Mr. Quiggin’s recent book, Economics in Two Lessons, is the latest intellectual salvo fired by a member of the mainstream economics establishment towards the legendary unabashed defenders of capitalism like Ludwig von Mises, 1974 Nobel Laureate in Economics F.A. Hayek, and of course, Henry Hazlitt himself, who von Mises once referred to as “our leader…the economic conscience of our country and of our nation.” Yet in this book he simply reveals himself to be exactly as Hazlitt predicted, as part of the usual crop of “men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as a way of economic salvation” and whose “ ideas which now pass for brilliant innovations and advances are in fact mere revivals of ancient errors, and a further proof of the dictum that those who are ignorant of the past are condemned to repeat it.”
The book gets the idea for its title from a quote by Nobel Laureate in Economics (1970) Paul Samuelson which heads the introduction and partly reads as follows:
“…When someone preaches “Economics in one lesson,” I advise: Go back for the second lesson.”
The first thing that should come to mind when one hears of Paul Samuelson is that his understanding of economics was so awful, that by 1989, when the Soviet Union’s tyrannical communist economic empire was crumbling, in the 13th edition of his textbook Economics, Samuelson wrote:
“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” (Samuelson, p. 837)
Let’s get closer to the heart of Quiggin’s errors. Quiggin writes early in introduction:
“Much of ‘Economics in One Lesson’ can be read as an attack on the work of John Maynard Keynes, the great English economist”
Hazlitt properly describes Keynes in a few sentences when he tells us,
“John Maynard Keynes was, basically, an inflationist.”…“In other words, the Keynesian solution to every slow-down in business or rise in unemployment was still another dose of inflation.” (Hazlitt, 1988, p. 208)
Yes! Regardless of all the impressive sounding mathematicobabble spewed by the “experts” employed by governments who ultimately follow Keynes’ advice, nearly everything they propose is ultimately based on the erroneous idea that the creation of money is needed to improve or fix the socioeconomic order.
One simple concept is all that is needed to easily see how the entire edifice of Keynesian economics, and thus the world’s “leading economists”, is wrong. Living things/orders/society are in constant cycles of wealth production and consumption, and very importantly, the production of wealth requires the consumption/use of existing wealth.
For example, if 10,000 men are to spend 2 years producing an airplane factory, they must consume/use the concrete/materials/food/energy/transportation/shelter that they (as well as their dependents/family) need while they produce the factory. If the needed real wealth or the means/wealth to create it already exists, because it had been previously produced and then remains unconsumed/SAVED, good, there is a chance that they end up producing more than they consumed thus being profitable and therefore increasing the economic pie. But if instead of real wealth/savings, governments/banks simply increase the amount money while no corresponding increase in REAL wealth/savings exists, all it is doing is increasing the amount of money per unit of wealth, thus higher prices than would have otherwise been the case, which eventually causes many entrepreneurs to face the obvious fact that there did not exist enough wealth at the right prices to complete their projects in a profitable way, therefore a sort of bust/chaos and massive loss of wealth will eventually happen as inevitable bankruptcies occur.
Sustaining the men’s consumption for a year to create some partly-finished building/machines and then having to abandon the project because prices have increased in a manner that no longer makes the project profitable leads to 0 planes/wealth for a massive net loss of wealth. Even easier, imagine two wealthy couples each with a child who both want to go out on the same night (project) but there is only one baby-sitter(savings/wealth), no amount of money will allow both to execute their plans, what they need is more savings/wealth/baby-sitters. Bottom line, governments via their central banks and money-creation can’t help the economy and are the source of disastrous business “boom/bust” cycles. We quote the great economist Ludwig von Mises:
“However conditions may be, it is certain that no manipulations of the banks can provide the economic system with capital goods[baby-sitter/wealth]. What is needed for a sound expansion of production is additional capital goods[savings/wealth], not money… The boom is built on the sands of banknotes and deposits. It must collapse.” (Mises, p. 559)[present author]
It should be easy to see that you can’t “print savings” at least not the REAL wealth/savings that the REAL world needs. Savings that come about through a real postponement in consumption and “fake savings” that exist due to an increase in money(bank credit) are obviously two totally different things, the former provides the real wealth which must be consumed while production takes place, and the latter simply creates the “illusion” that such wealth exists, yet Keynes hardly makes the distinction between the real and “fake” savings. Hazlitt, in an aptly titled section “Can Savings be Printed?” of his classic demolition of Keynes The Failure of the New Economics writes :
“Keynes, as we shall see, only seldom and haphazardly makes these latter distinctions. On the contrary, he often works very hard to argue them away. The ‘’savings” which result merely from increased bank credit (or, for that matter, from the mere printing of more fiat money), he argues, “are just as genuine as any other savings” (p. 83). Of course if this were so, the problem of a community’s acquiring sufficient savings would never exist. It could simply print them!” (Hazlitt, 1959, p. 97)
Let’s look at another absurd statement from Keynes which further reflects the utter ignorance of the vital role savings play in the economy:
“…whenever you save five shillings, you put a man out of work for a day. Your saving that five shillings adds to unemployment to the extent of one man for one day — and so in proportion. On the other hand, whenever you buy goods you increase employment…For if you buy goods, someone will have to make them. And if you do not buy goods, the shops will not clear their stocks, they will not give repeat orders, and some one will be thrown out of work.
