is what Congress should have been doing during the two Bush-Chenney administrations while our economy was still expanding, but they blew it. Now is the time to put pedal to the metal because monetary measures alone will not restore growth. If you doubt this, ask the Fed; Ben Bernanke has been most forthcoming about this with the Congress in recent weeks, having used every tool at his disposal to encourage investment to no avail, and Alan Greenspan has all but fallen on his proverbial sword over his advocacy of deregulating the financial sector.

    No, you are wrong, sir. I don’t teach socialism. Socialism, in the extreme, is a system that I do not advocate. But then, neither do I advocate Laissez Faire capitalism. I offer my students the full spectrum of economic theory, all of which is included in our text books, for a balanced introduction to the subject. But in my personal view, only Libertarians and ultra Conservatives today subscribe to “classical” economic theory in defense of unconstrained capitalism.

    Opa

  6. Opa, your article gave me a real wake up call earlier today as well as the comment from Jaydee. It is really good to read others perspective on today’s economy You had me scrambling to read up on a few chapters in my old Business 101 textbook.

    Thanks for the wonderful read today!

  7. I know, not very sophisticated of me to beat a dead post. But it’s now two years later and Keynesian economics has still not gotten us out of this recession (it has however gotten us far deeper into debt). In fact, Mr. Opa, I seriously question your argument that “We’ve tried the supply-side again and again in this country and it has consistently led us to ruin.” You make it sound like we’ve been trying laissez faire economics for some time now. I’m stumped. When, in recent history, has our government completely removed itself from the marketplace? When have we truly implemented full-on “supply-side” economics? Nearly every president since Hoover, Republican or Democrat, has bowed to some degree to Keynesian economics. Bush was the poster-child for Keynesian stimulus programs (that is until the current administration, who subsequently made Bush look like a kid counting his change in a candy store). In truth, Keynesianism is the system that has been tried again and again, consistently leading us to ruin and deeper debt.

    And why is this? Simple. Everyone knows that government “produces” very little wealth, if any at all. So if government doesn’t produce it, then whose wealth are they spending? It’s called OPM (Other People’s Money). They get it either through taxes or borrowing from other countries, right? And where do other countries’ governments get money to loan? Taxing their people. Right – OPM on a global scale! So, as it turns out, Keynes idea of “government spending” is somewhat of a misnomer. Government spending = OPS (Other People Spending). So, who is providing economic “stimulus”? There may be a hysteresis in play, but eventually: Other People. Who is bailing out failed corporations? Other People! You get the idea.

    Which brings us back to the swimming pool analogy. First, let me echo the notion that an analogy is, indeed, supposed to be simple by its nature. I would also argue that true intelligence isn’t that someone can visualize complexity, but that someone can break down the complexity into its fundamental principles. I consistently find the left trying to peddel the idea that systems become too complex for anybody to understand in simple terms. In the swimming pool analogy, the water does represent money, but let’s not forget that money, in turn, is only a representation of the value that an individual can provide. Mr. Opa actually gives us the best definition of the swimming pool itself when he says, “the rich have a much lower propensity to consume and a higher propensity to save.” In other words, the pool represents the capacity to provide value. So, yes, the rich are represented by the deep end of the pool due to their greater capacity to create and hold on to wealth. In contrast, the working class is represented by the shallow end because they are less capable of generating and retaining wealth. This is the analogy in a nut shell: that no matter how hard the government tries to pump money into the working class, it will never increase its capacity to hold on to that wealth. The wealth of the consumers will flow back to the producers every time.

    Mr. Opa, if you still think that Keynesianism can’t lead us to ruin, you need to reread the first line of your quote by Karl Marx: “Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology …” Now replace “Owners of capital will stimulate the working class…” with “Government spending will stimulate the working class…”. Isn’t the later the goal of Keynesianism? You’ve started out your post with a dire prophecy about what happens when capitalists stimulate the economy, but then you turn around and say that, no, it shouldn’t be the private sector that stimulates the economy naturally; it should be the government that does it artificially! Please enlighten me here. How is Keynesianism any different than capitalism in reference to Marx’s prediction? The only difference I see is that private property has now been seized, the money has now passed through more hands, and more corruption has potentially been generated within government. There really should be just as much energy spent to create a separation between Market and State as there is to create a separation between Church and State. Mixing money and power is just as dangerous, if not more so, than mixing theology and power.

