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Source link: http://archive.mises.org/14182/less-government-less-economic-trouble/

Less Government, Less Economic Trouble

October 8, 2010 by

Government spending — whether on our current armed forces and their more than 800 foreign bases or on “green” energy and other government-favored projects — does not produce prosperity. It only diverts resources. FULL ARTICLE by Robert Higgs

{ 4 comments }

Dagnytg October 8, 2010 at 5:16 pm

Though our current economic troubles are complex, many mainstream economists have endorsed the simplistic Keynesian theory…

Though I agree with the article, the sentence and premise above I find disturbing because I don’t see Keynesian theory or policies as simple nor do I see our economic problems as complicated.

Our economic troubles are not complex…they’re only complex when seen through the eyes of Keynesian theory.

The policies derived from Keynesian theory create huge perversions in the market and henceforth, complexity. Remember it’s Keynesian theory and policies that created the boom and are being reapplied to the bust (and this cycle has repeated itself for over a century).

I may be debating semantics but if their ideas were truly simple, they would just drop money from helicopters. (I know that has been suggested but even that undertaking is not simple. It would take much effort and planning and would change nothing.)

Austrian theory is truly simple…don’t do anything…let the market clear out malinvestment and heal itself. (Of course, having sound money would end a lot of complexity but that is another issue.)

It is because the Austrian solution is so simple that it is rejected and it is the complexity and convolution of Keynesian theory that is so embraced by everybody who lacks a real job-economists, journalists, bureaucrats, speculators, politicians, etc.

PS> Let me restate my premise.

If the essence of Keynesian theory is simple (as in throw money at the problem to fix it) then the application (who gets what and how) is not simple nor are the outcomes, which become complex. Conversely, the essence of Austrian theory is simple (man acts) and the application (there is no application) and the outcome…simplicity as demanded by consumers and entrepreneurs.

Russ the Apostate October 8, 2010 at 5:54 pm

I think where Keynesians are overly simplistic is their attachment to full employment, no matter what. Many people can see the need for re-allocation of capital, but when it comes to re-allocation of labor, people tend to turn off their minds and start “thinking” with their hearts. So they try to solve depressions in ways that maintain full employment, which causes other problems which need to be fixed by more intervention (while still maintaining full employment), and so on ad nauseum. That’s where the complications come in.

Austrian theory, on the other hand, is not so simplistic. It accepts that trying to maintain full employment, no matter what, is not the best approach. Since it doesn’t oversimplify in its initial premises, it doesn’t have to come up with Byzantine complications to try to save the initial over-simplification.

