Larry Kudlow’s favourite liberal economist Robert Reich appeared on CNBC, defending the Obama budget and the gigantic debt we’re building up (video below).
His argument: There’s simply no other way to get the economy going again than for the government to fill in the lost private demand. In other words, since consumers and businesses have stopped spending, the government has to step in, even if it means debt as far as they eye can see.
The problem with this kind of thinking, that it’s all about replacing lost demand, is that it’s a grotesque oversimplification of what an economy is. The economy isn’t just a simple formula that has DEMAND on one end and GROWTH and JOBS coming out.
Robert Higgs at the Independence Institute busted this idea in a recent article. The whole thing is worth a read, but here’s the nut:
This way of compressing diverse, economy-wide transactions into single variables has the effect of suppressing recognition of the complex relationships and differences within each of the aggregates. Thus, in this framework, the effect of adding a million dollars of investment spending for teddy-bear inventories is the same as the effect of adding a million dollars of investment spending for digging a new copper mine. Likewise, the effect of adding a million dollars of consumption spending for movie tickets is the same as the effect of adding a million dollars of consumption spending for gasoline. Likewise, the effect of adding a million dollars of government spending for children’s inoculations against polio is the same as the effect of adding a million dollars of government spending for 7.62 mm ammunition. It does not take much thought to conceive of ways in which suppression of the differences within each of the aggregates might cause our thinking about the economy to go seriously awry.
In fact, “the economy” does not produce an undifferentiated mass we call “output.” Instead, the millions of producers who bring forth “aggregate supply” provide an almost infinite variety of specific goods and services that differ in countless ways. Moreover, an immense amount of what goes on in a market economy consists of dealings among producers who supply no “final” goods and services at all, but instead supply raw materials, components, intermediate products, and services to one another. Because these producers are connected in an intricate pattern of relations, which must assume certain proportions if the entire arrangement is to work effectively, critical consequences turn on what in particular gets produced, when, where, and how.
These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. Moreover, when we speak of “economic action,” we are referring to the choices that millions of diverse participants make in selecting one course of action and setting aside a possible alternative. Without choice, constrained by scarcity, no true economic action takes place. Thus, vulgar Keynesianism, which purports to be an economic model or at least a coherent framework of economic analysis, actually excludes the very possibility of genuine economic action, substituting for it a simple, mechanical conception, the intellectual equivalent of a baby toy.
In the end, it’s not spending or supply or demand or jobs that define a healthy economy. It’s the ability for humans in this complex human network to work together to create value that defines health. No amount of spending or “priming the pump” will do the trick if the network is broken.
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