    I certainly don’t advocate laissez faire capitalism if it means anarchy, but I don’t believe it does. Capitalism needs regulation as much as sports games need referees. But I hope, Mr. Opa, that you’re not suggesting that the referees should start bailing out and owning the teams, or be allowed to take points from one team to give to another just to stimulate the game! That makes absolutely no sense.

  8. I don’t know who you are, Mr. Anonamemess, or what qualifies you to speak so eloquently in defense of “Vodoo” economics. So rather than attempt to counter your claims myself, I will simply refer you to a more recent post by another WordPress blogger on Republicans’
    distortion of the facts. See:
    http://thelonggoodbye.wordpress.com/2011/01/27/ryand-and-bachmann-lied-like-jackals-and-medicare-actuary-contradicts-own-report/.
    By the way, although the employment numbers are still quite bad, the Great Recession is officially over, or haven’t you heard? The economy is expanding again — too slowly for anyone’s liking, especially those who are still unemployed and looking for work. But we ARE in recovery thanks to The Recovery Act. Slashing government spending now, at such a tenuous point in the recovery, is dangerous and could well trigger the dreaded Double Dip. Most economists agree. Consider what Bill Gross, one of the world’s most successful bond traders has said recently about this. See:
    http://www.washingtonpost.com/blogs/ezra-klein/post/bill-gross-deficit-reduction-can–and-should-wait/2011/05/19/AG85ZqeH_blog.html.

  9. Thank you for the articles. But, I am well aware of how “facts” can be altered by both sides of the isle and therefore pay little attention to charts and graphs. What I was really hoping for was an explanation of how government-stimulus will have a different effect than “owners of capital”-stimulus. What makes government so much more qualified than business owners at handling money? I’m a bit disappointed there wasn’t an answer to that in the reply.

  10. Quite simply, Mr. Anonamemess, when the private sector begins to withhold spending, as it always does during recessions, government becomes the spender of last resort, and it is demand for goods and services expressed by spending that motivates businesses to expand production and keep or add employees. Recall from your college economics classes, I assume that you’ve taken some, every dollar spent eventually becomes somebody else’s income. That is why the middle class’s higher propensity to spend is so important. The wealthy accumulate wealth, thus withhold spending much more than the poor. The poor have to spend virtually everything they make.

    I am not surprised that you pay so little attention to charts and graphs. These are constructed from “real” data/facts, which are indespensibe to the study of serious economics. Ignoring them permits you to sustain your dogmatic views, which obviously are based more on theory and myth perpetuated by conservative politicians. In the absence of data, Mr. Anonamesmess, how can you substantiate your claims about the success of trickle-down economics and the failure of recent stimulus spending by the government? The answer is that you can’t.

  11. I couldn’t get answers to my questions from my college economics class, either. I’d get the same lemmings’ responses. You haven’t told me anything I haven’t already heard.

    Not only did you not answer my querry, but you continute to contradict yourself. Did you not just send me an article that suggests that “real” data/facts can be distorted? I question everything and everyone, Mr. Opa, conservatives as well as liberals. Just because I disagree with one side doesn’t automatically place me on the opposite side. And it certainly doesn’t make my views dogmatic – quite the opposite. Your views, on the other hand, are base on the phrase “Most economists agree” as you’ve used it several times now. This is very dogmatic. However, a theory’s popularity does not establish its acuracy. Yours is also the view based upon myth; the way you fall back on such terms as “voodo” economics. It’s generally those who don’t understand who refere to something as “magic” or “voodoo”; usually those trying to convince others how “evil” it must be.

    But, back to the point that keeps being eluded: Do you really not see the contradiction of your original post? I’ll simplify it even further: You open with a quote by Karl Marx; a dire prophecy in which Marx is claiming that there is a chain reaction that leads from the evil property owners to the rise of Communism that goes like this:

    1. Owners of capital (producers, capitalists, upper class) stimulate the working class (middle class).
    2. The working class buy more and more of expensive goods, houses and technology.
    3. The working class keeps buying until their debt becomes unbearable and they cannot pay it.
    4. The unpaid debt leads to bankruptcy of banks.
    5. Banks have to be bailed out by the government and become nationalized.
    6. The government will take the road which leads to communism.

