“Running” the Economy

No economy is a machine, despite the poetic renderings of writers or the misguided rhetoric of politicians and their economic advisors. An example of characterizing the Canadian economy as machine appeared in a recent print edition of the Globe & Mail’s Report on Business.

The Canadian economy may be pulling out of its steep nosedive, but most businesses still have their seatbelts firmly fastened and oxygen masks at the ready. And they are content, for now, to let government fly the plane. –Brian Milner, August 3, 2009

Mr. Milner’s colorful airline metaphor serves as an illustration of the generally poor understanding most observers have, including many professional economists, about economics. Let’s grant that Brian Milner is just trying to make his writing more interesting. But many of us trust journalists or columnists to explain the subjects about which they write. To describe the economy as a machine, even under poetic license, is in my view misleading.

The economy is not a machine of any description. There are no levers to pull, dials or gauges to watch, pedals to push or steering wheels to turn. Yet, how often have you heard someone, usually a political economist of some sort, advising that the economy needs some “fine tuning,” “tweaking,” “stimulating,” or an “injection of funds”? Political leaders are often spoken of as being “at the reins,” “at the helm,” “running the economy,” “at the controls,” or simply “in control”. Really now, what are these people talking about? What does this mean?

Perhaps it will be instructive to consider what the economy is, before getting bogged down in the words of politicians, professional economists and newspaper columnists. An economy is the sum total of millions of choices and actions taken by millions of people every minute of every day seeking the world over to improve their standards of living. Economies are global, necessarily. Wherever there are people who want things that other people can provide, some form of trade is possible. In fact, though we can speak of the Canadian or American economy, or the economy of any other nation, it is individual people who make an “economy” happen, whether representing themselves, their family, some group or some company. Economies transcend national borders, because of this fact. The maintenance of national borders serves only as an impediment to trade between willing individuals in different jurisdictions. Whatever barriers are erected by the respective states are just obstacles for the traders to overcome. If Johnny in Canada and Charlie in China want to execute a trade, they will find a way, barring outright coercive bans enforced ultimately by the state’s monopoly on the use of physical force. (For an example of how ineffective even this force can be, consider the lucrative though illicit drug trade.)

What then are the politicians and their economic advisors trying to accomplish by interfering in the economy? Since the economy is just an abstraction denoting the cumulative total of millions of voluntary individual choices, what can possibly be the purpose of obstructing this activity among consenting individuals?

Mr. Milner’s article makes the point that companies in the private (i.e. voluntary) sector of the Canadian economy, according to Statistics Canada, have dramatically curtailed capital spending plans (investments) and that the only “real growth” stems from “investments” by the public (i.e. coercive) sector of the Canadian economy. He writes that these findings “…underscore the economy’s fragility and buttress government arguments that it’s too soon to ease up on the stimulus pedal.” (Emphasis added.)

What is going on here? Let me offer some analysis. Most of us know there is currently an economic recession, which is a period of time in which an economy contracts, or stops growing. The rate of wealth creation eases. It is also a period of readjustment by those who may have made bad investment decisions and misallocations of capital. In recessions, people and businesses tend to cut expenses, increase savings, and look for new work or business opportunities. And, bad investments are liquidated.

Many people in government take the view that a certain rate of economic growth is required for the “national” health. Central planners even set target rates for economic growth, though I’ve never known them to legitimately qualify as anything but arbitrary. From this springs the logic that if people are not spending and business is not investing in capital projects, the government has to do it for them in order to continue economic growth. This action is called a “stimulus” to the economy.

Since the economy is neither machine nor some separate collective entity, but merely the total of millions of individual economic decisions by millions of individual participants, there is nothing to “stimulate”. Economic participants cannot spend or invest what they do not have, nor are they inclined generally to be profligate spenders of their own resources, particularly in times of adjustment in a recession. That is why recessionary periods are characterized by cutting expenses, liquidating bad investments, and looking for new work or opportunities.

What then is this so-called “stimulus” by government? Obviously, it involves spending. But where does the required capital come from and on what is it typically being spent?

The source of government spending ultimately comes from taxation, now or in the future. There is no other option. Governments do not produce anything. They are administrative and bureaucratic institutions by nature, working outside of the private profit incentive.

It should be obvious that these taxes represent an additional burden on all economic participants, either directly in the form of confiscatory levies or indirectly in the added costs of producing economic goods and services for consumption.

As to what the government “stimulus” spending consists of, decisions must be made on the basis of political motives since there are no possible economic ones. It cannot be otherwise. In the absence of economic incentives or a price system (which is itself the automatic result of countless individual trades) to provide information, political considerations as judged by individuals in government must be employed. (It could be argued that the only real economic motives are the personal ones of individual bureaucrats or politicians.)

What then is the government “running,” “steering,” “flying,” or “controlling” if political considerations trump voluntary economic decisions made on the basis of market information? Since the economy consists of the millions of individual people making millions of decisions, they are the ones being “controlled”. The government politicians and bureaucrats, well-intentioned or not, are attempting to run the lives of those individuals. Logically, political freedom exists on a continuum. Charismatic leaders elevated to political power tend not to be satisfied with the status quo and, more often than not, compliant followers foolishly accept promises of “state-provided” security or entitlement. By giving up personal responsibility in the economic realm more power is extended to political leaders. Lord Acton wrote, in 1887, “Power tends to corrupt, ….”

History supports the conclusions of logic. The 20th century offers several glaring examples of the consequences of unchecked political power. Both World Wars and the Soviet Socialist “experiment” were preceded by conditions in which economic power was increasingly ceded to the state in exchange for some madmen’s vision of Utopia. The practical results were carnage and horror on a scale that used to be unimaginable, and should serve as a warning for every soul. Journalists and other prominent commentators ought to care enough to take at least some responsibility for helping to provide the information we need to heed such warnings.

Copyright 2009 Edward Podritske

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