Lately, apropos of our situation and the government's response to it, I've been studying up on the Great Depression; what caused it, what the government did about it, and why it ended. I get the impression people (especially people in government) don't understand it very well, or bother to read any of the history or economics about it.
But the Depression inspired several classical works of political economics that effectively explored what makes economies work. The common theme is surprisingly simple (although it seems to elude most politicians): Incentivize the individual.
The first good book on my bookshelf inspired by the depression is one I've talked about in this space before: Capitalism, Socialism, and Democracy, by Joseph Schumpeter. Written in 1942, it starts out with an apparently sympathetic analysis of Marxism, which Schumpeter purposely put there to encourage socialists to read his book. Schumpeter went on, however, to say that "creative destruction" in the business sector, fueled by entrepreneurialism and "disruptive technologies", is essential to the long term survival of capitalism and continued economic growth and wealth creation. He then gloomily predicted that capitalism would eventually evolve into corporatism, hostile to the essential processes of entrepreneurialism and creative destruction. Schumpeter himself clear that he was not advocating the end of capitalism, writing "If a doctor predicts that his patient will die presently, it does not mean that he desires it."
It is hard to look at our current situation and not be a Schumpeterian. When I first studied Schumpeter in college, I remember thinking he was probably right, and hoping his predictions did not come true before I died, or at least before I retired. I didn't make it.
The next book talks about how the government will react to the economic trends predicted by Schumpeter. Written in 1944, The Road to Serfdom, by Frederich Hayek (what is it about these Austrian economists?) is one of the most influential and most published works in economics ever written. In it, Hayek makes the case that centrally planned economies will inevitably lead to tyranny. Tyranny is inevitable, he believed, because no government could adequately process and analyze all the variables needed to successfully implement a planned economy. Because of the inability of the organs of planning to do their jobs, disagreement and conflict was sure to arise over how to manage the economy, and the government would be forced to resort to coercion to impose its (flawed) plans. The eventual result would be a authoritarian state populated by poor and miserable serfs.
When I read them in the 1980s and the Soviet Union was still around, Hayek and Schumpeter made for highly effective critiques of Soviet Communism. But Communism was already dead at that point and just didn't know it yet (although many Communists did, right John?) and had been forcibly imposed by Marxist revolution anyway.
I'm starting to think Communism was good for our capitalist system because it kept reminding us what we didn't want to be. Now we seem to have forgotten it all and appear to be caught in the throes of some kind of demented hysteria - which if you read the history of the Depression, you may notice has happened before.
The third book talks about the role of the individual in a deteriorating economic situation. Atlas Shrugged, by Ayn Rand, was not published until 1957, although in many ways it appears to be set in the 1930s. Rand's themes are pretty well known, although they certainly seem to have been forgotten lately: namely that rational ("Objectivist") individual liberty is essential to the survival and prosperity of human civilization. Take away that simple motivation: that every person has the right to the fruits of their own labors - and it's only a matter of time until civilization collapses. Rand was particularly harsh towards collectivism, in particular collectivized labor - a particularly prescient theme in view of the current problems being suffered by the American auto industry.
As I write this I'm listening to a TV news story saying the big 3 car makers have reached an "agreement" with the United Auto Workers in which the UAW gives up essentially nothing, and guarantees at least another $25 billion will be needed to "prop up" these non-viable companies in the next quarter alone. Of course the government will not allow the car companies to enter bankruptcy, because that would give them the legal leverage to break the death-grip of the unions.
The theme of these classically liberal authors is simple: in economics, it is the power of the individual that counts, and it is the nature of human society to take away that power, with bad result.
On the other side of the fence are the "modernist" Liberals, who are currently in favor, represented most famously by John Maynard Keynes and John Kenneth Galbraith.
Keynes' most famous work, The General Theory of Employment, Interest, and Money, says that most of what we think we know about economics, supply, demand, etc., is wrong, and instead there are complex and cointerintuitive forces governing consumer spending, prices, and interest rates. Written during the Depression, General Theory says that, under such conditions, governments must engage in radical deficit spending to "jumpstart" the economy. Sound familiar?
Later, Keynes was one of the founding directors of the World Bank and the architect of the Bretton Woods agreements, and advocated creation of a centrally planned world economy with a single world currency.