    By opening with Marx’s comment, you are suggesting that the spending of the middle class (caused by the upper class) will eventually lead to communism. On the other hand, you have claimed not to be arguing for or wanting socialism/communism. But then you continue on to advocate Keynesianism, which is to do exactly as the “owners of capital” are supposedly doing in step 1 above. You complain that the rich aren’t spending during a recession and the only way out is to have government step in and force the upper class to spend through taxation and forced redistribution of wealth. So my question to you is this: Do you want spending and stimulation of the working class (which, according to Marx, leads to government control and communism) or not? To me, Keynesianism sounds a lot like Marxism.

    I’ll give you one more chance to address this evident contradiction between Marx’s quote and your definition of Keynesianism. Otherwise, this is a waste of my time.

  12. Thank you for the opportunity to explain myself one last time with regard to quoting Marx in my blog post about the Swimming Pool analogy. Obviously, you don’t appreciate irony, Tim. It was not my intention to suggest that we should radically and abruptly adopt the ideas of this 19th Century philosopher and social-economics theorist. I trust none of my other readers were left with this impression. I meant only to point out how ironic it seems that the economic conditions that prevailed in colonial Europe in his time seem to be evolving here in America in these times. You may not perceive this as I do. But that’s your prerogative.

    Yes, data/facts can be distorted. That does not mean that all are so as tp serve the perverted purposes of those who pay the statistians to do it — think political think tanks working for both liberal and conservative camps.

    If one accepts the claims of one camp based solely on others’ opinions absent any corroborating facts, that to me is dogma. True, just because an idea is popular doesn’t make it true. But I draw considerable comfort for my persuasions when there is a consensus among those who make a study their field of expertise. When I doubt, I will most often go with the majority opinion of experts in the field, and there’s a lot more persuasive facts and arguments that support Keynesian economic theory than classic, laissez-faire, supply-side and Austrian School theories.

    Recall who coined the term, “Voodoo Economics.” It was George Herbert Walker Bush in his bid for the Republican nomination for President when he campaigned against Ronald Reagan. He later became an advocate of trickle-down economics, at least for Republican voters, as Reagan’s VP and when he succeeded Reagan. At the time, I thought he was wrong and Reagan was right. Now I am convinced otherwise.

    Tim, I sincerely believe our country has become less a democracy and more a corporatocracy in recent years. And conservatives seem to be oblivious to this or want it thay way, their votes manipulated by campaign contributions and political action groups funded by corporate interests. Like Marx before me, I can imagine the possibility of a revolution against the status quo in Washington, the people demanding change. Change, afterall, is what they voted for in both 2008 and, 2010, though the kind of change they voted for each time was different. Once voters reconcile their passions enough to conclude that neither major party has a monopoly on the truth, perhaps something new and better will emerge. In the mean time, you and I will no doubt continue to disagree; neither of us able to “unhorse” the other. So, if I have not yet made myself clear and sufficiently answered your questions, then this debate is indeed a waste of time.

  13. OK, I must have missed the use of irony. What threw me was the near-credibility you give it near the end with the comment, “…the Karl Marx quote, does come pretty close to explaining what has happened to us owing to deregulation of the financial sector.” I simply don’t agree that an “unregulated” private sector is the cause for the working class bankruptcies. It may be my opinion alone, but the Fed playing with interest rates had more to do with the housing bubble and subsequent crash (and subsequent recession) than anything the private sector did. Government involvement fulfills Marx’s prediction far more than private property holders ever could.

    I fully realize that we live in a corporatocracy. And I know first-hand that it’s not just conservatives who are blind to this fact. But, again, it is government involvement that allows coprporatocracy to flourish. For example, if GM was at the end of its useful or life, or was no longer honorable in its business dealings, or whatever the case may be; it should have been allowed to die, and then let the market recover naturally. (Maybe I’m mistaken, but I didn’t see enough evidence that GM had enough clout to take down the entire economy. And quite frankly I don’t think it could have died entirely, even if the government didn’t step in.) But, instead, this administration over-stepped its Constitutional bounds by bailing GM out with tax-payer monies and allowing it to live. There are many more examples of corporporations being boosted up by the government – on both sides. How can we blame them for not wanting the goose-that-laid-the-golden-eggs to die? Where else would they get their spending cash?

    Government is the problem – or I should say corruption in Government is the problem. Of course corporations can fund political groups – it happens equally on both sides of the aisle. But it takes two to tango. Who has more power to stop campaign “bribes”? You can blame corporations all day for making the offer, but government inevitably decides what offers are allowed to be accepted.

