Lord Robert Skidelsky is unlikely to have understood the anecdote in his opening remarks in the LSE Hayek/Keynes debate. He related that, after addressing an audience of Cambridge economists in 1931, Hayek had been asked,
‘Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’
And that Hayek had replied,
‘Yes, but [pointing to his triangles on the board] it would take a very long mathematical argument to explain why’.
Indeed, the argument does take a very long time to explain to economists who lack the basic understanding.
Hayek’s triangles (to which Skidelsky made no reference) were to illustrate the structure of capitalistic production; and Hayek later criticised Keynes for not having taken the time to understand capital theory. It is a criticism that applies to most Keynesians today.
Briefly stated, an investment boom that is triggered by an excessive expansion of credit diverts capital toward long-term projects, many of which are doomed to falter in the ensuing bust. ‘Housing’ is the most recent illustration and ‘green’ energy is a likely candidate for the future.
As an excess-credit boom diverts resources to long-term capital projects, fewer goods are produced for more immediate consumption. Yet, expenditures are raised all round, which means that excess demand adds impetus to the boom.
In the most recent illustration, as rising property values stoked higher levels of consumption, too little saving could be identified as the universal feature of excess-credit booms.
As the recent boom went bust (as was inevitable) the temptation grew (as is usual) for the state to intervene in support of non-viable projects. (With the $3 billion ‘Cash for Clunkers’ scheme to boost US automobile sales, costs were estimated to exceed benefits by about $2000 per vehicle.) Before an economy can thrive, however, mistakes must be remedied; which is something else that Keynesians fail to grasp.
So, where there has been too little saving, it makes no sense to encourage any consumer into the High Street to purchase a new overcoat.