Economics

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Why Government Stimulus Doesn’t Work

August 3, 2010 in Economics by Greg | 1 comment

The broken window fallacy helps explain the unintended consequences of government stimulus. In 1850, French political economist Frédéric Bastiat wrote about this misconception in an essay entitled Ce qu’on voit et ce qu’on ne voit pas or “That Which Is Seen, and That Which Is Not Seen.”¹ Below is a short video that explains this fallacy.

In 1946, noted economic journalist Henry Hazlitt wrote about the seeming “benefits” of this type of destruction:

So we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments’ thought. Yet the broken window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction.

Though some of them would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace.²

Some 64 years later, the illusion of the broken window continues to be used in government public relations.

Sources:

“The Broken Window”. Ludwig von Mises Institute. 2 Nov 2009.↩
Economics in One Lesson. New York: Pocket Books, 1952.↩

KSL’s Coverage of Bob Bennett and the Tea Party Movement

May 16, 2010 in Constitution by Greg | 17 comments

KSL’s recent coverage of the ouster of Senator Bob Bennett from the United States senate apparently as a result of the Tea Party’s activism appears superficial and is noteworthy for a number of reasons. For example, on Friday night editorial director Duane Cardall read the following statement:

Senator Bob Bennett has served the people of Utah well for nearly 18-years.

It’s unfortunate the general populace didn’t have opportunity to decide whether or not he should be retired at the end of his third term. Instead, his fate rested in the hands of a few thousand delegates at last weekend’s state GOP convention who seemed determined to defeat him, whatever the cost.

Senator Bennett certainly has solid conservative credentials, but also an understanding of the art of political compromise and the ability to work closely with those of all persuasions. It is a gift sorely lacking in today’s divisively toxic political climate. And, sadly it is an attribute that likely contributed to his defeat as anti-Washington fervor spreads across the nation.

KSL doesn’t endorse candidates, and our criticism of what happened last Saturday should not be construed necessarily as support for Senator Bennett’s re-election. Our concern is the way he was so unceremoniously, even boisterously defeated by a system that rewards extremist rhetoric more than rational dialogue. That this dedicated and capable public servant would be roundly booed, even vilified by resolution, speaks volumes about the tenuous nature of politics today.

For all he’s done for Utah, Bob Bennett deserved better.¹

While the editorial rightly pointed out the polarizing nature of political debate in a two-party system, it entirely missed the point that Utah citizens deserve more from its elected officials. Senator Bennett serves in the senate at the behest of the citizens of the state – not the other way around. Also, while political compromise may seem laudatory, at what point do the statist policies of an ever encroaching government end and personal responsibility and accountability stand firm?

State delegate Connor Boyack recently commented on the senator’s seeming lack of principle:

Bob Bennett and the Tea Party »»

“Senator Bennett”. 14 May 2010. KSL.com. 16 May 2010.↩

Keynes and Hayek Rap Video

January 27, 2010 in Economics by Greg | 1 comment

This is a great little rap video parody featuring the government intervention policies promoted by Lord John Maynard Keynes versus the free market policies advocated by Friedrich A. von Hayek and Austrian Economics.

Created by Russell Roberts, Professor of Economics at George Mason University, and John Papola, an Executive Producer/Director at SpikeTV, the video features Billy Scafuri as “Grand Master” Keynes and Adam Lustick as F. A. Hayek (Billy and Adam).

In order to put this into some context, according to one writer:

As Hayek has shown, economic crises of boom and bust are created by governments that expand credit through central banks, creating unsustainable bubbles that ultimately crash. Unfortunately, based on Keynes’s theories, governments have foolishly then further intervened with bailouts and “stimulus” spending measures of pork and war that only prolong the recovery (e.g., Great Depression as well as the current economic malaise).¹

Lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

Keynes and Hayek Rap Video »»

Theroux, David. “‘Fear the Boom and Bust’: Hayek vs. Keynes Rap Video. 26 Jan 2010. The Independent Institute. 27 Jan 2010.↩

Introduction to Socialism vs Capitalism

January 21, 2010 in Capitalism by Greg | 5 comments

Part 1 of 1 in the series Socialism vs Capitalism

While this blog was being formulated, there seemed to be little debate over which type of political economy should be dominant in the United States. In fact, the economic policies of the major political candidates at that time seemed to differ from each other only by degree in terms of government intervention in the economic affairs of citizens.¹ This eventually led to the series Notes on Socialism which explores that topic from a religious, social, economic and historical point of view.