John Kenneth Galbraith was perhaps most famous for being FDR's chief of the Office of Price Administration during World War II, responsible for the government's setting of prices for everything from table salt to ocean liners at the point of a gun. His most famous postwar work, The Affluent Society (1957), drew on both his wartime experiences and the theories of Keynes to say that only the government is smart enough to decide how to manage modern complex economies, and governments should use consumption taxes to shape public behavior. Galbraith, perhaps even more than Keynes, was very paternalistic, repeatedly making the point that intellectual elites (usually in government but also in big business) must make decisions for the ignorant masses on how to manage their affairs. He was consistently dismissive of the power of the free market, and even of the classical entrepreneur, writing that it was big business that was the main engine of technological progress.
So the intellectual debate that we haven't had in this current crisis boils down to this: Who can better decide how you spend your money: you, or the government?
I've spent a (mostly wasted, I'm afraid) lifetime in and around big government, and my overwhelming experience is that government is usually about the worst way to do anything. The bureaucratic system promotes mediocrity and corruption and the more I learn the more government seems functionally almost identical to organized crime - and I know a lot about organized crime as well.
The Congress just passed and the President just signed the largest spending bill in the history of the world, and not a single one of them even read it. They read only "their part", namely the sections where their patrons (in organized crime, or banking, or the car industry, or whatever) get their money. And this is not surprising or even noteworthy in Washington because that's how it always works.
I have my own non-scientific theory that a big part of the world's economy comes from crime or some kind of illicit activity. Every economic system is a continuum between legitimate, legal activity (you make or buy something honestly and sell it honestly) and purely criminal activity (you steal something and sell it or sell something you don't own, or which doesn't exist). In between is a wide spectrum of "grey area", from not paying taxes on cash transactions, to artificially but legally inflating prices, to deceiving people about what they are paying for, to charging people outrageous but secret interest rates (That means you, Chase Bank), to smuggling legal commodities from one place to another to avoid taxes, to a zillion other complicated and shady but profitable activities.
My theory is based on my own observations of money being spent that has no apparent legitimate origin, from the local scale (your neighbor has no job, but a new $400,000 yacht) to the macro scale (Russia). Non-scientific extrapolation suggests to me that as much as 40% of even healthy economies is dirty. In non-healthy economies the 'crime fraction' may be much higher, nearing 100% in places like North Korea.
The other thing I notice is that the more authoritarian the regime, the higher the crime fraction, because when you take away the incentive for legal entrepreneurialism the void tends to be filled by the criminal variety. Do your own analysis and form your own conclusions.
Criminal activity, in almost all of its forms, is very corrosive to a healthy economy. The current economic crisis was precipitated by an epidemic of corrupt "gray area" activity: a big chunk of the financial industry made loans they knew were bad then packaged and resold those loans without disclosing the risk associated with them, in order to keep inflating the real estate bubble, encouraged by politicians who not only took money from but openly conducted homosexual affairs with the financial executives making the bad loans. (Want to see an eerie coincidence: study the biography of John Maynard Keynes.)
Governments rest on legitimacy in the eyes of the governed, even authoritarian ones. As authoritarianism increases, individual liberty decreases, and the crime fraction grows, loss of legitimacy accelerates the process, leading to a "failed state". A failed state may lash out against its neighbors or become a humanitarian and economic sinkhole, draining resources from neighbors.
We are now at the decisive moment for the United States, and are betting our whole future that Keynes and Galbraith are right and Schumpeter, Hayek, and Rand are wrong - that government really does know better than you and me.
The stimulus bill signed yesterday contains a provision to allegedly spend $81 billion "protecting the vulnerable" (plus another $61 billion of vulnerable-protecting deceptively lumped under "tax relief"). No information, so far, about what that means, but it probably means welfare or straight-up wealth redistribution - maybe that plan to give tax refunds to people who paid no taxes.
However, the government promises:
This is your money. You have a right to know where it's going and how it's being spent. Learn what steps we're taking to ensure you can track our progress every step of the way.That is, without telling us what $142 billion worth of "protecting the vulnerable" means. I downloaded the bill, and studied it for a while (It's 407 pages, I haven't read the whole thing yet, either, but then again I didn't vote for it.) and can find no reference or explanation about protecting the vulnerable.
If it works, we'll be fat, dumb, and happy serfs. If it doesn't work, what will happen?