An article by John Papola – you know, the chap who did the Macro Follies video and the Keynes-Hayek Rap – on the impossibility of consuming one’s way to prosperity. He has taken Say’s Law to places it has never been before, in this case into the PBS News Hour in the US. Many great observations but I will restrict myself to this:
As John Stuart Mill put it two centuries ago, ‘the demand for commodities is not the demand for labor.’ Consumer demand does not necessarily translate into increased employment. That’s because ‘consumers’ don’t employ people. Businesses do.
Since new hires are a risky and costly investment with unknown future returns, employers must rely on their expectations about the future and weigh those decisions very carefully. Economic historian Robert Higgs’ pioneering work on the Great Depression suggests that increased uncertainty can depress job growth even in the face of booming consumption. Consumer demand that appears to be driven by temporary or unsustainable policies is unlikely to induce businesses to hire.
Increased investment drives economic growth, while retrenched investment leads to recession and reduced employment — and it always has. John Maynard Keynes, like most business cycle theorists before him and since, paid particular attention to this boom and bust in investment, blaming volatility on the ‘animal spirits’ of businessmen. This observation about the importance of ‘confidence’ is surely true, if somewhat obvious.
Unfortunately, Keynes and his successors focus on aggregate levels of spending and often explicitly disregard the details of how money is spent and resources are employed. This led him and the profession down a dark road to the defunct underconsumptionist ideas of the early 1800s which haunt us to this day. Keynes repeatedly asserts throughout his famous tome, The General Theory, that even wasteful expenditures could increase the wealth of society.
Is it any wonder that so many of our policies are focused on consuming and sometimes even destroying wealth rather than creating it?
Do you ever wonder whether the mainstream economic establishment will ever begin to wonder whether this theory they have been peddling for three quarters of a century may be wrong?