Therefore, oh patriotic housewives, sally out to-morrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good…And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities…
…Surely all this is the most obvious common sense. For take the extreme case. Suppose we were to stop spending our incomes altogether, and were to save the lot. Why, every one would be out of work. And before long we should have no incomes to spend.” (Keynes, 1963, pp. 152–3)
Wow! First of all, when most people save their money they invest it, which for the general case here we’ll just assume that it is loaned out at interest. The money still gets spent by the borrowers! Hazlitt stresses this point in his classic Economics in One Lesson,
“ “Saving,” in short, in the modern world, is only another form of spending. The usual difference is that the money is turned over to someone else to spend on means to increase production.” (Hazlitt, 1988, p. 164)
That’s right. When you save and lend your money, the borrowers still spend it but they have to spend it in a way/cycle that increases the economic pie enough for them to not only pay back the loan, but to also pay the interest on it, which means that they are increasing the economic pie. With respect to his “extreme case” where people save all their income and don’t spend. Why bring up such a foolish scenario that would never be in anyone’s best interest to attempt? Who does not want to trade/spend for the food, gasoline, wealth they need to survive?
Keynes, like most of his adherents (and the public at large sadly), is also utterly ignorant of the vital fact that ‘economic activity’ must be coordinated in a way that produces more than it consumes, otherwise it is obviously shrinking the economic pie. Yet this coordination requires precise knowledge and is something only millions of free individuals and businessmen can achieve by using profit/loss calculation at the individual, household, and corporate level. Unaware of this, Keynes disastrously encourages the purposeful destruction of wealth just so people are put to work rebuilding it even though the effects of this are a massive shrinking of the economic pie. He writes:
“…activity of one kind or another is the only possible means of making the wheels of economic progress and of the production of wealth go round again.
…why not pull down the whole of South London from Westminster to Greenwich, and make a good job of it…Would that employ men? Why, of course it would!” (Keynes, 1963, pp. 153–4)
One should not be fooled by fancy money-related terms or equations. If you just keep your eye on the cycle of wealth production and consumption, most economic fallacies can easily be avoided. The housing that comprises the ‘South of London’ exists, it is then destroyed thus a huge loss in wealth has occurred, then a massive amount of existing wealth has to be consumed in terms of food/energy/materials/etc. to sustain many men who produce new buildings. The net result is the loss of existing housing and the wealth needed in exchange for new buildings. Had the housing not been destroyed, Londoners would’ve still had them plus new housing or whatever else the men would have produced as they consumed the same amount of existing wealth as before.
So the erroneous belief that real savings/wealth can be “printed” to then “stimulate the economy” (i.e. ‘activity of one kind or another’ even if you have 0 regard for whether the people are ordered in a way that produces more than it consumes), provide the one-two punch of fallacies that keep the mainstream making the same errors over and over.
With the above in mind, let us now actually criticize the book’s content. Quiggin regurgitates perhaps the most dangerous economic fallacy of all, that government control of the economy for war production is what helped end the Great Depression and is thus beneficial in some way.
“…the US economy has been in recession for about a third of the period since 1929, only a modest improvement on the period 1854–1929.
But this is still an underestimate. The post-1929 average was pulled up by World War II when the government actively worked to ensure that everyone capable of working toward the was effort did so, and by the period of Keynesian macroeconomic management from 1945 to 1970. If these periods are excluded, the proportion of time spent in recession is around 40 percent.
To sum up, except when governments are actively working to maintain full employment, the economy is in recession almost as often as not. The idea of full employment as the natural state of a market economy is an illusion”
And elsewhere:
“…the Great Depression began with the stock market crash of 1929 and did not properly end until 1939, when preparations for war drove a rapid return to full employment”
This erroneous myth is based on the fallacy of believing that just because people are employed doing “activity of one kind or another” they are actually increasing the economic pie in a healthy/sustainable way. Keynesian economists and the likewise economically ignorant public are easy prays for wanting to achieve “full employment” even if this is done in a manner that leads to more consumption than production thus making vigorous war production that much more attractive. Once again the error is easy to see if one keeps an eye on wealth and the continuous cycle of production and consumption and is not misled by mathematical formulas or money-related calculations/gimmicks. Millions of people, previously employed or not, join the war effort by either killing fellow human beings or working to create armaments/etc. thus increasing the economic pie by little in terms of civilian goods, and while they do so, they must consume food, energy, etc., real useful stuff, thus leading to an obvious overall shrinking of the economic pie in terms of civilian goods. They are all working of course, but ultimately they are not ordered in a way that truly grows the economic pie with the wealth that makes life worth living and can be further consumed while producing more things. If military spending and “full employment” thanks to it were a good thing, then the militaristic Soviet Union and North Korea would have flourished. Sadly this type of thinking seems to currently dominate the upper echelons of the Trump administration, prompting him to increase military spending/consumption even more and perhaps lead to additional motivation for some disastrous war. Is there a need to really criticize this other Quiggly absurdity?:
“Yet once demand was stimulated by the outbreak of World War II, unemployment virtually disappeared. The contrast between Depression and the War made brutally clear the opportunity cost of leaving 15 million workers idle rather than defying the orthodoxy of One Lesson economics.”
References:
Hazlitt, H. (1988). Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics. Three Rivers Press.
Hazlitt, H. (1993). The Wisdom of Henry Hazlitt. The Foundation for Economic Education.
Keynes, J. M. (1963). Essays in Persuasion. New York: W. W. Norton & Company.
Mises, L. (1998). Human Action Scholars Edition. Auburn, AL: Ludwig von Mises Institute.
Samuelson, Paul A. and Nordhaus, William D. (1989) Economics. McGraw-Hill, p. 837.
