Grasping Reality on TypePad, by Brad DeLong

I'm not sure whether this is a successful smackdown or not--and I'm not sure of whom.

An email exchange:

Anonymous Correspondent: ...You really shouldn't say that Steve Horwitz is an ethics-free partisan hack...

Me: Why shouldn't I say that he's an ethics-free partisan hack. He writes things like:

Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy...

That's certainly hackish--so false that nobody who has thought for ten minutes about the issues can believe that it is true. And as an attack against Obama's fiscal policies it's certainly partisan.

AC: A hack says things that he doesn't believe. Horwitz believes every word he writes.

Me: I don't think so. Take

Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy...

and replace "government" by "Larry and Sergei's internet company." It then reads:

Larry and Sergei's internet company can only spend what it gets from other businesses and consumers one way or another, either through sales or borrowing. For every dollar that Larry and Sergei's internet company spends, there is one less dollar being spent somewhere else in the economy...

Horwitz has just proved that the funding and creation of Google did absolutely nothing to increase the flow of spending in the economy: if the VCs hadn't funded Google, they would have funded somebody else, and if consumers didn't buy services from Google, they would buy services from someone else.

It generalizes: if Horwitz believes what he says about how government decisions to spend don't change the total flow of spending, he is thereby committed to believing that nobody's decisions can change the flow of spending--and thus that the flow of demand (whether nominal or real isn't quite clear) is always constant.

He doesn't believe that.

AC: ...I don't think he has ever thought of it that way. But he does believe what he says. You should not call him an ethics-free partisan hack...