The View From 1776
Wednesday, November 07, 2012
Basic Economics vs. Liberal-Progressive Theories
With a hair more than half the voters having opted for four more years of Obamanomics, it’s worthwhile to take another look at liberal-progressive nostrums for reducing unemployment, policies that are divorced from the real world and have never been effective.
Liberal-progressives’ simplistic economic theory tells bureaucrats that, under all circumstances, an increase in the amount of government deficit spending will cause people to increase consumption of goods and services. From this will follow businesses’ increased production and added employment, thus ending an economic recession.
It hasn’t worked for Obama. Unemployment, counting people who have given up seeking work, is about 50% higher than when Obama took office, despite the highest level of deficit spending in the history of the world. In the 1930s Depression, after twelve years of stimulus spending by Hoover and Roosevelt, unemployment was still at 17% just before we began rearming for World War II. In the 1970s, we suffered stagflation: high unemployment and double-digit inflation.
To understand the real-world nature of production and consumption, it’s helpful to imagine a collection of several thousand people, not yet organized into a political state, living in relative isolation from similar social groups elsewhere. Assume that this group is agrarian, not nomadic.
As families in that society grow larger, some of them will not be able to grow enough food or produce sufficient clothing and shelter on the land they occupy. Our earliest archaeological data show that such families began to make things with available materials, things that could be traded to other families for food, clothing, and shelter items. One of the earliest codified economic theories, that of the French Physiocrats, emphasized that the land’s agricultural production was the fundamental source of wealth. No matter how much money a government might spend, the only result would be inflation, unless farmers saved seed corn, worked harder, and increased crops to exchange for other goods and services.
The first point is that production of goods and services precedes improvement in people’s living standards. People exchanged their goods and services only if other people had surplus goods and services available to trade. Nobody would have handed over his goods or services for pieces of paper money, unless that money was backed by gold or some other valuable commodity into which the paper money could be converted.
Wealth is not paper money or bank accounts, but goods and services that can be exchanged with other people for things one wants. Money is merely a medium of exchange. Before consuming goods and services that they lack, people must produce something of real usefulness (the measure of value in the Austrian school of economics).
The second point is that a short-term increase in deficit spending by a governmental body doesn’t put people to work producing real goods that other people will voluntarily buy. Sustainable employment comes instead from energy and imagination of individuals perceiving ways to produce things that can be exchanged for goods and services that the producers lack.
Liberal-progressive economic theory, most fully expounded in the doctrine of John Maynard Keynes, holds the exact opposite. Consumption, Keynes theorized, precedes production. Saving money, i.e., failure to spend money on consumer goods, was the cause of recessions.
As President Obama put it, in effect, goods and services produced for trade in our hypothetical society were not the result of individual ingenuity, initiative, and hard work. Goods and services would be called into existence by bureaucrats’ issuance of paper money and establishment of regulations, subsidies, and higher taxes. People then would mindlessly, like Pavlov’s dogs responding to the diner bell, spend the money and create employment.
Government “pump-priming” policy has never worked. Henry Morgenthau, Roosevelt’s Treasury Secretary during the 1930s New Deal, lamented that the administration had experimented with stimulus spending on every conceivable project, but nothing had worked to reduce unemployment. Obama is experiencing similar failure.
We can hope that reality, some day, may intrude; that Obama may come to recognize that bashing businessmen, raising taxes, and reducing people’s incentives to save will only hinder economic recovery.