Sunday, June 24, 2012

The Fallacy of Common Sense

When I was a child growing up in the late 1940s and early 1950s one of my favorite radio programs was the continuing saga of The Lone Ranger. I would huddle next to the radio every night to follow the adventures of the Lone Ranger and his faithful companion, Tonto. Unfortunately, the program aired just about my bed time and, as often as not, my parents would insist that I miss part of the program and keep to the schedule they'd deemed appropriate. One night as I was trying to negotiate a few extra minutes so that I could finish that night's episode, it occurred to me that a.) the program was coming from the radio; b.) if I unplugged the radio, the program would stop, i.e. nothing would get out of the radio and c.) if my assumptions were correct, I could plug the radio back in at my convenience and the program would resume right where I left off!

It was common sense! Imagine my disappointment when, the next morning, I plugged the radio back in with eager anticipation of hearing the rest of latest adventure from right where I left off the night before. Imagine my surprise when I found myself in the middle of "As the World Turns"! The problem was that I didn't know diddly squat about how radios worked. That's the problem with common sense. We fall back on common sense when we don't know what in hell we're talking about. The fact of the matter is that common sense can be totally, dead wrong.

I've heard a lot lately about how our national economy is like a family budget and how it's only common sense that, if a family budget encounters financial difficulties, the best advice to the family is to stop spending.

The problem is that a national economy is nothing at all like a family budget. If a family spends money, as far as the family is concerned, the money is gone ... poof ... it isn't there any more!

An economy is something completely different. An economy is value in motion. If I spend money, you make money and if you spend money, then I make money. If I buy a loaf of bread at the grocery store, the store keeps some of the money (profit) and buys another loaf of bread from the bakery. The bakery buys more flour and pays it's employees to bake more bread. One of the employees at the bakery take their share of the money they get for their work and buys a pair of shoes ... which profits the show maker.

My spending money may be a negative on my family budget. In that context, I buy the bread, the money is gone and when I eat the bread ... well, there's nothing left.

In an economy, when I spend money, it starts a chain reaction. Value in motion.

So, if consumers stop spending money (as they have, or certainly slowed down a lot) and if companies stop spending money (as they have to the tune of sitting on about $2 trillion in liquid cash value) and the government stops spending (as many would have it do because they believe an economy works like a family budget) the economy grinds to a halt; it crashes. It crashes because an economy is value in motion and when value stops moving ... there simply is no economy.

If you don't know how something works, common sense can lead you astray. Just keep in mind that, for thousands of years, common sense had people believe that the earth was flat. Common sense is no substitute for knowing how the world works.

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