Anyone who supports a public works program because it will create jobs knows nothing about how an economy works

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.

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20 Responses to Anyone who supports a public works program because it will create jobs knows nothing about how an economy works

  1. Albatross

    “Pure fallacy from beginning to end.”

  2. Roger

    Meanwhile, in QLD, we’ve just had a doctor of Unionism – deputy premier Steven Miles – named minister for state development, infrastructure, local government and planning. It’s a safe bet that removal of red and green tape in the business and development sectors won’t be on his agenda.

    He’s also on public record as opposing new coal mines.

    Meet the new Deputy Premier; same as the old Deputy Premier.

  3. duncanm

    Per Bylund’s article at Mises

    thanks for the link Steve. He explains it much more succinctly than many.

    The nub.

    But if the entrepreneur fails, which means there is not sufficient demand to generate revenue to cover the costs, the enterprise still employed workers. Granted, if the entrepreneur does not believe the situation will change, those workers may lose their jobs. But the point is that the jobs are created whether or not there is spending (ed. consumption).

  4. Petros

    Would there not be follow on benefits from some public infrastructure spending? E.g. an Autobahn between Cairns and Townsville could increase tourism to FNQ.

  5. RobK

    That Milton Freedman clip lifted my day, thanks .

  6. John A

    Petros #3659891, posted on November 15, 2020, at 12:58 pm

    Would there not be follow on benefits from some public infrastructure spending? E.g. an Autobahn between Cairns and Townsville could increase tourism to FNQ.

    It could, as long as the alternative was less efficient (making it more difficult to get there) AND if there was sufficient pre-existing demand for travel to FNQ.

    If the demand for travel did not exist, the building of an autobahn would not change that reality.

  7. max

    The Vic govt this morning has announced a billion dollars to be spent on a social housing program and is selling it as creating jobs. But really it is to stop the flight of the tradies. Like the flight of the wild geese.

  8. Roger

    The Vic govt this morning has announced a billion dollars to be spent on a social housing program…

    Will it be as successful as Kiwibuild?

  9. max

    We need many more autobahns. With appropriate speed monitors and cameras every k they are an efficient way to fleece the public.

  10. gafa

    Will it be as successful as Kiwibuild?

    When it’s “government” money isn’t success measured by how many cronies get to line their corrupt pockets and with how much [?]

  11. Siltstone

    Lots of mobile speed camera’s out in Qld since the election, ALP desperate to raise money. Always placed at very safe segments of highway, never at black spots.

  12. Paul

    as a consequence, more people are able to get jobs, earn a wage

    important is creating an environment where more industry/jobs, opportunites are also created, that is wealth creating industries and jobs, and this can only happen where energy costs are cheap, i.e. not prohibitive to industry competitiveness and thus creating jobs

    it should be organic economic growth, this is counter to the lefty group think of no more capitalist growth

    This is the only way to overcome this massive debt, not by the lefts method of increasing taxation to what would be crippling levels, subject the middle class to poverty and welfare dependency

  13. Boxcar

    The economics are simple.
    Tollway building, for example, is apparently good for votes.
    That checks to “Public works are Good” box.
    Dan borrows $5.3 Billions from China.
    Dan signs contracts for $7.0 billion with, say, John Holland., etc, but you get my drift.
    Holland subcontracts materials to Chinese manufacturer, or if all else fails to Australia manufacturer owned by Chinese.
    457 Visa workers complete construction with supervision by CF FU ME, and Worksafe criminal monopoly.
    Dan saves the day by using our money to cover $2 Billion cost overrun
    Dan extends completion date to furthest from election year.

    So Victoria has a $10,000,000,000, that’s a 10 billion dollar, debt, with sfa value added to the state economy, with tolls and speed cameras to pay for it.
    The few Australian Public works of any value would probably be the Snowy, Sydney Harbour bridge, Westgate Bridge, Murrumbidgee irrigation, and a few more, but they were nation building.
    And that is the fundamental and only justification for public works.

  14. Trax

    It all boils down to one question: should you produce first and more than you consume or consume first and more than you produce.
    Keynesian economics assumes you should first consume more than you produce and magically the production will catch up despite the inverted incentives and the reduction in investment and outsourcing of production (overseas).
    Say’s Law rightly assumes you must produce first and more before you can consume what is produced which allows for reinvestment and a degree of waste (eg. government).

  15. Herodotus

    Intertstate highways, rail, dams and Snowy Hydro back in the 1950s/1960s, completing with the Murray stations late 60s.
    Private enterprise wouldn’t have done it.

  16. Herodotus

    Wait a minute. Aren’t those things I mention above more like “supply side” than tawdry consumption boosters?

  17. H B Bear

    Such low quality thinking it could easily come from Gittens or Our Jessica.

  18. H B Bear

    The Vic govt this morning has announced a billion dollars to be spent on a social housing program

    To be clipped by the CFMMEU before being handed over to the drug addicts, mentally ill, natives and muzzies to be destroyed and rebuilt. Keynes would approve.

  19. RobK

    John Holland subcontracts materials to Chinese manufacturer, or …
    John Holland is now Chinese owned.

  20. Nicholas (Unlicensed Joker) Gray

    A great slogan for a t-shirt. “Tell Keynes to go to Hayek!”

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