Wildberry October 8, 2010 at 6:53 pm

“Politicians, who are always looking for plausible rationales for their insatiable spending, borrowing, and power grabbing, had never abandoned Keynesianism, so they have been elated to find economic “experts” again confirming their self-interested inclinations. Indeed, several prominent economists, such as New York Times columnist Paul Krugman, are urging Washington to spend even more, lest the economy slow.” and
“These short-sighted actions create great potential for a second round of the housing crisis.”
Whereas I agree with most of the analysis and positions expressed here, I take issue with one implication of the paragraph above. It misstates the relationship between these actors, and therefore implies the wrong approach for change.
Suggesting that politicians have merely been “delighted to find” support that justifies their actions causes one to ask “Just how did they get so darn lucky?” It seems to me in a very real sense one is the creator/benefactor of the other. By acting as agents for their own self-interests they serve the interests of others, and vice versa.
This is not a “perfect storm” scenario where two characters in the play, politicians and economists, worked independently of one another and then, amazingly and against all odds, bumped into each other in the dark of night, only to find to their utter delight, that the one matches perfectly the purposes of the other. And of course, these are not the only characters in the play. The real economic power behind the symbiosis comes from those who stand to generate personal and corporate wealth form the conditions developed and supported by the status quo arrangement.
This is important because making the proper distinctions in stating the problem, or at least avoiding smuggling in false assumptions, has an effect on the way we conceive a solution. For example, if it is the “short-sighted actions” of politicians, then one solution may involve educating and persuading them to pursue better alternatives. This is merely a lobbying effort directed at incrementally changing public policy by changing the views of those already in power.
The cooperation of politicians, special interests, academics and lobbyists makes for a pretty formidable and historically successful coalition of mutual self-interests. From a macro-politico/economic perspective, that is one way to describe the status quo.
The status quo can be fundamentally transformed in more than one way; it may implode from its own weight, creating a catastrophic change, from high levels of order to something approaching chaos in a very short period of time and likely causing a good deal of collateral damage. Or, it may undergo a more orderly transformational process that systematically focuses on key pressure points that serve as catalysts for additional change.
In the first scenario we get a blank sheet of paper from which to design our society anew in a very short period of time, (once the collapse begins) but that paper is likely to be torn and charred, and we may have a hard time finding that pencil we need. The second is much more exacting, and requires an extended time frame to implement. But while things may get worse before they get better, we don’t have to operate from a platform of resources that may have been severely damaged. Of course if the time-frame is too long, you get chaos anyway. Certainly there is any number of alternative possible scenarios, but this makes my point.
By analogy, if we live in a crummy house and decide we want a new one, we can level the thing and start over. This is the fastest and simplest course of action, assuming you have a clear idea of what you want to build (if not you live on the vacant lot under the stars until you do). However this plan looks less attractive if it is 20 below outside and the wind is howling. It might be better to keep the current shelter functional while you design and build your masterpiece. Keeping the suffering to a minimum is a good survival tactic.
Now I can already hear Ancap adherents retorting that this is not a free-market, all things are not otherwise equal, and any solution that leaves any vestige of the State intact must be, at its conception, a false solution. A solution that attempts to correct a faulty system from within that system cannot create significant change from what we have now.
As you may have gathered here or elsewhere, I disagree. I believe it is neither necessary nor desirable to roll the clock back to some point of social “disorganization” in order to reverse the trend and start out anew with our collective eye on a new destination. I believe we can decide the direction we want to go based on widespread agreement on a few fundamental principles that attract subscribers and build coalitions for the purpose being described here. The key question is, exactly what are those few principles that can catalyze such a profound change? And even more difficult, how do those agreements coalesce into a powerful “purchasing” block in the political context?
Using an economics analogy, at the macro level we are discussing a complex system of mutual cooperation and support that successfully satisfies common-held values of mutual interest, which expresses itself through market preferences which we are calling the “status quo” politico/economic system. It is a successful product by virtue of the fact that it exists, and has been supported in the “market”. Ok, it may not be a free market, but that goes to availability of alternatives. Despite all the things wrong with it, it is dominant and therefore successful on its own terms.
For this macro level view to be true, according to Austrian model, it is the result of countless acts of individual human actions at the micro level, each expressing their own value preferences given available alternatives. A successful product ceases to be successful when consumers no longer buy it. When they find that a pass is better than a purchase, they do that. When they must buy one of the available alternatives, they hold their nose and “vote” for the least obnoxious. But when a new alternative appears, the market can suddenly switch preferences at astounding speed. In business writings, this has been called the “Tornado Effect” as it applies to rapid shifts in market preferences, as in technology, for example.
Therefore, if we assume that the status quo is the result of “market preferences” being expressed by the “consumers” (i.e. voters), then a sustainable alternative model may also come into being by way of this same process. A successful product attracts consumers.
This way of stating the problem implies a need for a successfully competing political coalition that gains the right to implement alternative public policies. That is no easy task. Not to mention the near impossibility of forming agreement in advance of just what the right “alternative product” looks like in its entirety.
The patterns of politico/economic behavior I have been discussing here are ones that have persisted, with only minor interruptions, at least since the Civil War. The author lists the major change-producing episodes as follows:
“The first five episodes were World War I, the Great Depression, World War II, the upheavals associated with the civil-rights revolution and the Vietnam War, and the post-9/11 events associated with the war on terror and U.S. engagements in Afghanistan and Iraq.”
I think the cold war belongs here, but that is a side issue. Although there have been significant episodes where rapid changes have occurred, in most ways one could argue that the trend has been one of maintaining a sort of equilibrium, at least so in the direction of increased power of those actors mentioned here. While this is certainly arguable in the details, I think few would disagree that on the whole, we have been creating more of the same for some time now.
I am interested in the possibility of establishing some level of consensus about a process whereby realistic and sustainable change of the scale and scope discussed within LVMI can take place, within the American politico/economic context.
I’m reminded of a fascinating encounter in the 1970’s with something called the catastrophe theory, initially advanced by Rene Thom. Here is the shortest summary I can find from Wikipedia. (I know, I know…)
“Catastrophe theory, which originated with the work of the French mathematician René Thom in the 1960s, and became very popular due to the efforts of Christopher Zeeman in the 1970s, considers the special case where the long-run stable equilibrium can be identified with the minimum of a smooth, well-defined potential function (Lyapunov function).
Small changes in certain parameters of a nonlinear system can cause equilibria to appear or disappear, or to change from attracting to repelling and vice versa, leading to large and sudden changes of the behavior of the system. However, examined in a larger parameter space, catastrophe theory reveals that such bifurcation points tend to occur as part of well-defined qualitative geometrical structures.”
Think of a sandglass timer. The sand trickles through a few grains at a time, building a cone shaped pile at the bottom. At some point, a part of the sides give way and the mini landslide moves down the pile in a sudden movement. That is a minor catastrophe.
Another example would be a building implosion. Although it would be possible to pack a building with enough explosives to bring it down (catastrophe) a more efficient method (and one which produces less collateral damage) is to place a few carefully placed shape charges in strategic locations, based on a careful analysis of the building engineering. When they are set off, you can barely hear the sound of the explosions, but the building topples none the less, landing precisely within the intended space. That is a major catastrophe for the building, but a fabulous success for the demolition engineers. It is directed by a careful analysis and well-coordinated plan.
Take the Fed, as a random example. If it ceased to exist tomorrow, there would be some considerable chaos. If it was supplanted by an alternative over some reasonable time, a better result could emerge. If that process was built on the very principles that would prevail at the “end”, so much the better. Either way, there are very good reasons for why it must go.
The Teaparty movement has at least the potential for bringing some significant change. They have defined “the economy” as the scope of the message, and I hope they can resist the temptation to try to become all things. It is remarkable to reflect just how quickly large numbers of people have been attracted to an alternative. And to some limited extent thus far, they have actually exercised some political power in defeating status quo supporters and installing, if nothing more, some fresh faces. Has anyone from LVMI offered their expertise to help formulate a comprehensive economic policy platform? I haven’ heard of it if so. Remember what Rham said, and I agree, it would be a shame to let this crisis go to waste.

