by James
E. Miller
In a recent New York Times column, economist Paul Krugman once again took to chastising
a claim he has infamously dubbed the
“confidence fairy.” According to the Nobel laureate, the “confidence
fairy” is the erroneous belief that ambiguity over future government regulation
and taxation plays a significant role in how investors choose to put capital to
work. To Krugman, the anemic economic
recovery in the United States shouldn’t be blamed on this “uncertainty” but rather a “lack of demand for the things workers produce.” Being the most prominent mouthpiece
for Keynesian economic policy in modern times, the Princeton professor
represents the school’s circular thinking very well. Keynes and his
followers saw most economic slumps as being the result of insufficient
spending. A slowdown in spending means the
animal spirits aren’t so aggressive in their lust for immediate consumables.
As a thinker, Keynes
viewed a preference for saving over spending as ignorant and asinine.
In his essay “Economic Possibilities for our Grand Children,” he belittled the “purposiveness” of
misers who are forever looking toward the future instead of relishing in the
present. The man who behaves with a purpose is “always trying to secure a
spurious and delusive immortality” while depriving those around him of his
wealth. This is the heart of Keynesianism. Saving is seen as a
necessary evil while instant gratification is looked down upon as morally
repugnant. Keynes was a hater of
bourgeoisie prudence throughout his professional career. It is likely
that this antagonism played a role in the development of his theories on
economics.
But even assuming
that Keynes took the value-free, deductive approach to economic science, the view
of spending as the driving force of improved living standards is still horribly
inaccurate. Human beings possess infinite wants.
So, in a sense, there is never a true lack of demand; just the resources to
fulfill desire. And these resources are not something to conjure up out
of thin air. They must first be produced. As Henry Hazlitt
explains,
…demand and supply
are merely two sides of the same coin. They are the same thing looked at from
different directions. Supply creates demand because at bottom it is demand.
Goods
and services are what ultimately enhance human life. Without them, man would still
be relegated to live as a nomad desperately seeking out food each and every
day. It is through producing, saving, and investing that the eternal
scarcity of the world becomes increasingly manageable. In other words,
the act of producing more than is immediately consumed is what saves humanity
from a hand-to-mouth existence. This improved material well-being can
then lend itself to further spiritual pursuits. Murray Rothbard
recognized the necessity of available resources for less-material purposes when he wrote:
All great works of
art, great emanations of the human spirit, have had to employ material objects:
whether they be canvasses, brushes and paint, paper and musical instruments, or
building blocks and raw materials for churches. There is no real rift between
the “spiritual” and the “material” and hence any despotism over and crippling
of the material will cripple the spiritual as well.
As a
species, we are forever trying to achieve a happiness dictated solely by our
own individual valuations. This requires labor and production in
order to meet whatever ends are sought. With this truth in mind, it
becomes clear that economies don’t necessarily suffer from an absence of demand
but really a lack of investment or production. Since there are always needs
to be fulfill, an uninhibited market economy would never undergo a period of
long-term unemployment. There would be capital to be worked and put into
use. So what then causes entrepreneurs and capitalists to withhold
investment?
In a landmark
article in The Independent Review, economic historian
Robert Higgs presented evidence that the Great Depression was not prolonged
by a slack in demand but rather the unprecedented intervention into private
life by the Roosevelt regime. Titled “Regime Uncertainty: Why the Great Depression Lasted So
Long and Why Prosperity Resumed after the War,” Higgs summarizes his position:
First, the Great
Depression was not just another economic slump. In depth and duration it stands
far apart from the next most severe depression in U.S. history, that of the
1890s. We are talking about history, not physics; unique events may have unique
causes. Second, the hypothesis about regime uncertainty makes perfectly good
economic sense. Nothing in the logic of the explanation warrants its dismissal
or disparagement. Third, given the unparalleled outpouring of
business-threatening laws, regulations, and court decisions, the oft-stated
hostility of President Roosevelt and his lieutenants toward investors as a
class, and the character of the antibusiness zealots who composed the
strategists and administrators of the New Deal from 1935 t o 1941, the
political climate could hardly have failed to discourage some investors from making
fresh long-term commitments. Fourth, there exists a great deal of direct
evidence that investors did feel extraordinarily uncertain about the future of
the property-rights regime between 1935 and 1941. Historians have recorded
countless statements by contemporaries to that effect; and the poll data
presented earlier confirm that in the years just before the war most business
executives expected substantial attenuations of private property rights ranging
up to “complete economic dictatorship.” Fifth, investors’ behavior in the bond
market attests in a striking way that their confidence in the longer-term
future took a beating that corresponds exactly with the Second New Deal.
Much like the Great
Depression, there is evidence abound to support the notion that regulatory
uncertainty is presently withholding the private investment that is the true
source of economic growth.
The newly released mid-year economic report from the National Small Business Association shows that 34% of
small-business owners are expecting a sluggish economy on the horizon while 68%
of respondents cited economic uncertainty as the biggest “challenge” to future
productivity. In the September 2012 Small Business Optimism Survey released
by the National Federation of Independent Business, the results showed a new
record of 22% of respondents who view political uncertainty as a leading cause
of their reluctance to expand. Higgs himself points out in
a recent blog post that real private fixed investment has yet to surpass its
lowest point during the bust of the dot-com bubble.
Historically,
economic downturns have been met with upswings that matched in terms of intensity. But at no other time since the
Great Depression has the recovery been as weak as it is now. The
explanation lies in the fact that something is causing investors to keep money
on the sidelines rather than risk putting it towards satisfying the limitless
wants of consumers. Empirical evidence and logic would suggest that it is
the current atmosphere of tentative political measures that is frightening
capitalists whose job it is to create wealth. From
the unknown consequences of the Affordable Care Act and the Dodd-Frank
financial regulatory bill to the expiration of the Bush-era tax cuts at the end
of 2012, it is unclear as to the amount of income businessmen will be allowed
to keep in the near future. As economist John B. Taylor shows, the amount of federal government workers engaged in
regulatory activity has taken off since 2008.
Likewise, the
number of expiring tax provisions has also increased substantially over the
past four years.
The
theory which puts a lack of aggregate demand as being the cause of economic
recessions has the issue backwards. Demand
by itself doesn’t add to the stock of goods in society; only production
does. Because economic theory deals with the interactions of mankind it
needs to be applicable to all times and places. On a desert island, only
a true charlatan would insist that a “lack of demand” is holding the primitive
economy back from its full potential. Desert islands are no different
from today’s economy; both are still dominated by scarcity. If the world
economy is ever going to recover, the obstacles put in business’s place have to
be lifted to make way for investment in real, tangible goods and
services. Consumption will come after.
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