    The only thing we seem to agree on is that there is a problem in Washington. The only difference is, where you see the problem only on the conservative side, I recognize the problem on both sides. Was there really a “change” that happened in 2008 or did we get even more support for the corporatocracy machine? I’m still waiting for that change.

  14. There is much about our economic and political situations upon which we disagree, Tim. But we’ve quite a bit of common ground too. As for the things economic that we disagree on, I am comforted knowing that my understanding is in company with the majority of experts’ opinions.

    No, I don’t exclusively blame the Republicans for our woes. Democratic members of Congress have been no less corrupt than Republicans and some of them have even been party to many of the decisions that got us into this mess. But I’m sure you know that the Democratic Party is no where near as regimented nor as uniform ideologically as the Republican Party. I just happen to think that most Democrats, including our current president, have better ideas.

    We can argue all we want about whether it would be better to let the chips fall where they may, whether government should have bailed out GM, Fannie Mae, Freddie Mack, and the financials. Our disagreement on this and the proper role(s) for government won’t change anything, least of all the views of one or the other of us. On this subject, however, we do violently agree: Government is the problem. But getting rid of government is not the solution. Reforming government is. Easier said than done though.

  15. I wish I had been here when this discussion was fresh. Unfortunately, I was busy studying economics. It is a difficult pursuit and I will forever be studying it. Thankfully, I entered into it with a degree in electronic engineering. This has given me the advantage of a solid mathematical foundation and the understanding of feedback systems.

    The swimming pool analogy fails because it is not a feedback system. The economy is a feedback system.

    One commenter replies, “I believe the “swimming pool” in this analogy refers to the money supply and government spending not to other economic factors. In that alone it is adequate.” He is fundamentally wrong.

    The swimming pool analogy does not work because is is not analogous to the economy. No manner of looking at it will make it so. It is not just too simple, it is simply not analogous to the economy in any manner. It is like using a stove as an analogy for a bicycle.

    The only hope of salvaging the swimming pool analogy is in two things. One is that this analogy of moving water from one end to the other does result in flow. A bucket of water, taken from one end and dumped in the other, does result in the water then flowing back again.

    The second chance of salvaging the analogy would be to consider using the water to prime the swimming pool pump. A water pump, that has gone dry, will not pump because it is simply spinning air around internally. By filling the pump and the intake line with water, it will begin to pump.

    Never the less, even this attempt to salvage the analogy does little as it is not a feedback system. An analogy requires that the two things have similarities that are, in all important ways, identical. The analogy is useful because it is more familiar to the audience. They are then able to match the components of the analogy to the subject.

    In all my studies and experience, I have not yet come up with an analogy that is both familiar to a general audience and adequate as an analogy for a feedback system.

    At best, consider a crowd of people that are at a party in the backyard of a house. They have a rule, if the doorbell rings, someone is to go see who is there. And, for some silly reason, when they get there, they are to ring the doorbell and return to the party. Left alone, nothing happens. Then some neighborhood kid plays doorbell ditch. The doorbell rings and one of the attendees goes to find out who is at the door. When she gets there, she finds no one around so she rings the doorbell and returns to the party. The rest should be obvious. Now, due to one stimulus ring, the rest of the day will have a feedback loop of people leaving the back yard, going to the door, ringing the bell, and returning.

    This is still inadequate as an analogy. It does not grow. The reason it fails is because the economy is a positive feedback system.

    Rather, let us extend the backyard party analogy such that one person goes to the door for each doorbell ring. If there are, say three rings in succession, then three people go together. When they get to the door, each rings the doorbell. The last person in the group, rings it twice.

    So, now, the initial doorbell ditch ring prompts one person. This person rings the doorbell twice, once for him, one extra for his “group”. This prompts two new people to go to the door. These ring the doorbell three times. This prompts three people who ring it four times. And on it goes.

    Now, being a rather large party, soon people are just tripping over each other, going back and forth through the house. The doorbell is just ringing away, people are lining up to go to the door, people are squeezing through the door trying to get back to the party. The doorbell economy has reached a point of diminishing returns. The physical constraints on the system has caused it to settle into a steady state of continuous work.

    Now, we have something that is a bit analogous to the economy.

    The feedback of the supply and demand in an economic system is due to each market being connected. The supply of one market is the demand in the other. A shift in the demand curve in one market results in a large supplied quantity. This then causes the demand curve in the next market to shift, which in turn increases the supplied quantity in the next. Around the market this goes until it comes back around to the original market.

    The economy is, of course, even more complex than this.

