Article published in the Financial Post, August 6, 2003, p. FP-15
'U.S. economy soars on war spending," ran a newspaper headline on Saturday. This suggests a little economic puzzle: Why can't we have the economic boost without the dead soldiers? Suppose the state called a war on, say, the ocean, took $80-billion worth of real resources -- steel, aluminum, trucks, airplanes and computers -- and sank them off the continental shelf. Why wouldn't this stimulate the economy?
According to John Maynard Keynes, it would. In his famous 1936 General Theory of Employment, Interest and Money, he wrote: "If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is."
The problem is that there is no such thing as a free lunch. If defence expenditures increased by $80-billion, other expenditures -- consumer expenditures, in this case -- must have decreased by the same amount, because the resources grabbed by the state have been taken from the private economy.
Keynesian macroeconomics is now pretty much discredited among academic economists, but survives in popular discourse and among journalists and economic forecasters. They continue to use Keynesian or mechanistic terminology. They see the economy "losing steam" as if it were a Via Rail/Bombardier locomotive. "Governments contributed strongly to economic activity," writes the Royal Bank in a recent macroeconomic report. It's just as well because, at the same time, they siphoned about 45% from the private economy!
Since the (partial) demise of Keynesianism, junk economics has taken refuge in other applications. Just consider one example of junk public policy based on junk economics: the push to impose (American-style) corporate governance requirements. This trend, which continues two decades of witch-hunt against insider traders (Martha Stewart being only the latest witch), is based on no serious economic analysis, but on a simplistic social-political theory claiming that the state should, and can, "moralize our markets." The wolf will moralize the sheep.
Indeed, a common thread in all junk economics and all junk social science is the assumption that the state is as angelic as individuals are selfish. Notwithstanding Machiavelli and the whole classical liberal tradition, this theory of the Nice State still exerts much influence in political, academic and business circles. Just assume that political actors (politicians, bureaucrats, voters) are moved by an altruistic love for their fellow men, and know what the latter need. The state will then respond to popular demands, and acts for the people's good. Mistakes can be made, but the state will remain focused on maximizing social welfare.
Indeed, a whole new field of economic theory, called welfare economics, developed during the first part of the 20th century, formulating abstract conditions under which the welfare "of society" could be maximized. In a famous 1920 book, British economist Arthur Cecil Pigou explained how "externalities" or "market failures" need to be corrected by the state. Cost-benefit analysis developed as an application of welfare economics. Keynes was not alone in assuming that the state is naturally well-intentioned, perfectly informed and efficient.
During the second part of the 20th century, this idyllic vision of the state has been successfully challenged by Public Choice theory, under the early leadership of Jim Buchanan, the 1986 economics Nobel Prize winner. This school of economic analysis assumes that the state is manned by ordinary individuals who pursue their own self-interest like everybody else. On the "political market," clienteles whose support the rulers need most obtain favours at the expense of other groups.
One problem with state redistribution lies in the incentives it generates: Getting on the right side of the government wicket wastes resources through lobbying and similar activities (this is what Public Choice economists call "rent seeking"). Another problem is that, in the process or redistribution, the state becomes more and more dangerous. As French political scientist Bertrand de Jouvenel put it: "The more one considers the matter, the clearer it becomes that redistribution is in effect far less a redistribution of free income from the richer to the poorer, as we imagined, than a redistribution of power from the individual to the State."
The state is in the business of redistribution and in the business of power. No wonder that it always seems to want more control over social and economic life.
Junk social science looks for collective-choice solutions. Serious economics suggests that political and bureaucratic processes are much more imperfect than market processes, and that the domain of public policy should be minimized as much as possible.