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The Benefits Keep Coming
Part III demonstrated that income and employment need not fall in response to thrift. Quite the contrary, income and employment can – and, logically should – rise as a result of saving. More specifically, they expand in direct proportion to the increase in savings and the extent of successful entrepreneurship. As a result of these beneficial developments, nobody loses and at least one person (Junior) gains. Indeed, when we incorporate monetary issues into the analysis, we find that not just Junior but all consumers benefit from the workers’ and capitalist’s saving (for details, see Murray Rothbard, Man, Economy and State, Ludwig von Mises Institute, 1962, 1993, ISBN: 840212232).
Assume that there is a fixed and invariable amount of money (say 110 identical slivers of gold) on Mises Island. Eleven units of goods per day were produced before Boss’s proposal was implemented, but 12 units per day are produced thereafter. Accordingly, and assuming that there is no extension of trade credit beyond that financed by savings, we can expect that prices on Mises Island will, as a result of saving and successful entrepreneurship, fall 8.3%. A little thought and a reference to economic history should demonstrate that this process is a logical, valid and reliable route to material prosperity. To cite just one of many possible examples: after the United States returned to a gold standard in 1879 (it left the gold standard during the Civil War so that both warring governments could issue as much “fiat” money as necessary to buy war materiel) prices began a slow and steady decline that continued for the remainder of the century.
According to Milton Friedman and Anna Schwartz (A Monetary History of the United States, 1867-1960, Princeton University Press, 1963, 1971 ISBN: 0691003548), during these decades America‘s population grew at a rate of more than 2% per year, railroad networks were constructed from coast to coast, the settlement of the continent was completed and an extraordinary increase both in the acreage of land in farms and the output of farm products occurred. The number of farms rose by nearly 50% and the total value of farm lands and buildings increased by more than 60% – concurrent, it needs to be emphasised, with the steady decline in the prices of most goods. Yet at the same time - i.e., whilst most prices fell – manufacturing industries grew even more rapidly. Indeed, the Census of 1890 was the first in which the net value added by manufacturing exceeded the value of agricultural output.
During these decades, hardly co-incidentally and for the last time, the U.S. Government was small enough to fit inside the Constitution. The lengthiest occupant of the White House, Grover Cleveland (1885-89 and 1893-97), was determined that government should impose the least possible burden upon taxpayers. Jim Powell (FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, Crown Forum, 2003, ISBN: 0761501657) noted that Cleveland “struggled to cut tariffs, which were then the most important and controversial federal taxes. He opposed an income tax and vetoed a bill [altogether, he vetoed more than 300] that would have distributed $10,000 worth of seed grain to Texas farmers who had suffered a drought. Cleveland wrote ‘Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character.’”
On Mises Island, then, the steady advance of prosperity is not built upon government intervention. Nor is it built on hedonistic consumption (i.e., that which is not financed by savings or current income) or upon the debasement of money. Prosperity, whether on Mises Island or anywhere else, is built upon savings and the successful conversion (by means of entrepreneurial discovery) of savings into productive capital. An assault on either savings or capital or both, as exists on Keynes Island, hampers the creation of capital - and therefore imperils future prosperity.
Back to Samuelson
What is astonishing is that the problems that are part-and-parcel of life on Keynes Island have been well-known for decades (see in particular Henry Hazlitt, The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies, Foundation for Economic Education, 1959, 1994, ISBN: 157246016 and William Hutt, The Keynesian Episode: A Reassessment, Liberty Press, 1979, ISBN: 0913966606). Prudent politicians would have recognised these flaws and adjusted retirement programs to emerging social and economic realities (indeed, truly public-spirited politicians would have resisted the establishment of these programs in the first instance and abolished them at the first opportunity). People can finance retirement either through savings and productive investment (perhaps supplemented with part-time work) or reliance on others (taxpayers and the coercion of government). As life expectancy has improved, the obvious response was gradually – and with much advance warning – to raise eligibility ages and to tie the benefits paid in retirement to the income earned during one’s working life.
These actions would have encouraged saving and tempered future demands upon the public purse. Alas, little or nothing along these lines has been achieved. One after another, political leaders have ignored the future. Clearly, however, the blame cannot be sheeted exclusively (or perhaps even predominantly) to politicians. In a new book entitled Who Will Pay? Coping With Aging Societies, Climate Change, and Other Long-Term Fiscal Challenges (International Monetary Fund, 2003, ISBN: 158906223X) Peter Heller notes that citizens have greatly facilitated if not enabled the politics of denial. They, no less than their political masters, have been short-sighted. Robert Samuelson (“U.S. Turns a Blind Eye to Looming Catastrophe,” The Australian Financial Review, 14 January 2004) has the last word. “The longer choices are postponed, the harder they become – and they’ve already been delayed so long that they can’t be easy. Productive baby-boom retirees may assume that their children will always pay the costs of federal retirement programs. This may be an illusion. As Heller notes, one possible response to a future budget crisis would be for government to ‘abandon or suddenly scale back on their commitments’ to retirees. Abrupt benefit cuts would be arbitrary. But given the baby boomers’ role in sanctioning today’s indifference and denial, they would be richly deserved.”
 
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