DEBUNKING ECONOMIC MYTHOLOGY – PART 4
My colleague Steven Spencer has reminded me of an anecdote relayed by the owner of a brand new Corvette sports car.
A bystander speculated: “I wonder how many people could have been fed with the money that sports car cost?”
The owner replied: “ I really don’t know the answer to that one. But what I do know is that it actually did feed many families in Bowling Green, Kentucky, where it was built. It also fed the people who make the tires; it fed people who make all the components that go into it, as well as those who mined the copper for the wires, not to mention feeding the people at Caterpillar in Decatur, Ill., where they make the vehicles that haul the copper ore. It fed the truckers who conveyed the car from the plant to the dealer, and fed the people working at the dealership, and their families.
“So, I admit, I really don’t know how many people could have been fed with the money I paid for that car. But it does tell me what happens at the point where economics and human nature meet: when you buy something, you put money in people’s pockets, reward their skills and give them dignity. This occurs quite naturally when you freely give your money in exchange for something you value. And it is certainly preferable to depriving able-bodied people of their dignity and self-worth by giving them something for nothing.”
A telling exchange, no doubt. The Corvette owner was clearly no mean economist!
What is seen, and what is not seen
This story contains the essence of a rarely acknowledged economic phenomenon: that which is seen, and that which is not seen. What the cynical bystander sees is a gleaming new Chevrolet Corvette sports car, and his mechanical mental reaction about feeding families betrays the scope of his myopic vision.
Vast possibilities of the unseen
The owner’s reply, however, had the potential to alert him to the vast possibilities of the unseen, and the 19th Century French economist Frederic Bastiat wrote brilliantly on the importance of this distinction.
Bastiat tells of a shopkeeper whose son accidently smashes a neighbour’s windowpane, and the shopkeeper must pay for its replacement. Witnesses console the shopkeeper by pointing out that if windows were never broken glaziers would soon go out of business. This observation belongs, of course, to the world of the “seen”.
Reasoning in the world of the “seen” tells us that breaking windows is ultimately a good thing. After all, it brings profitable work in its train, creates jobs and causes money to circulate.
[Some might even argue that this is a positive instance of “creative destruction”. But they would be quite wrong. The economic phenomenon of creative destruction arises when traditional methods of production are superseded by processes that are measurably more efficient or cost-effective in their use of the factors of production, and often entail job losses. The breaking of windows in this example is not, in any sense, creative.]
But the above reasoning, based on what is “seen”, is defective because it takes no account of the many “unseen” alternative uses to which the shopkeeper may have preferred to put his money. For the shopkeeper, spending his money on a replacement window was a waste of resources. Given the option, he would have had any number of preferred expenditures, possibly involving new products that would add more value. But because those options are unseen, we cannot even begin to know what any of those more productive outlays would have yielded.
You cannot vandalise your way to prosperity
Can politicians “create” jobs?
This story is worth remembering whenever you hear politicians boasting that their policies would “create jobs” (which you will hear them doing virtually every day!) This populist drivel is a short, but logical, step from the idea of paying boys to smash windows, as if we could vandalise our way to prosperity and growth. But our powers of reason tell us that Hurricane Florence did people on the East coast of North Carolina no favours in September this year, when it turned their homes into matchwood. It certainly didn’t provide a massive boost to the economy!
Yet the single word ”jobs” is the stock response when those of a certain political persuasion are quizzed about policy priorities that they would pursue should they find themselves in office. One of John Maynard Keynes’s most memorable suggestions was that “the government should pay people to dig holes in the ground, and then pay them to fill them up”. When others objected: “That’s stupid – why not pay people to build roads and schools?” Keynes tellingly replied, “Fine, pay them to build schools. The point is, it doesn’t matter what they do – as long as the government is creating jobs.”
Not a thought for whether it’s productive
Although this line of argument may strike you, as a reasonable human being, as completely nuts, you may be surprised to know that, even today, respected economists, including at least one Nobel prize-winner, assure us that destruction and useless employment can be positive. After all, reparation and reconstruction provide employment and, with it, demand – as if that were the be-all-and-end-all of economic considerations. Not a thought for whether any of that employment is productive in the sense of creating something that people would willingly pay for with their own money. Instead, the seen is prioritized over the unseen.
You have heard the catchphrases “demand management”, “command economy”, “managed economy”, and the like. These are serious contenders for policy options right now. They all mean the same thing: that more and more government intervention can somehow contrive to create jobs and feed us all – until the degree of intervention reaches its inexorable apogee: total and absolute control.
No wonder everyone was drunk
Our middle son witnessed the fruits of a managed economy at first hand while in Moscow with a friend in 1985. When shopping for food they would find that one week the shops were filled with carrots, the next week with potatoes, and so on. That was it – no choice, no competition, no variety. What a life – no wonder that most people staggered around in a state of perpetual drunkenness!
Nor do some politicians and economists confine the scope of their job-creation fantasies to the “positive” aspects of destruction and useless employment. They also favour construction as an important channel for spending public money, even when it involves dubious, uncosted infrastructure projects that cost millions even before leaving the drawing board. Their criteria would be utterly different if they were talking about their own money.
Not seen, is the money collected from taxpayers to pay for it. And not seen is how those citizens, left to exercise their own free will, would choose to spend their money.
Some government expenditure is no doubt of great value to the community – but since, by its nature, it cannot be subjected to objective economic calculation, its initial conception, and its progression towards eventual completion, is often haphazard and invariably involves huge waste. Nine out of every ten government-sponsored projects in the UK suffer cost overruns. Underestimating cost, and overestimating demand, blights the economics of infrastructure spending.
Yet again, that’s what you see
Few would deny that a modern, community-petitioned, facility that eases the plight of elderly, impoverished and disabled citizens is a worthwhile outcome. But for every such project you may have to suffer a fanciful mock Gothic clock tower on the embankment, or yet another local government-funded shopping mall dedicated to the worship of Mammon: amplifiers blaring mind-numbing “music”, cinema complexes, mobile phone upgrade centres, popcorn and burger stands, innumerable glitzy jewellery and fashion houses. Yet again, that’s what you see.
What is not seen is how the council got a hold on the community’s land in the first place. Think of all those ratepayers who paid for this project but never voted for it. Is that how they would have chosen to spend their money? Would they choose to pay for the inescapable corruption that accompanies so many grants of planning consent? We read about it day after day, until we become inured. We shrug… that’s the way of it. We have lost “sight” of the alternatives because they lie in the realm of the unseen, just as the online shopping facility was unseen – until it emptied all those ill-conceived malls that no one would have invested their own money to pay for.
The jobs fallacy
The fallacy underlying the whole charade begins with the belief that creating jobs creates demand – and that demand will, on its own, generate economic growth. However, that doesn’t happen, and it’s not how economic growth occurs anyway.
Remember: (i) it is in the nature of the human condition that there can never be a shortage of demand; but (ii) if it is not preceded by commercially evaluated production, demand on its own is completely useless because it can never be satisfied.
Next time you watch the news and witness the mass “caravan” of hordes fleeing North from corrupt Central American serfdoms ask yourself: “What are they really fleeing from?” What is seen is gang-controlled police brutality, pervasive political corruption, drug cartels, murder and mayhem. What is not seen is that it all began by swallowing the Marxist platitudes of power-crazy dictators, crying “jobs for all”!
Natural law dictates that this bogus economics must fail: it always has, and always will. But that doesn’t deter politicians from trying again, for that is the way of the world. George Santayana observed that those who fail to learn from history are doomed to repeat it.