Economics of illusion

This is by Peter Boettke: “How the Culture of Government Spending and the Economics of Illusion are Destroying Free Market Capitalism”, as opposed to other forms of capitalism such as state capitalism or crony capitalism. It is the free market version that is under threat, the one that actually creates growth and prosperity.

Keynesian theory tells governments which are addicted to spending that spending is good, and consumers who are anyway reluctant to save that saving is a bad thing. We now have a “fiscal commons” where the institutional structure is designed to expansionary governments. Since 1950, private real spending has grown by a factor of five, but over that same period government spending has grown by a factor of 13!

We have failed to deal properly with recessionary times by allowing adjustment. Instead we have continuously re-inflated bubbles – the economics of illusion. Governments must start doing less. Must depend on self-governance and most importantly, we much find institutional constraints on the natural proclivities of governments.

Discussant comments The problem, it is being argued, goes well beyond economic policy to the very socialist presuppositions that now exist across the board in Europe.

Peter replies that there is a rich literature on these issues. However, the subcontext in his presentation is not just a critique of Keynes. There is nothing, for example, in the way the logic of Keynesian economics is often presented that is fundamentally false. Need to divide governments into trustworthy and untrustworthy on one side with passive versus strategic citizens on the other. Trustworthy governments with passive citizens could possibly work. Untrustworthy governments plus strategic citizens is a very bad combination but that’s what we have. Challenge is to get social values in line with the needs of a limited government.

My own question was about the prevalence of Y=C+I+G+X-M. Whatever the presuppositions may be, if you overlay these with this fundamental Keynesian equation, the result will be higher public spending on a continuous basis to maintain growth and employment. Certainty of market failure is the very essence of the Keynesian message. How are we going to finally get rid of this equation, because if we don’t the problem will never go away since it is always there in the political arsenal for dealing with recession.

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10 Responses to Economics of illusion

  1. stackja says:

    Voters have to say no more.

  2. hammygar says:

    It is the free market version that is under threat, the one that actually creates growth and prosperity.

    This is stated as if it’s something “bad”. In fact if it’s really true it’s an extremely healthy development. So-called growth and so-called prosperity is exactly what’s killing this planet. By the time my grandchildren reach my age the earth will have been destroyed if we don’t drasically change our ways. We are heading for a major disaster.

  3. Ralph says:

    G’day,

    Hammygar if you really believe such nonsense I suggest you change your ways. Log off the internet, unplug the computer, turn off your electricity and reverse your personal prosperity. Get rid of your current home and step back into a medieval hut. That would be a good start.

    ta

    Ralph

  4. Twodogs says:

    So socialist misallocation, waste and inefficiency is good, while efficient use of resources is bad, and you’re saying we are destroying the planet?

    Whaddya mean “we”, white man?

    Prosperity doesn’t equate to growth, dumbarse, it equally applies to producing the same with less. Short of going back to caves, we are going to have to adapt to conditions or perish. Statistically insignificant temperature change mitigation at $trillions ain’t gunna save jack shit except generous politicians remuneration and pensions, and the usual bullshit utopian fantasy.

    Apologies for the rudeness, but it’s late, and you sound suspiciously like a troll.

  5. Poor Old Rafe says:

    It is surprising that the free enterprise groups have not been systematically monitoring (and complaining about) the content of high school courses, especially in economics, history and social studies. There was a start on the process for economics at the CIS in 1990 but I am not aware that it has been repeated or extended. Given the spread of non-Labor governments around the nation the time is ripe for serious improvements in school courses, especially vis a vis Keynesian economics and also limited government as the appropriate form of democracy.

  6. dd says:

    It is surprising that the free enterprise groups have not been systematically monitoring (and complaining about) the content of high school courses, especially in economics, history and social studies.

    there seems to be a blind spot when it comes to anything to do with families and kids. They’ve taken a long time to figure out the mess that child care is in, too. (although that seems to be now on everyone’s radar). And there are other examples.

  7. Token says:

    Keynesian theory tells governments which are addicted to spending that spending is good, and consumers who are anyway reluctant to save that saving is a bad thing. We now have a “fiscal commons” where the institutional structure is designed to expansionary governments. Since 1950, private real spending has grown by a factor of five, but over that same period government spending has grown by a factor of 13!

    What I hear Boattke telling us is the reality of democracy is the Left (with Keynesianism as the vehicle) has been very effective in using emotive language to motivate the voters to vote for their short term interests at the cost of the long term.

    (You may object to that thesis).

    Using that technique they manuever into power and rapidly consume the resources of society to sate the emotive electorate.

    Doesn’t that fit within the paradigm of economics, people want money in the short term and demand a premium in the long term?

    It seems the only way to fight the Left and its campaigns manipulating the base instincts of people is upon strong values (which campaigns like gay marriage are designed to disrupt).

    There is an element of that in the Australian & US electorates (and I think Nordic/Germanic nations) with their natural distrust of too much debt which strangely seems to be missing in other European and Japanese democracies.

  8. DLT says:

    Y=C+I+G+X-M implicitly assumes G is limited by the level of taxation.

    In a world where G can be artificially increased by the issuance of government debt, of course the theory falls over as the underlying assumption (G limited by taxes) is no longer true.

    “aha!” I hear you triumphantly retort, “but government bonds need to be paid off!”

    – Yes, this is true – but debts only need to be repaid in “the long run”. And a number of the world’s capitalist governments have shown a painful awareness of exactly what Keynes said about “the long run”…

  9. MickRWC says:

    The public needs to be educated and we are educated at school, uni and the media. All three are strong-holds of the left. Throw in unions who hold productivity and job creation to ransome and it’s a four card fush. We need to combat all four through continued conservative policies.

    The family is being attacked from the inside out with all this progressive rubbish. A return to some conservativism through the church would also be beneficial. It’s one of the few remaining bastions of conservative thought on the planet. We have strayed from conservatism as well as right wing free market capitalism.
    Good right-wing think-tank research papers will lead the way and provide the empirical support for conservative state & federal gov’ts to bring in a paradigm shift in education, IR and social policy. Finding a trail-blazer like Newman in Qld will help if he can prove his policies work. He may need a lesson or two on bringing the public with him. Perhaps Howard and Costello may have some hard fought lessons on what to and what not to do!

  10. MickRWC says:

    Greece was a missed opportunity for some good ole fashion market based ecomomics; however they did vote for the soft option as this article suggests people will want to do.

    Qn. What would work to bring Greece back from debt to prosperity?

    Pure Right-Wing conservative free-market based policies. Minimise govt, eliminate union pattern bargaining and minimum wage conditions. Allow wages to dip with the economic cycle. Eliminate business red-tape and regressive taxes. Minimise business taxation. With negligible business bureaucracy and red tape, lower wages, lower business tax all to encourage EU investment in Greece.

    With business allowed to flourish, jobs will come in no time, even if at lower wages than before. With restraint on unionism and pattern bargaining there can be wage restraint creating productivity. With wage growth kept in check behind productivity, prosperity will follow. It will take a long time to repay debt though.

    Problem – how to get people to vote for restraint? Let Greece fail. Stop bailing them out. Force them out of the EU and back to the dracma. When they are on their knees, maybe then they will see some sense. Or maybe not. But continued socialist welfare sure is not the answer.

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