Did you ever notice how an idea can get so deeply embedded in society that thinking the opposite would be impossible? Imagine traveling 500 years back in time to Hawaii, and trying to convince natives that periodically sacrificing a virgin in a volcano would not prevent its disastrous eruption. You would be laughed out of the village by challenging their long-held “wisdom.”
However, some truths seem to be timeless. The stricture that a loving father and a mother bonded to together in marriage provides the best possible structure for raising children is as valid today as it was thousands of years ago, despite recent claims to the contrary.
We tend to develop new economic beliefs from time to time that suit current societal fashions – as well as politicians’ aspirations to accumulate more power. Wishful thinking plays a part in human belief formation in all spheres of life, not just economics. For example, people would like to believe they can completely overcome genetic liabilities by diet, exercise, or other interventions. So regimens to do exactly that are promulgated and promoted, usually with minimal results. Similarly, humans like to believe that old economic admonitions can be discarded, in favor of new ones that can “fix” all problems. Ignored is the reality that:
- Not all societal problems can be “fixed” by economics.
- Economic interventions have not only benefits, but deleterious consequences that inevitably come later and are usually not as obvious as the benefits.
Here I chronicle some old-fashioned economic tenets by topic, and compare them to “modern” beliefs currently in vogue. Perhaps the reader can think of even more!
THEN- A strong, resilient currency protects the labors of savers and contributes to economic stability. Stable currencies are desirable as they make commerce easy and predictable.
NOW- Currency should be devalued by a technocratically determined amount per year to maximize employment. A weak currency is desirable to increase exports and discourage imports.
THEN- A currency functions as a reliable measure of value, as well as a store of value.
NOW- A currency functions as a useful tool in state power.
THEN- To protect the value of a currency, it is prudent to link it to a physical asset in limited supply, for which it can be freely exchanged at any time.
NOW- A currency need not be linked to any resource, scarce or not. Its value rests solely on the faith and confidence in the government issuing it,as well as supply and demand. An “elastic” currency is more desirable.
THEN- A central bank’s function is to be a lender of last resort during bank runs to reliquify member banks under stress. It functions to maintain a stable currency and banking system.
NOW-A central bank should do anything and everything economically possible for the greater good. In fact, it is often characterized as “running” the whole economy. It should finance enormous government debt, goose the stock market and maintain “full employment,” even if the ultimate result is debasing the currency. There is no limit as to what a central bank should do. Lately, it is even being suggested that our Federal Reserve Bank intervene to promote “economic equality!”
THEN- Avoidance or minimization of debt by businesses and government adds a safety margin to weather treacherous economic downturns.
NOW- Debt should be used to the maximum amount possible to increase profit or give voters things they “need” and/or desire.
THEN- Government deficit spending is to be avoided as it moves spending forward in time, thus mortgaging future prosperity. Good times will be had now, but our future, and that of our children, will be jeopardized.
NOW- Government deficit spending is virtuous because it helps stimulate current demand and employment. Deficit spending is no problem because “we owe it to ourselves.”
FINANCIAL ASSET VALUES
THEN- The free market alone should determine the values of stocks, bonds, and other financial assets. Market prices are more likely to reflect the inherent risks and profitability of companies whose shares and debt issues are sold to the public. Government intervention should only occur to investigate and prosecute fraud and deception in financial offerings to investors.
NOW- The government and its central bank should intervene whenever necessary to prop up financial values, because the “wealth effect” is a net positive for the economy.
THEN- Financial institutions have a duty to strictly safeguard the privacy of their client’s financial dealings. They are to act in their clients’ best interests.
NOW- Banks and brokerage institutions are to act as extension of government taxation and law enforcement agencies, reporting any and all transaction histories requested of them. Not only that, but financial institutions should act as informants, alerting the government to transactions that seem out of the ordinary for their clients.
THEN- Redistributing income is bad because it discourages work, investment, and taking entrepreneurial risk. Wealth inequality can actually be useful by providing purchasers for relatively expensive new products. Wealthy early adopters in essence subsidize later mass production with attendant lower prices for the masses.
NOW- Redistributing income is good because it helps eliminate income inequality and directs money to people who will more likely spend it.
