Educational Repost:
Source: LewRockwell.com
lewrockwell.com
Our Duty to Spend?
by Don Mathews
Here's an ironic quotation:
"The ideas of economists and political philosophers, both when they are
right and when they are wrong, are more powerful than is commonly
understood. Indeed the world is ruled by little else. Practical men, who
believe themselves to be quite exempt from any intellectual influences, are
usually the slaves of some defunct economist."
John Maynard Keynes, a famous British economist, wrote those in words in a
book published in 1936.
The words are as true today as they were back then: in the worldly realm of
political economy, many practical people today are indeed the slaves of some
defunct economist.
The irony is the defunct economist is John Maynard Keynes.
More than any other economist, Keynes is responsible for the notion that
recessions are caused by underspending in the economy. The notion is hugely
mistaken.
It's also hugely popular. Open a newspaper or turn on the TV news these days
and you're sure to find some pundit or public official exhorting consumers -
which would be us - to get out there in these troubled times and spend,
spend, spend.
Some go so far as to suggest that, by God, it's our civic duty to go out and
spend because that's the only way to get the economy rolling again.
One need not be an economist to recognize that something here is really out
of whack. When did saving become such a bad thing? Is the economy harmed by
supplying it with financial capital? And is thrift no longer a virtue?
If thrift is now a vice, then many Americans, in the current recession, are
guilty. But some are more guilty than others. The most guilty are easy to
identify.
Since March, unemployment has increased by several million people. No doubt
the newly unemployed have sharply cut back on their spending.
Should these people get back on the stick and go on a shopping spree? Is
that what a true economic patriot would do after losing his job?
People with some savings invested in stocks or in stock mutual funds have no
doubt cut back on their spending, too. Young people saving for their first
home, parents saving for their children's college education, retired folks -
these sorts of people.
Take, for example, a retired couple who worked hard in their younger years
and saved when they could and amassed a portfolio of NASDAQ stocks worth,
say, $100,000 in March of 2000. Today that portfolio would be worth about
$38,000.
Should this couple now go out spend like there's no tomorrow? Would that be
good?
How about the many businesses whose profits are puny today because they were
sucked in by the Federal Reserve's easy money and all the "new economy" hype
and overinvested in new technology during the 1990s? Should these firms
disregard their past errors and load up on new technology all over again?
Or perhaps the rest of us have a duty to take up the slack. Never mind that
consumer debt has gone through the roof. When economic duty calls, we must
answer, even if the cost is bankruptcy, right?
Exhorting people to spend, spend, spend during a recession to get the
economy rolling again is like exhorting some one who's sick with pneumonia
to go for a jog because he needs to start breathing deeper again.
The notion that recessions are caused by underspending is wrong, never mind
defunct. It mistakes effect for cause. A decrease in spending during a
recession is an effect of recession, not a cause. The causes run much
deeper.
December 8, 2001
Don Mathews [send him mail] is a columnist for the Brunswick (Ga.) News.
Copyright © 2001 LewRockwell.com |
