Saturday, August 20, 2011

Arguing against abundance and Keynes

Here is an alternative view on abundance, by Stephen Moore of the powerful low-tax campaign group Club For Growth. He argues that the Keynesian idea that abundance can be a problem is just not true.

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

There is no doubt that lack of goods can , and IS, a huge problem for much of humanity, and that Soviet Russia was a slow-moving economic catastrophe.

Demand is not the issue for me. I am not inclined to defend standard Keynesianism. In the simplistic sense, that is not so much about a problem of abundance as too many goods chasing too little buying power at a point in time. The actual level of income and wealth At at point in time can be very low.

This is obvious if you think about it. Keynes thought there was insufficient demand in the Great Depression. But society was less than quarter as wealthy and abundant as it is today.

Moore is arguing microeconomics works, and the aggregate macroeconomics of demand management has led us astray. But this is still a debate about managing the economy over the cycle, not the long haul. At some point the flows in the economy get dominated by the transformations in the economy, like ice changing to water which later changes to steam.

There are plenty of entrepreneurs who are innovating now not to give us new products to buy, but new products we get for free. This very web hosting service, blogger, is an example. I don't pay Google a cent for it, even if they can make money by using it to sell other services like advertising.

The very fact that so many needs are becoming very cheap relative to income - but some are not - changes the nature of the economy and people's lives.

The reason I keep coming back to Keynes' partially whimsical essay Economic Possibilities for our Grandchildren is because it takes a long range view. What happens when abundance is not the primary problem, but a stage we've already achieved? When many valuable things are given away for free, or drug patents expire, and copyrights time out?

There are clearly no consumers lined up to desperately buy things off empty shelves in the US. But a lot of people in the middle class still struggle with making ends meet in this, the wealthiest and most powerful country in recorded history.

A lot of the problem is that money is an enormously powerful tool, but it also evolves and has its own problems. "Money illusion" is a well-known term in economics, largely about being unable to understand the effects of inflation. But problems of misperception of money go much deeper.

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