Public debt — a case of atomistic fallacy

7 Mar, 2015 at 10:41 | Posted in Economics | 2 Comments

Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen. Everyone knows what financial debt means: money owed, often borrowed. To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.

This anxiety is readily transferred to national debt – the debt owed by a government to its creditors. How, people ask, will governments repay all of the hundreds of billions of dollars that they owe?

SkidelskyThe next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt. Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”

Again, an analogy with household debt readily suggests itself. My death does not extinguish my debt, reasons the sensible citizen. My creditors will have the first claim on my estate – everything that I wanted to leave to my children. Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.

That is why deficit reduction is at the center of most governments’ fiscal policy today. A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.

Robert Skidelsky

However — this official doctrine contains heaps of fallacious thinking, the most fundamental being a kind of atomistic fallacy most eloquently examplified in Keynes’ “paradox of savings”:

An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand …

If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specific order for future consumption, the effect might indeed be different. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption could be turned over to preparing for the future consumption … In any case, however, an individual decision to save does not, in actual fact, involve the placing of any specific forward order for consumption, but merely the cancellation of a present order. Thus, since the expectation of consumption is the only raison d’être of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has ceteris paribus a depressing effect on employment.

The trouble arises, therefore, because the act of saving implies, not a substitution for present consumption of some specific additional consumption which requires for its preparation just as much immediate economic activity as would have been required by present consumption equal in value to the sum saved, but a desire for “wealth” as such, that is for a potentiality of consuming an unspecified article at an unspecified time. The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished.


  1. There is also a strong moral component to debt as a meme. As David Graeber has shown in his book, Debt, morality is much more primitive on the developmental scale than money, and the memes of money and morality are closely bound to each other through the development of money from the credit-debt relationship that arose from mutual obligation on one hand and compensation on the other.

    Being bound up in morality, debt also has assumed a religious dimension, for example, sin being cognate with debt and debt being cognate with sin, as in “forgive us our debts as we forgive our debtors.” (Mt 6:12 KJV)

    What this implies is that the human attitudes toward debt are shaped only on by exposure to default, which gives rise to fear, but also a deeper and even less rational factor involving morals.

    Couple this with the venerable observation that the love of money is the root of all evil, and it is clear that what the Greeks called chthonic forces acting as cognitive-affective biases are involved with debt at least as much if not more than Apollonian rational factors.

    So even though we may understand debt, as a species subject to evolutionary factors it may be some time before we can actually integrate that knowledge into praxis.

    Can we get beyond this deep irrational bias in public policy? Even FDR struggled with this conundrum during his second term, listening to Keynes and Eccles with one ear and Henry Morgenthau and the “Treasury view” with the other. The recession of 1937 resulted when FDR favored Morgenthau in 1936. Now we are repeating that error on a massive scale in the EZ and to a somewhat lesser degree in the US and UK.

  2. On the other hand our bankers appear to have got over the primitive morality implied by Tom Hickey. With heir help in lending to people who could not afford it, and then selling on the debts as “the next best thing” we ended up with a global economic crisis and bailing out banks in a big way (something that has not been unwound in the UK as the banking sector has not recovered sufficiently to sell it back to the public).

    And if we want to talk about Greeks, should we consider the current Euro crisis more than ancient philosophy developed in a different world from today.

    It seems to me there is a lot to be said for a debt-free world. Apart from the advantage of getting rid of this particular argument over whether to reduce deficit or surplus economies, there are advantages too for Highly-Indebted-Poor-Countries as well as on the micro-economic scale of individuals caught up in debt they cannot pay back.

    And just to come full circle some individuals were no doubt caught up in debt thanks to bankers.

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