Readers of this blog know that I share very little in common with Keynsians. I think that the whole premise of government stimulus is built on a false premise called “aggregate demand”. Simply put, Keynes believed that there was an “aggregate demand” in an economy that could be described by the following equation:
GDP = C + I + G + (X-M)
C-Consumption, I-investment, G-Gov’t spending, X-Exports, M-Imports
This equation is a good one and most entry level economics courses spend a lot of time focused on it. Just like most elementary chemistry courses talk about the equation to calculate the number of molecules in a volume of gas. However, in chemistry the students are told that this equation only holds for standard temperature and pressure. If either of those changes, the equation must change. The benefit that chemistry has is that you can run controlled experiments at standard temperature and pressure to analyze your results.
For economic analysis, you can’t hold variables constant and run the experiment. I can’t go back to the late 1990′s and change the Clinton Administration policy to make low income household homeownership a key policy and analyze the impact in 2007. GDP is not a stagnant number. It changes minute to minute, second to second. “Aggregate demand” is a useless number for setting policy — as the world is now recognizing.
So, with this as a back drop, it was nice to see Friedrich Hayek getting some ink in the Wall Street Journal, today. The Op-Ed can be found here (subscription fee may apply). The following quote from the piece I find particularly accurate:
First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren’t buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch-diggers with limited effects outside that sector.
Not too mention that the government must issue debt to pay the ditch-diggers. That debt is a tax on the future. Consumers are smart enough to know that taxes will be rising and so future consumption will take a hit. The result is to reduce spending today to prepare for the future.
Need proof? Just look at the economic indicators — reduced business investment, reduced employment, low levels of personal spending, etc…
The last point I’ll make regarding Hayek focuses on crony capitalism, which has seen a huge step up in the US in the last few years. Look at GE, and how it uses NBC to promote policies and stroke egos that it needs to grow its bottom line (and stock options for insiders)…
Even when the state tries to steer only part of the economy in the name of the “public good,” the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don’t attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn’t be confused with the real thing.
Look at Delaware’s Strategic Fund (which is getting a huge influx of fresh taxpayer cash) to see this point played out in little Delaware. Or look at the Escheat Process and the deals cut to balance the budget and spread the “goodies” around in a completely non-transparent way.
Hayek rules!!
[...] A year ago I wrote a post regarding Hayek’s comeback as the leading economic philosophy blowing Keynesian economics out of the water. The post can be found here. [...]