THEN- Even by the admission of as late an economist as John Manyard Keynes, inflation is the “cruelest tax” because it robs savers of their purchasing power. On the other hand, gradual price deflation is the natural way productivity raises the living standard of workers. Thus, it is nothing to be feared.
NOW- Stable prices or even inflation should be the goal. Deflation is economic enemy #1, since it encourages consumers to delay purchases because the price will be lower. Inflation, on the other hand, will drive consumers to purchase earlier, fearing future price increases.
THEN- Interest is the reward for your delayed gratification and letting others use your money. By one person putting off elective purchases, another person with a more urgent (or more productive) use for capital will be funded. The price he pays you for this immediate funding is interest.
NOW- Positive after-inflation interest rates are damaging, because they raise borrowing costs to the government, as well as discourage people from spending now- which causes unemployment. Interest rates should even be pushed into negative territory, to punish people for not spending all their income!
THEN- Productivity is increased by investment in labor-saving capital assets.
NOW- Productivity is increased by government mandates by technocrats, as well as government subsidies to “winners” chosen by politicians. Government-funded research also increases productivity.
THEN- Recessions, especially deflationary ones, require cuts in government spending and taxes with it.
NOW- Recessions necessitate increased government spending to “make up” for decreased demand for goods and services.
THEN- The future is unknowable. Ideas and technologies that seem to hold promise may disappoint. Investors who freely put their own funds at risk are more likely to fund only projects with the most promise. They will also be the first to abandon funding of projects if initial results prove disappointing.
NOW- Government should be the one to pick winners and losers. Technocrats can wisely decide what new projects and technologies should be funded by taxpayers.
THEN- In a world of finite resources, the free market is most efficient in preserving scarce commodities for their highest economic use.
NOW- Central planning by governments is best used to allocate scarce resources in an equitable and just way. Methods utilized may include rationing, embargoes, sale restraints, taxes for undesirable uses, or subsidies. Government technocrats know best how resources should be utilized.
THEN- Saving for a rainy day is virtuous. The citizen is prepared for unforeseen expenses and shortfalls in income. He will be less likely to be a burden on the government, and thus taxpayers.
NOW- Saving is bad because it decreases current consumer spending, a large source of aggregate demand. This is the so-called “Paradox of Thrift”.
SIZE OF GOVERNMENT
THEN- Government spending should be minimized, because government by its very nature is inefficient. The reason is twofold. The absence of a profit motive gives no incentive for making workers productive. Never does a government agency disappear because of unprofitability, so employee slovenliness and dishonesty are more likely to occur. Bigger government in the economy means lower average productivity in the economy, which translates into lower standard of living.
NOW- Government spending is the root of most good. Government can and should be used to fix everything that seems amiss in society. There should be no limit to the amount of government spending, not even the revenues it can tax away from constituents.
THEN- Free trade is desirable so goods may be obtained from nations most efficient at producing them. It is a logical extension of the principle of division of labor.
NOW- Free trade is undesirable because it may result in more imports and jobs eliminated domestically.
THEN- Real wages increase when workers become more productive by less regulation and/or more labor-saving capital investments. The real cost of consumer items goes down in terms of hours worked to pay for them.
NOW- Nominal wages increase when government mandates that companies pay workers more via minimum wage laws and other legislative contrivances. These nominal increases may or may not keep up with inflation, so there may be no increase in purchasing power.
It is remarkable how perceived economic “realities” may change over time. Can you imagine any presidential candidate advocating a “sound currency?” Yet that was a campaign promise in the early 20th century.
Many economic beliefs Americans hold now would make economic titans of the past shake their heads in bewilderment. Economists like Adam Smith, Frederick Bastiat, Ludwig von Mises, Frederick Hayek and others spent their entire lives trying to study what made societies prosperous, so leaders could emulate the success in other countries.
This has given way to preposterous economic dogma with the goal of “economic equality” and “social justice,” whatever those popular terms mean. Economics has been turned on its head, often times making the whimsical sound believable. One prize-winning economist writing for the New York Times even suggested that if our government borrowed two trillion dollar to ward of a Martian invasion that did not materialize, the spending would still “help” the economy.
One cannot help but believe the promotion of such absurdity is to enable politicians to do things they want to do anyway, but need a rationalization for it. And our news media friends are more than willing to comply with the deception. Don’t be fooled by it!
Dr. Kim Henry
March 27, 2021