I know…apparently I’m like a cat chasing a string. I’m addicted to sharing my opinion. I can’t stop.
I was reading through the UK papers this morning and noticed that John Maynard Keynes is alive and well in the halls of the UK Parliament. They are contemplating a stimulus based on “infrastructure” spending over here similar to the wasted Obama “stimulus” (most of which went into the pockets of cronies and generated nothing “stimulative”).
There is a great site over here for the Adam Smith Institute. You remember Adam – he is the father of capitalism and the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. It earned him an enormous reputation and would become one of the most influential works ever published.
The Adam Smith Institute lists its goals as:
- Fighting big government
- Today the Adam Smith Institute faces new challenges. The industrial landscape has changed beyond recognition since the 1970s. Communism has fallen. And most politicians at least pay lip service to the free market ideas of choice, competition and enterprise. And yet in many ways government is bigger and more intrusive than ever, whether it is regulating businesses, interfering with lifestyle choices, or undermining historic civil liberties. Meanwhile public spending has grown out of control, and Britain faces a fiscal crisis unprecedented in peacetime. In short, there are many battles still to be won.
- Our agenda
- The Adam Smith Institute has a number of overarching objectives: to make liberty a consideration in every political argument; to win once-and-for-all the intellectual arguments against Keynesian economic policy; and to make people realize that our current fiscal path is completely unsustainable, as demographic change begins to take its toll on the welfare state. And it has a number of policy areas on which it is actively campaigning for far-reaching free market solutions – like flat taxes, free banking, and radically liberalized education.
Smith was born in 1723 in the town of Kirkcaldy in the Kingdom of Fife, a scant 15 miles from where I sit writing this in Edinburgh. Smith, being that he is widely cited as the father of modern economics and capitalism, was a champion of private enterprise and a enemy of public spending. Perhaps the most concise description of his position rests in his own words:
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [emphasis added].
Those who regard that statement as Smith’s central message also quote frequently Smith’s dictum:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
At the Adam Smith Institute blog, there is a great post by gent by the name of Guy Bentley. Bentley concludes:
It is a fallacy to believe that the government can allocate resources effectively to meet future economic needs, instead of entrepreneurs. What advocates of state infrastructure spending fail to grasp is that government cannot suddenly acquire the knowledge as to which parts of the UK’s infrastructure either needs repair, replacement or, indeed, which new projects should be undertaken. The economy is dynamic and never static. The government cannot predict what it will look like in 30 years time, whether there will be an increase of manufacturing jobs in the northeast or high tech in the midlands. This is simply not possible to anticipate into the next twenty or thirty years.
The argument commonly made for infrastructure spending is that it will have a kind of Keynesian multiplier effect. Private construction firms will be employed, idle resources will be put to use and money will start to circulate through the economy as people spend their newly earned wages. But this, again, is untrue. Government infrastructure drains the economy of resources and, even in the short term, stops resources from being used elsewhere. These decisions are difficult even for the private sector, which relies on price signals. Sometimes the private sector fails, sometimes it succeeds, but because it is the investor’s money that is on the line it has a reason to act rationally. Government lacks the information to act wisely, and the incentives to act prudently.
In Japan, large government infrastructure projects have failed to lift the country out if its low growth high debt slump. In the UK, many cities have built tramlines, which have almost universally turned out to be loss makers and failed to promote growth.
The Keynesian fallacy is that even if they can create economic activity in the short run and based on Keynes definition of “economic activity”, they can – but the money that is used for stimuli must be subtracted from the economy in the form of borrowing or taxes. The fact is that government has no money but that which it first takes from the actual transactions of commerce. People can say that it can borrow, but when it does, it just creates a delayed liability that remains to be paid from the exact same sources – taxpayers. Government debt is just delayed confiscation – kicking the can down the road in hopes that the economy will be better when the bill comes due. They can also inflate the money supply by printing more fiat money but in real terms, that is an inflationary policy that devalues the currency.
How much better is it for you to have two dollars in your hand today if it buys what one dollar did yesterday? You are no better off in real terms.
Do you know what the number one cause of business failure is in America? It isn’t lack of sales or profits – it is lack of cash flow. Not enough money flowing through the business to pay the bills as they come due…it is the same for government.
Keynesian economics counts on creating enough cash flow to outrun the debt load…and with our staggering debt and currency devaluation, it is impossible to run that fast.
The Keynesian approach to economic stimulus of Obamanomics is like having your chronically unemployed brother-in-law and his family move into your basement, eat your food, watch your TV and use your credit card to buy stuff for themselves. Doing so they create “economic activity” but at the end of the month, you are still the one who gets the bill, not them.