Over time, however, it was pointed out that the U.S. economy had really undergone many changes and had passed through various stages of government intervention to what Charlotte Twight called a Participatory Fascism-type system. During this time, some have stumbled upon the site and wondered about the other side of the proverbial coin. For example, what, if anything, does capitalism have to offer?

This series of posts explores a similar set of issues related to capitalism. At first, it might not be apparent why there should be a series called Socialism vs. Capitalism. The question might be asked, Why not just discuss capitalism on its own terms? The short answer is that the term capitalist (Kapitalist) was popularized in the mid-19th century and was used frequently by Karl Marx and Friedrich Engels in some of their later writings.²

Over time, the term capitalist came to refer to someone with private ownership of capital and the means of production. Interestingly, some have noted that capitalism is really “a term of disparagement coined by socialists in the mid-nineteenth century, [and] is a misnomer for ‘economic individualism’, which Adam Smith earlier called ‘the obvious and simple system of natural liberty.’”³

From a Hegelian Dialectic point of view, capitalism is the thesis in which socialism is the antithesis. Based on this perspective, these two systems are at constant odds with each other and as proponents of each system seek preeminence, new syntheses⁴ are created as societies “supposedly” continue to evolve.

So it is within this dialectical context that both series – Notes on Socialism and Socialism vs. Capitalism – should be considered. Capitalism simply cannot be discussed without exploring socialism and vice versa. And although today’s political discourse seems to portray choices based primarily along these two seemingly competitive political economies, perhaps there is a third way – or better yet, other ways – that should be considered and become part of public debate.

Sources:

For example, see Ekelund, Robert B. and Mark Thornton. “More Awful Truths About Republicans”. 4 Sep 20008. Ludwig von Mises Institute. 19 Jan 2010.↩
For example, the phrases capitalist and capitalist mode of production appear more than 2,600 times in Das Kapital. See “Capitalism”. Wikipedia. 19 Jan 2010.↩
Hessen, Robert. “Capitalism”. Library of Economics and Liberty. 19 Jan 2010.↩
For example, the development of Market Socialism.↩

Federal Reserve and the Constitution

January 15, 2010 in Money by Greg | 1 comment

Part 2 of 1 in the series Paper Money

Congressman Ron Paul (R-Texas) wrote about the role of the Federal Reserve in relationship to the Constitution. After providing a brief U.S. history lesson of the debate over paper money, its attendant danger of inflation, and the role of a central bank in society, he wrote:

The lack of respect for the Constitution even in the nineteenth century set the stage for the Federal Reserve Act of 1913. Fear, misinformation, and ignorance allowed government to ram bad policies down the throat of the American people. This is not unlike giving the president authority to go to war and to bail out those least deserving help in an economic crisis. The rationalization that the state’s interest supersedes the interests and the rights of the people is embedded in the arguments as to why the American people had to go along with those who hate commodity money and love central banking.

The Fed was established as a result of the public and banking clamor for an elastic currency, and an elastic currency is nothing more than one that can be arbitrarily increased in volume at the discretion of the monetary managers. Sometimes they argue over who exactly will have the authority to do so, the central bank or Congress or private banks themselves. Increasing the supply of money and credit is the proper definition of inflation, meaning that when the demands were heard for an elastic currency, all they were looking for was a legal right to inflate the currency for the benefit of whatever special interests they were concerned for at the moment.

Noble intentions are always used to justify the inflation, but the real reasons are far more sinister. Those who get the control over the money are the beneficiaries, not the people as a whole.

Economist John Maynard Keynes, before he became the champion of inflation, wrote quite correctly of the grave danger of inflation. Like Greenspan, he changed his tune as the years moved on. Keynes stated in his book The Economic Consequences of the Peace:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.¹