P.M.Lawrence October 11, 2010 at 8:31 am

The editors probably thought that their …

Government spending — whether on our current armed forces and their more than 800 foreign bases or on “green” energy and other government-favored projects — does not produce prosperity. It only diverts resources.

… and Robert Higgs’s …

Though our current economic troubles are complex, many mainstream economists have endorsed the simplistic Keynesian theory that massive government spending will produce jobs and prosperity.

… were saying the same thing, that they were just paraphrasing him. They aren’t the same.

Higgs is right. The simplistic Keynesian theory incorrectly asserts that just doing that, in and of itself, will help. At most it can work like a tourniquet and so on; Higgs’s summary is accurate.

However, the editors have claimed something else far stronger: that any government spending whatsoever does not produce prosperity and only diverts resources. That is wrong, because while that is all that usually happens, certainly with the kinds of government activities done these days, there are other possibilities, ones that historically have happened occasionally. For instance, the Culture System in the Dutch East Indies produced jobs (for the natives, at the expense of their subsistence resources and activities) and prosperity (for a few native middle men and for Dutch and other bond holders who had invested in it, leveraged by taxes, land use laws, and a one off debasing of the coinage – the equivalent of just printing money). Even if the claim is that yet other, free market things would have yielded even more gains, on the one hand this did produce jobs and prosperity, and on the other hand the freer things around before showed their gains in yet other areas than jobs and prosperity, e.g. leisure and lifestyle. (British tea and opium production in India showed similar features, though with more private enterprise involved.)

The big difference is that some projects are profitable that way even when a government does them, but not simply because there is a Keynesian thing going on, rather because they have their own merits. Of course, that’s not what is happening in today’s world…

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