Economic prejudices

A week or so ago I gave a presentation about the economic and non‑economic implications of public sector growth to the University of the Third Age ‘campus’ in Melbourne CBD.

I outlined aspects of the nature and origin of the state, provided a historical and statistical account of Australian public sector growth, discussed the economic, social and political consequences of larger government, and sketched the outlines of a ‘new constitution of liberty’ inspired primarily by the classical liberal public policy agenda suggested by American economist Peter Boettke.

The presentation went down quite well, I must say, with much positive feedback received from an attentive and enthusiastic audience. However there was one strand of criticism concerning my presentation, as expressed by two attendees, relating to my characterisation of the economic effects of policies pursued during the Great Depression.

Drawing upon the work of Catallaxy’s own Sinclair Davidson, I stated that Australia pursued under the Depression‑era Premiers’ Plan policies to reduce burdens upon the private sector. These included agreed expenditure reductions by the commonwealth and the states across most aspects of governmental activity, wage reductions, interest rate reductions, and depreciation of the fixed exchange rate.

By contrast the United States under Franklin Delano Roosevelt pursued an economically interventionist cocktail of increasing public sector expenditure, rising taxation and additional regulation, as described in great detail in Amity Shlaes’ The Forgotten Man: A New History of the Great Depression.

I stated that the economic results of these contrasting policy dispositions could be seen in the varying economic growth and unemployment trajectories of the two countries during the 1930s. I referred to statistical information contained in this paper co‑authored by Davidson and myself.

During question time after my presentation, one of the attendees put to me her criticism of my statement in the following terms: ‘my father told me how life was tough for so many years after the Great Depression, and it was only World War II which helped us recover.’

While I stated that the lived experiences of individuals necessarily vary during any given period of time, the most authoritative compilation of long run aggregate macroeconomic statistics illustrated that the level of output per person in Australia returned to pre‑Depression levels more quickly than it had in the United States. Similar trends were evidenced with regard to the unemployment rate.

As for the ‘war stimulus’ line I couldn’t help but apply Frederic Bastiat’s famed ‘broken windows’ proposition. I posed the argument that if World War II was indeed pivotal to restoring levels of economic activity to their previous glory then the answer to today’s post‑GFC stagnation is to wage another war on a similar scale to the 1939‑1945 campaign of destruction.

With regard to the World War II period itself, it should be noted that the size and scale of Australian governments reached an extent perhaps not unlike that experienced during the same period within the Soviet Union. Not only were controls on the allocation of labour and capital imposed severely constraining the domain of free enterprise, but individual consumption choices were politically overthrown in efforts to maintain the war effort:

You could not walk in and buy a chocolate. Just occasionally the grocer might furtively slip one small block (wrapped, but without any foil) into the bottom of a customer’s basket. The smoker was lucky to get his smokes, and often he went short. There were queues for beer. A whole day’s ration of butter was only about the size of a large tube of lipstick. Vegemite and marmite were early wartime casualties. In their place we were offered a sticky yellow muck in a blue tin, with salty crystals of preservative thick in the bottom. It was called Globex, and I am sure that it was made in Japan for the demoralization of Australians…[C]lothes buying [was] restricted by the coupon system…When we got a shirt it was a ‘Dedman’ – a shirt with no tail to speak of, bobbed like a Manx cat by order of the Hon. J J Dedman…To combat the petrol shortage, the comparatively few cars on the road were usually fitted with charcoal-burning gas-producers. These were Heath-Robinson contraptions, something like galvanized garbage cans…Car headlights were painted blue, leaving only a narrow slit clear. Street lights were out. Every window had blackout curtains. (website link to quote here)

The following chart shows selected types of investment expenditures as a proportion of GDP in Australia during the twentieth century (sources: Noel Butlin and ABS; the gap in the chart represents a structural break). The statistical evidence appears to suggest that during World War II private non‑dwelling investment expenditures dropped quite significantly as capital became subordinated to Australia’s war efforts in the Asia‑Pacific, Africa and Europe.

It was only after the war, and the removal of the communistic ‘octopus of control’ branching out over most aspects of Australian life, that private investments and value‑adding economic activity recovered thus contributing to the so‑called ‘golden age’ of prosperity during the 1950s and 1960s.

Upon later reflection I realised that the statement put to me at the U3A seminar about what ‘my father told me’ was, in fact, the first type of general prejudice identified by the French classical liberal economist Yves Guyot in his terribly neglected book of 1910 entitled Economic Prejudices:

Etymologically speaking the word “prejudice” from the Latin prefix prae and the verb judicare, means: a judging beforehand. The Dictionary of the Academy defines it: a generally erroneous opinion, adopted without examination. … Errors may be classified according to … six categories … They include: 1. Prejudices that rest upon the positive opinion of our forefathers: ‘As our fathers said! …’

As Guyot recognised in his time, and as economists such as Bryan Caplan and Donald Boudreaux recognise today, adults are armed to the teeth with preconceived, but typically erroneous, notions and beliefs about how economies operate, appropriate roles (if any) for government in the economy, and descriptions of pivotal events in economic history. Deep‑seated, but mistaken, ideas about economics subscribed to by adults are certainly more difficult to dispel when they are transmitted through stories uttered in childhood and adolescence by family elders who, as one could be prone to say, are always right even when they’re wrong!

Regardless of the imposing practical hurdles associated with countering economic wrongheadedness wherever it might be found, it is precisely this humbling yet vital task to which classical liberals must invest a considerable portion of their time and energy.

Classical liberals may not always succeed in enlightening prevailing public opinions concerning economic history, theory and policy, especially when questions of vested interests come into play, but to relent in our economic education efforts would be nothing short of a reckless dereliction in our intellectual responsibilities to further the cause of liberty.