Thursday, June 05, 2008

Birthdays and Economic Theories

Today is the birthday of two men who have had tremendous influence on modern economic theory: Adam Smith and John Maynard Keynes.

Mr Smith was a Scots merchant whose classic book The Wealth of Nations (published in 1776), suggested that market forces serve the public good, and that government regulation, for the most part, doesn't.

Mr Keynes was an English economist who published his famous book The General Theory of Employment, Interest and Money in 1935, during the Great Depression; in it, he argued that governments can correct severe depressions by increasing their spending, even if it means running a deficit, so as to increase employment. The policies pursued by president Franklin D. Roosevelt in his "New Deal" were heavily influenced by Mr Keynes' theories, and "Keynesian" economic concepts have been used to justify deficit spending ever since.

Well, now we know who to blame.

Adam Smith's ideas on the role of government regulation of markets lie at the heart of the difference between economic "liberals" (read, for the main, Democrats) and "conservatives" (generally, Republicans). Economic "conservatives" argue that the marketplace, left to itself, will eventually correct all of its own problems through a sort of economic Darwinism that will hurt some, but benefit most; therefore, government regulation is anathema. Economic "liberals," on the other hand, tend to focus more on the social impact of economic policies, and are more liable to advocate the judicious regulation of various parts of the economy to minimize the impact of economic ups and downs on the lower and middle classes.

John Maynard Keynes gave us the wonders of deficit spending. This is something I've never quite understood, since if I engage in too much deficit spending I end up bankrupt, while if the government engages in too much deficit spending it just prints more money (yes, I know that's overly simplistic, but I'm a relatively simple observer). While some may argue that Keynesian theories may have helped us to recover from the Great Depression, I think that deficit spending is no more a good idea for governments than it is for lower and middle class workers who try to cope with skyrocketing prices through easy credit.

Now you know why the Nobel Prize selection committee has overlooked me for the prize in Economics for all these years.

To me, there are two steps to sound economic policy on the national level as well as the personal level: don't spend more than you earn, and save as much as you can. The fact that I don't follow my own advice doesn't make it any less valid.

So drop your loose change into a coffee can and save it for a rainy day. The economic weather forecast is calling for a lot of rainy days, pushed by the massive hot air front coming out of Washington.

Have a good day. More thoughts tomorrow.

Bilbo

5 comments:

The Mistress of the Dark said...

Isn't there enough hot air coming from Washington?

ARGH!

KKTSews said...

The traditional association of economic conservatives with Republicans and economic liberals with Democrats has been blown out of the water by Bush II. Check out that deficit!

The good news in my mind is that people (well some of the minority who vote, anyhow) no longer blindly follow party tickets, but actually (horrors!) think about issues as they pull the proverbial lever in the voting booth.

Did I ever tell you how much I hated Econ in College? Makes zero sense to me. Every solution that seemed reasonable and sensible was wrong. Kind of like Keynes.

Anonymous said...

Actually, Keynesian economics probably prolonged the depression. (Because most economists until the Hayek/Friedman renaissance were liberals, this fact was obscured in economic education for about 40 years.) As Bilbo so rightly pointed out, the government can't go on spending more than it intakes without eventually having to face really bad consequences, no more than Bilbo can. The USA has gotten away with it because there is no safer place on earth to invest the funds that flow oveseas, so the money we leak through our outrageous trade deficits and our governmental deficit generally comes back as investments. These investments provide capital for our economy, and the consequent genuine growth papers over the fundamental problem. The fundamental problem is that we individually borrow to spend more than we make, just as the government does.
Economists were probably rightly afraid that the housing bubble bursting would precipitate a general meltdown similar to the Great Depression. However, most liberal economists forget that the Stock Market Crash did not precipitate the worldwide Great Depression; the Smoot-Hawley Tariff, by almost completely disrupting all foreign trade guaranteed the Great Depression worldwide, and eventally proved to be the real cause of WWII (the worldwide poverty fertilized the fields for Hitler, Mussolini, and Stalin's rotten fruit). The only thing Herbert Hoover should be castigated for was signing the Smoot Hawley Tariff, although his veto would probably have been overridden anyway, as the US Congress, then as now, had not an economic clue. The only reason we are not in a depression right now is that the world economy is so globalized Congress could not possibly do something as stupid as the Smoot Hawley Tariff Act. Or maybe they could. But hat's enough right-wing economic analysis for today.

Mike said...

Mistress, good one. Really good!

anathema -
4. any imprecation of divine punishment.
5. a curse; execration.
I'll let the reader pick between 4 &5.

And all economic theory will be turned on its head soon. Belgian brewer InBev is going to buy out Anheuser Busch. The United States will cease to exist as we once knew it. Plague and pestilence will sweep over the land. InBev has said they see 1.4 billion in immediate savings. Guess what that means.

Jean-Luc Picard said...

An excellent post about two key men in economics.