Published in the Financial Post (www.nationalpost.com), December 19, 2008, p. FP-11

 

The Brave New World of Stimulus
by
Pierre Lemieux

“Aggregate demand” drives “the economy.” If it falters, government stimulus is necessary. Welcome to the economics of the Brave New World! Aldous Huxley’s imaginary world is built around slogans like “Ending is better than mending. The more stitches, the less riches.” Don’t repair your old clothes, buy new ones. Boost consumption. “Otherwise the wheels stop turning.” The more we consume, the richer we are. It is, of course, the other way around: The richer we are, the more we can consume. Consumption cannot create opportunities and wealth out of nothing. If it could, consumers in poor countries would learn the recipe and soon become as rich as Croesus. Like politicians, novelists often have it wrong when they venture into economics. Huxley thought it was capitalism that would lead us into the brave new world. Society’s god was named Ford. The genial novelist was as mistaken about capitalism as those who now believe that nationalizing car manufacturers is the way to economic freedom. From his grave, Huxley must notice a little dissonance: Chrysler and GM cannot make consumers purchase cars they don’t want. With his consumption voodoo, Huxley was Keynesian before Keynes. The former’s Brave New World predates the latter’s General Theory of Employment, Interest and Money by three years (the two books were published in 1933 and 1936 respectively). It suggests that Keynes’ theory was already a popular superstition. In the General Theory, Keynes does admit that many such theories had emerged since the First World War, including Major Douglas’s social credit, which he mentions in passing but dismisses. The idea that the more you spend, the more “the wheels of the economy turn” and “money circulates” is an old but flawed idea. Whatever scientific and modern-coloured varnish has been put on it, it relies on funny mechanical metaphors and plumbing analogies. The state “primes the pump” and “injects money” into “the circular flow of income” as macroeconomics textbooks have been rumbling for seven decades. If an analogy were needed, the electronic analogy would be much more appropriate and consistent with modern economics, for an efficient economy is based on information and co-ordination. One argument (perhaps the most serious) for government stimulus is as follows. Think in real terms: If real goods and services are to be consumed, real goods and services must be produced. If people produce fewer of them because they think they won’t be able to exchange their output with others (who are producing less), you get a contagious recession. Confidence can be restored by a big, trusted spender — a.k.a. the state. Indeed, investors trust the state so much that, these days, they take refuge in government securities that pay close to zero interest. Since it is government policy that started the mess, there are good reasons not to trust the state’s magic wand. But this is not my topic here. My point is that with the Big Trusted Spender comes the Big Trusted Regulator. The idea of establishing a “car czar” in the United States was only the latest symptom of the growth of the regulatory state over the 20th century. Down there, they already have a drug czar, an energy czar, an intelligence czar, etc. Only the top czar, the Czar, is missing; or perhaps it is not. If the state is responsible for everything, it must control everything, which is exactly Huxley’s brave new world. Everybody is taken care of, and some permission is required for everything. There, the visionary Huxley got it right. As we see again in the second New Deal in less than a hundred years, stimulus certainly makes some wheels turn, but they are the wheels of the state. Government spending does provide stimulus — for its own growth. “O brave new world...”