The View From 1776

Classical economics, on the whole, attempts to explain how individuals behave under changing economic conditions.  The implicit idea is that people, acting as individuals, collectively move an economy.  But classical economics recognizes that within an economy, many different economic factors impinge upon individuals who have highly variegated economic preferences.  Free market prices, changing continually in response to the changing balance of supply and demand across markets for tens of thousands of different kinds of products and services, are the signals that trigger individuals’ economic decisions.

Keynesian macroeconomics, in contrast, assumes that the economy is comprised of monolithic abstractions treated as if they were independent, controllable “things.” Among others, those “things” are consumption, savings, investment, wages, and employment.  The implicit assumption is that everybody can be controlled by one-size-fits-all policies.  Thus divorced from the multitude of individual aspects of real life, Keynesian economists believe that their computer models can with precision predict consumption, investment, and wages, enabling them to maintain full employment at all times.

Because prices are not very important in the Keynesian scheme of things, liberal-progressive economists are unworried that labor union wage rigidities and government’s massive deficit spending will almost certainly lead to punishing inflation.

It was these hubristic presumptions that gave us economic stagflation in the 1970s.  Unemployment soared, and so many manufacturing businesses went broke that the Midwestern industrial heartland became known as the Rust Bowl.  Because of massive deficit stimulus spending by the government, inflation soared into high double digits, the worst in our history, and short-term interest rates went above 20% per annum.

Rather than dealing with the reality of endlessly changing prices of tens of thousands of products and services in a free market, Keynesians prefer again to deal with prices as a “thing” represented by price indexes.  For the Federal Reserve, there is no inflation, so long as they use the so-called core inflation price index, which eliminates food and fuel costs. 

Though grocery and gasoline prices may be busting your budget, Fed chairman Bernanke tells you that there is no inflation, that your problems arise from too much personal savings and insufficient government spending.  This is somewhat difficult to square with negative rates of personal savings, maxed-out credit cards, and the highest Federal debt and deficit spending in history.

In a free-market economy, price changes do a better job of balancing the economy than heavy-handed government intervention.

A fundamental tenet of classical economics is that higher prices both reduce demand, and tend to induce increased supply of a good or service.  Lower prices tend to reduce supply and to increase demand.  Merchants with excess inventory cut prices and hold sales.  Other conditions remaining the same, if goods are on sale, people buy more.

When oil and gasoline prices soar, people drive fewer miles, and oil drilling contractors pull drilling rigs out of mothballs to ramp up drilling activity, because the higher prices make it profitable to drill in higher-cost areas.  When oil, gasoline, and natural gas prices drop, supply is reduced as drilling rigs go back into mothballs,.  If gasoline prices decline, people resume driving more miles, and government-subsidized ethanol and windmill electricity projects become even more uneconomic.

Free-market prices, which are the summation of hundreds of millions of individual consumers’ preferences, are distorted when government social engineers impose their value judgments upon the people.  Those value judgments are expressed in such things as “excess profits” taxes, support for labor union wage and benefits extortion, the Community Reinvestment Act in the housing market, and a national socialist healthcare scheme. 

President Nixon’s price controls, imposed in 1971, not only failed to work as intended, but distortions in supply caused by price controls pushed the annual Consumer Price Index inflation rate up 400% by 1980.  Among other things, gasoline shortages led to drivers waiting hours in service station lines.  After President Reagan removed controls, the gasoline shortage disappeared.

The Keynesian hypothesis that dumping vast amounts of fiat money into the economy will automatically increase consumption is belied by repeated experience, most recently under the 2008 George Bush-Nancy Pelosi stimulus plan, which flopped completely. 

Contrary to Keynesian theory, government stimulus spending in a recession causes, not higher levels of consumption, but increased savings.  Fearful consumers with high personal debt, who unfortunately today are the bulk of the populace, reduce consumption and pay down their debt.  No amount of stimulus money will induce them to resume free-spending ways until those debts are cut down to manageable size. 

Proposed cap-and-trade carbon credits and carbon taxes are intended, as President Obama declared during the presidential campaign, to kill off the coal industry and to squeeze heavy industries like steel production.  New CAFE standards are simply government-imposed higher prices on automobiles, along with regulations forcing auto makers to produce unprofitable “green” automobiles that only a small portion of the electorate want to buy. 

The Democrat/Socialist Party’s healthcare scheme is price controls writ large.  The intention is to mandate lower prices for pharmaceutical companies, doctors, and hospitals, while making it illegal for private insurance subscribers to pay higher, market prices.  Those lower prices will result inevitably in fewer doctors in the future, fewer new hospitals, less advanced medical diagnostic and treatment equipment, and a reduced frequency of new pharmaceutical discoveries.  Fewer people will spend great amounts of money and extra years in medical school to enter a profession in which they will be increasingly poorly paid and tightly bound in regulatory red tape.  Manufacturers will have little incentive to invest millions of dollars to produce medical equipment at unprofitable prices.  Nor will pharmaceutical companies be inclined to invest billions of dollars in medical research when they will not be allowed to charge prices that will produce a market rate of return on their investments.  Assuredly neither lenders nor investors will be inclined to lend money or make new investments in sufficient amounts to fund unprofitable research.

Our government will deal with the results, as government does in Canada and the UK, by rationing medical care.  Everyone will wait longer for medical treatment, and senior citizens will simply be denied some treatments that, in the value judgments of social-engineering bureaucrats, are not worthwhile for people who probably have only a couple of decades to live.  To deal with an insufficiency of privately produced medical equipment and new pharmaceutical discoveries, bureaucrats will be tempted to nationalize companies, as they did to compel production of “green” automobiles at Government Motors.  After all, in the religion of liberal-progressives, profits are considered to be capitalist greed.  Government experts will pick winners and losers, backing the companies in which the government has financial control.

Cynically, one might suspect that a hidden aim of the Democrat/Socialist Party’s healthcare scam is to kill off senior citizens as rapidly as possible as one way to deal with the trillions of dollars of unfunded Medicare and Medicaid entitlements. These entitlements, let’s not forget, were created by President Lyndon Johnson’s Great Society, one of history’s largest essays at distorting market forces to redistribute income in accord with liberal-progressive concepts of social justice.

For more details, read Jon Hall’s The Consequences of Government Intrusion into Prices.

Economic liberties for which the colonists fought in 1776 have long since been abandoned.  Democrat/Socialists “know” what is best for us and, by Karl Marx, they are prepared to use the crushing force of government to make us do their bidding.  The only liberties they seem prepared to leave us are the degraded, animalistic debaucheries championed by mainstream liberal media.  Economic liberties are taken from individuals and collectivized in Washington, a process made easier because besotted voters dependent upon the political state are easier to herd like cattle to the slaughter house.