    The shift in the demand goes both directions, changes the supply upstream, it changes the supply downstream.

    There is an interaction between the supply and demand in the market. A shift in the demand will prompt the supply to shift as well. This shift in the supply curve causes the demand to change in the connected markets, both upstream and downstream.

    And around and around these changes go until all the players, both suppliers and consumers, are once again tripping all over each other and the economy settles into a new steady state.

    Even this is over simplified. John T. Harvey, a prominent economist, points out that we simply are able to supply all of the demand for basic needs without employing everyone. So, when the economy is churning well, and people are happy to spend their money on filling their house with excess consumer goods, like pet rocks, everyone is employed. A little shock to the system, and people get edgy. They stop spending extra income. That causes layoffs. People without jobs don’t spend money. That causes more layoffs. And soon, the economy is winding back down again.

    If we are lucky, someone invents something really useful. Pretty soon, venture capitalists are all getting in the game, employing all sorts of people to make this new thing. The economy starts back up a business cycle to get as much in the hands of as many people as possible. But, soon, everyone has one. The only demand is the demand of new people entering the work force. Demand begins to fall again and most of the new companies close, leaving only enough to supply the increasing population or new graduating high school senior. But, these closed companies mean laid off workers. Unemployment goes up, demand drops off, and down goes the economy.

    I believe that I have adequately described a significant effect of the economy and it’s ups and downs.

    I left my analogy behind when it got more complicated. It was meant to be a “starter” analogy. It is inadequate as an analogy of the full economy. Even the description that followed doesn’t fully describe the economy.

    It is no wonder analogies are hard to find. The economy is the most complicated thing in the universe. It is made up of the most complex biological creatures every devised by man, nature or god. There simply is nothing that is truly analogous to the economy.

  16. Opa – I could sense your frustration as you conversed with anonamemess. I couldn’t help but laugh, in that sort of sympathetic sense that makes us laugh when we see some one hit their thumb with a hammer.

    I have had the pleasure of studying psychology as well as having had the unfortunate experience of needing it. Sanity, as we are use to it, is a precariously balanced thing. If not for reality, we would all be crazy.

    Rational thought comes from a wealth of feedback. There is internal and external feedback that must be employed. And, our adult level of rational thought comes from external feedback. When that feedback is broken, irrationality is the result.

    Crazy does not always look like the exaggerated and most obvious insanity that we expect of the severely challenged. It often has all the initial appearance of a rational individual. Eventually, as you no doubt recognized, there is something missing, some disconnect of external feedback.

    What you may not recognize is that this broken feedback loop is not entirely broken, it just becomes internally reinforced, no longer needing to be checked against the real world. This is, though, not “abnormal”. It is a natural outcome of how the human mind functions. Our minds make a tremendous number of assumptions about the world, right down to the basics of vision, in which we “see” a three dimensional world where the information is entirely two dimensional and insufficient to really produce what our mind reconstructs.

    We assume a glass is a distance away, our brain determines what amount of movement is needed to grasp it, we reach out to grab it, only to have it knocked over because we were off by just a bit. Our brain “recalculates” and then makes a new assumption about our world.

    At more complex levels, this feedback can be internalized and self reinforcing. No manner of external evidence will get the individual to “recalculate”.

    I know a woman, now in her 50s, that is a compulsive liar. It is a defense mechanism. She feels that she will “get in trouble” so she lies about even the littlest things, things that any adult would simply and rightfully defend as having every adult right to do. I mean simple things, like “did you get the mail out of the mailbox?” Any adult would say, “yeah, so?” And the response would be, “Well, I’d like to see it when your done.”

    She is convinced that her lies are perfect. It is, in her mind, impossible that anyone could know that she lies. Like a ten year old, she knows that, because you didn’t actually see her do it, you cannot know. She cannot conceive of the adult capability for reasonable inference. I saw the mailman arrive to drop off the weekly ads. I heard her voice outside and the sound of the mailbox. When I went to the mailbox, the mail was gone. There was no one else in the house. This happened repeatedly. I ask the mailman, just to be sure, and was told that he did leave the ads, he is required to by law.

    Now here is the interesting part. Having subsequently lied, and convinced that her lie is perfect, no manner of reality will convince her otherwise. Caught in the lie, confronted as having lied, she must further rationalize. I am therefore lying. I cannot know that she did take the mail. I cannot know that she has lied. I am therefor lying about knowing that she took it.

