There is this grand distinction between an individual borrower and a borrowing government, that, in general, the former borrows capital for the purpose of beneficial employment, the latter for the purpose of barren consumption and expenditure.— J. B. Say
If there is anything that exposes both economists and politicians as economic illiterates it is where they argue that public sector spending creates jobs as if jobs would not naturally be created if things were left to the market. This is the great Keynesian lie. Job creation programs have never on any occasion created a net increase in jobs, not once, not ever. Instead, many such “job creation programs” have led to less employment and fewer jobs than would otherwise have naturally occurred. The stimulus programs across the world that followed the Global Financial Crisis are a vivid case in point.
Keeping this in mind will prevent you from falling into the Keynesian trap which has infused the whole of mainstream economics. Keep an ear open for carriers of this disease since it is everywhere and on all sides of politics. No one any longer knows any better. Let me go through two recent publications, one an article based on a book I have just had published, and the other an article by Per Bylund at the Mises Institute.
First my own which is mostly, but not entirely a reprint of the first third of the book’s opening chapter. The book is Classical Economic Theory and the Modern Economy and the article at Quadrant is titled, What Classical Economists Knew that Modern Economists Do Not. The book is about a lot more than just what’s wrong with modern macro, but that is a substantial part of it.
The article at Quadrant is taken from the opening chapter of the book where I try to explain why anyone should pay attention to what I have written since it really is odd to be arguing that the whole of economic theory is utterly wrong, but that is what I have done. I describe how I came upon John Stuart Mill and the economics of mid-nineteenth century England, how I discovered “Say’s Law” for myself, how because of the work I was doing at the time that I had instantly understood the point Mill and his contemporaries had been making, and how thereafter, in every test of the classics versus the moderns, that classical economics would unfailing forecast what would happen while modern macro would not.
Why anyone should believe that public spending at the direction of political leaders will automatically create value and growth is one of those things that has entered into how economics is taught. The more you think about it, the more incredible the idea ought to be, but onwards it goes. Here again, as inane as Keynesian theory is, the science has long been settled. I recommend the article, and the book, if you would like to see the antidote to the economics version of global warming. Keynesian theory as it has developed allows massive misdirection of our resource base and productivity, but trillions of dollars are made by various government contractors through the application of Keynesian policies because everyone believes it and all economists are taught it. If you read what I wrote, you will merely have the satisfaction of understanding how your pockets are relentlessly picked by governments. Nothing can ever be done about, I suspect, but you will at least understand what is going on.
Per Bylund’s article at Mises is titled, More Spending Does Not Drive More Employment which is more direct but reaches the same conclusion. Here is what he is denying:
It is almost universally asserted today that consumer spending drives employment. This thesis gives support to the general Keynesian idea that government should “stimulate” the economy when it is suffering from a recession, whether it is through fiscal or monetary policy.
At the core, the idea is that if spending on goods and services goes up, then more people are needed in their production. And, as a consequence, more people are able to get jobs, earn a wage, and thus buy goods and services. In other words, it doesn’t matter if government wastefully increases spending — even if it is borrowed money — because the economic wheels start turning and as growth picks up we’ll be able to deal with debt, deficits, and so on.
He absolutely gets the point. Read his entire article. Again, the value in reading what he wrote is merely to understand the world in which you live. Nothing can be done – it all sounds so plausible – but there is some satisfaction in understanding what is being done. Not necessarily a lot of satisfaction, but at least some.