Friday, February 22, 2008

Liberate Don't Stimulate

Dr. Brook has an excellent article up at Forbes discussing the latest "stimulus" plan.

For those wishing to encourage more such articles, I think that adding comments helps show publishers that people find the material useful and interesting -- which increases the odds that they will publish more of a given author’s work. My personal approach in commenting is to try to either amplify a point that perhaps space limitations made impossible for the author to treat at length, or to address a reasonable objection made by other commenters. For this article, here is my attempt at the latter:
Thank you, Dr. Brook, for this insightful and principled article. I hope that Forbes continues to bring us more like it.

As to the comments, I think cejocejo’s (#6) reflects a common misconception, one that seems to be shared by many nightly newscasters and, unfortunately, by policy-makers in Washington. In this case, as is so often true of errors, there is a grain of truth to their idea that consumption drives production -- but it is not a primary in the way they construe or present it, rather its only explanatory value is to see that production must ultimately be understood as being for the sake of consumption, i.e. it is not an end in itself. But this of course does not mean that consumption makes production possible, manifestly it’s the other way around.

This would be all too evident if you lived on a self-sufficient farm or a desert island where for every item you wished to consume you’d find that the order must be: produce then consume. In a civilized society however -- one which features the enormous benefits of the division of labor and of trade – there is an extra step, so that the order becomes: produce > trade > consume. And only here is there a perspective from which we can say consumption “drives” production, that is, if one wishes to trade the goods one produces, someone else must want them, i.e. there must be a consumer for them. For instance it would serve no purpose for me to spend my time producing 8-track players or buggy whips because I couldn’t exchange them for anything I’d want to own/consume, and therefore I’d simply be wasting my time and resources. Yet this consideration only sets the boundaries on which productive activities are reasonable in an exchange-based economy, it emphatically does not mean that consumption can occur without production, or that lack of demand is the reason there is not enough production. Indeed as Jean Baptiste Say pointed out long ago, in a trade-based economy there can be no demand without supply: each party offers the good they are exchanging (their supply) for the good they wish to receive (their demand). Thus supply from one perspective is demand from another.

Once we see through the myth of “insufficient demand”, we also see that the Bush plan is not a “stimulus” at all, it is simply another case of the redistribution of wealth (the government collects taxes and then gives a small portion of them back). It therefore can, and does, add exactly nothing to the economy. To achieve that goal, one must follow the prescription outlined by Dr. Brook in his article.


Anonymous Anonymous said...

Amit check you blogroll. The Primacy of Awesome link has been hiijacked and should be treated as malware risk. You should delete or change the URL. Sorry about leaving a comment but I didn't see an email link to you.

Chris Sandvick

10:51 AM  
Blogger Amit Ghate said...

Thanks Chris, I'd been meaning to update the blogroll but hadn't gotten around to it. I've now done so thanks to your comment.

3:55 PM  

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