The long run fallacy

5 May, 2016 at 10:06 | Posted in Economics | 5 Comments

It appears to me that one great cause of our difference in opinion, on the subjects which we have so often discussed, is that you have always in your mind the immediate and temporary effects of particular changes—whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them.

Letter from Ricardo to Malthus January 1817

long run.jpgOn this issue Keynes agreed with Malthus, and it was probably the debate between Ricardo and Malthus that Keynes was thinking about when he formulated his most well-known aphorism, in A Tract on Monetary Reform (1923):

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.

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  1. My own reading of Keynes is that while he did not focus entirely on the long-run, he wasn’t entirely focussed on the short-run either. In the short-run extrapolation from econometric is generally sound, uncertainty typically becomes dominant in the longer-term. The short run is normally at least days, but in crises it can become much less.

    So whatever Keynes might have thought, I think the hard ground is between Ricardo and Malthus, and it matters.

  2. “The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs, the error of a thousand political speeches, the central sophism of the “new” economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole.”
    — Henry Hazlitt in Economics in One Lesson

    • The “One Lesson” of Henry Hazlitt is not to allow only for the long run, but it was specifically to examine the current situation but most importantly to include more than the single effect about which many would-be economists are interested. In fact there are always two opposing effects that apply (or even more) and this kind of macro-economy is what is modeled in my recent book.

  3. Yes of course why would you bother dealing with the trials and tribulations of tens of millions currently unemployed when you can fantasize about all those happily enjoying the fruits of full employment at some point in the future, a point in time which recedes into the future at the rate at which time passes.

    Fantasy as panacea.

  4. I think the best along this line is Harry Hopkins:
    “People don’t eat in the long run. They eat every day.”


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