    There is a second, more fundamental effect called “projection”. We all do it. It is normal. We generally, and initially, assume that other people are acting on the same reasoning that we do. People that are generally honest expect that others are honest. Drug addicts assume that everyone is getting high during their break. Abusive personalities assume that everyone beats their kids, it just isn’t “PC” to talk about it. And liars assume everyone is lying.

    There is also another psychological effect called “transference”. Transference is when the person transfers their image of a past experience onto the individual that they are interacting with. This is also normal. We have to as all we have to go on is past experience. It is not easily distinguished from projection, not without considerable information about the person.

    But, when projection and transference become dysfunctional is when the current information isn’t updating our initial assumptions about what and who we are dealing with.

    The feedback with the outside world is broken. It has become internally satisfied. No manner of external evidence will cause the person to re-examine their assumption.

    Eventually, the individual reveals something that speaks to this. If you read back through the comments, I am sure you can identify many. I believe it hit you like a brick at “I am well aware of how “facts” can be altered by both sides of the isle and therefore pay little attention to charts and graphs.”

    There is another interesting effect that you may have felt. I don’t know it it is there as I am an outside observer. And, I am not of a mind to go back over the thing again to find it. But, you may have gotten a feeling, as if the other person was trying to “prove” that you were lying or being somehow manipulative. You may have even felt a sense of the other person “pushing” to get some statement that would reveal your “deceit”, “sheeplness”, or “dogma”. (Sometimes it becomes apparent, sometimes not. I just thought I’d mention it.)

    Again, I don’t know if it is their, just that the exchange is reminiscent of a more extreme case. And, if you did get this sense, you would likely be right. This mechanism if internal feedback is so ingrained that it is “known” that the facts are being altered. Or they will find reason to prove why they are to be disappointed.

    I couldn’t help but laugh, in that sympathetic manner, as one laughs when seeing another hit themselves in the thumb with a hammer. You were, at that point, deeply invested. You are a teacher and, first and foremost, a learner. You learn honestly and openly. And, as is normal, project that behavior onto others, fully expecting that they are actually trying to understand what you are presenting.

    There is great reward in bringing knowledge to others. And, it requires an openness and empathy that carries with it a bit of risk. I am, of course, projecting. I am assuming, from available evidence, that my empathy is indeed representative of yourself. I feel the frustration. But, like that hammer, it doesn’t really hurt me, it is just my empathy that yields the pain. And that sense of relief creates a sort of release. The empathy triggers the endorphins. The endorphins find no real pain to soothe. And I laugh, not at you, but in sympathy.

    I commend you for your effort. And, I thank you for putting it online. The net has given us great opportunities. I had a friend that taught master’s level psychology in a chat room style. He loved it because he could scroll back and re-examine the conversations. So thank you for the data. It is great.

    Now, you will have noticed a theme between my two posts, one on economics, one on psychology. They both examine feedback systems. There is one feedback loop missing.

  17. John, you should be teaching this stuff to bright young people. Ever consider a teaching career?

  18. Now 4 years after this was written when the whole world sat in a trance hypnotized by the Obama story, we find ourselves at the tail end of a bull market driven by uncontrolled Keynesian spending with barely a whimper of improvement in the economy, the next downturn is set to brutally expose the poor investments driven by ZIRP. The folly of the consumer of last resort and a policy of creating jobs without considering whether they are truly profitable will finally be obvious as it becomes apparent that the 2009 consumption binge was just borrowed from today.

    Perhaps I should open my eyes. The economy is just beginning to deliver right? A growing economy doesn’t guarantee a continuing bull market. Watch as tumbling asset prices lead us into the next recession, only this time the consumer of last resort is already broke.

  19. There is more than just a smidgen of truth to what you have said, Mike. Given the lack of consumer demand in the economy, business has had little motivation to borrow from helicopter Ben’s stream of QE dollars to financial institutions. Accordingly, his monetary policy has done little more than to drive stock prices higher. But I judge that it was well-intentioned, given the logjam Congress has thrown up to prevent any useful expansionary fiscal spending. Yes, there will be considerable profit taking between now and the 2014 mid-terms, which will give the broader economy the heebie geebies. But this will not be enough to convince voters that the slow recovery has been Obama’s fault. Most know that his every effort to get progressive fiscal measures passed have been filibustered in the Senate and, in the House, nothing but wasting time proposing more tax cuts for the rich, deregulation, and the repeal of Obamacare.


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