THE ROBINSON CRUSOE ETHIC VERSUS
THE DISTEMPER OF OUR TIMES

Part V

1 January 2002

...continued from Part IV

In this book we have argued that unless some restoration of the older ideal of liberalism is effected, the result is likely to prove ruinous both to our liberty and prosperity over the long run … We have sought to demonstrate that the major elements of the traditional liberalism … are themselves closely attuned to the persistent demands which temporality imposes upon all human action.

T. Alexander Smith, Time and Public Policy (1988)

The Distemper of Our Times: Four Major Attributes

Attribute #1: The Fetish for Fiscal Stimulus (Government Spending)

Most (indeed, the vast majority of) Australians are salary earners; and salary earners, as we have seen, tend to have high time preference, i.e., a strong orientation towards current consumption. It thus comes as no surprise that a phalanx of politicians, bureaucrats, academics and lobbyists (salary earners all) promote government spending, and that a large number of citizens demand it. According to its proponents, government spending “creates jobs” and encourages spending; more jobs and spending, in turn, counteract recession and hasten a eventual return of prosperity; hence more government spending neutralises recession and brings forward the resumption of good times. The method of Crusoe Economics, the examples of Crusoes I, II and III and a moment’s reflection are sufficient to demonstrate the self-defeating nature of these proposals. Let us say that Crusoe III proposes to the tribe on the neighbouring island that a new boat (replacing the one which is father built and which his own neglect has ruined) be built. Lacking the pool of funding, inclination and knowledge to build it himself, Crusoe III promotes this project as a “government-supported” initiative that will “create jobs” among the members of the tribe. This project, adds Crusoe, is thus in the “public interest.”

Crusoe omits to mention, but the tribe’s elders nonetheless realise, that Crusoe will be the boat’s primary user. For this reason the elders agree to its construction only on condition that it will be financed from additional taxes levied exclusively upon Crusoe. Crusoe readily agrees: given his high time preference he discounts the present value of the taxes to be paid in the future. Henceforth and for ten years, he will render each month a portion of fruit and berries equal to the amount he can collect with his own hands and without any assistance during two days.

Note that this arrangement does nothing to reduce Crusoe III’s time preference. Quite the contrary: it is a consequence of his pre-existing and already-damaging short-term time horizon. Accordingly, the boat’s construction causes neither Crusoe’s rate of savings nor his pool of funding to grow. Indeed, given an unchanged rate of savings and an increased monthly tax obligation, Crusoe’s pool of funding – the source of the productive capital goods he requires in order to restore his consumption to the level enjoyed by his father – will shrink. Government spending, then, does nothing to improve Crusoe III’s fortunes, and over time will worsen them.

Two other observations are in order. First (and consistent with his high time preference), Crusoe envisages the boat as a consumption good (i.e., a means of travelling to the neighbouring island and resuming his carousing) and not as a capital good (i.e., a means of catching more fish and replenishing his pool of funding). Second, it is true that Crusoe could conceivably use the boat as a capital good. Alas, he has forgotten or never learnt much of what his father knew about fishing. Not only has he imperfect technical knowledge about how to catch: his tacit knowledge about which fish can be caught where and when is sorely lacking. Accordingly, even if it were utilised as a capital good the boat would not be very productive in Crusoe III’s hands.

In this respect it is likely that the boat will be bigger, more lavish, etc. than a boat built by Crusoe for the explicit purpose of capital accumulation. Government expenditure, then, is consumption and not “investment”; and to the very limited and infrequent extent that it might be construed as investment it is wasteful investment. From the standpoint of most politicians, bureaucrats, businessmen, academics, consumers and taxpayers, this conclusion is clearly heretical. As James Grant reminds us, however, “the more intense the craze the higher and broader the types of intellects that succumb to it.” The fundamental point about government spending – embarrassingly simple and probably for that reason usually overlooked or derided as “simplistic” – is that the money governments spend must come from somewhere. This “somewhere” is ultimately tax-paying individuals and businesses. A government must raise revenues either through taxation, borrowing or inflation (see below). Regardless of its approach, not only is no new wealth created: the possibility of otherwise creating new wealth is foregone. A recent editorial in The Wall Street Journal (19 October 2001) concludes that “it’s pretty much impossible to find an introductory macroeconomics textbook that recommends this type of fiscal stimulus. If [Lord] Keynes appeared in any of the heavy-duty academic centers around the world, he would find his idea referred to as a ‘classic fallacy.’ Most economists have moved on to other models.”

Attribute #2: The Fetish for Monetary Stimulus (Government Inflation)

The vast majority of Australians are salary earners; salary earners, as we have seen, tend to have a strong orientation towards current consumption; and some consumption goods, such as houses in fashionable suburbs, late model motor cars, overseas holidays and the like have high price tags. Hence the pervasive practice of paying a small fraction of their price with current income, acquiring credit and mortgaging the remainder to future income; and hence the very high levels of mortgage, motor car and other consumer debt in Australia.

It thus comes as no surprise that politicians, bureaucrats, academic economists and lobbyists (who tend to be salary earners) promote and applaud the creation by government of vast amounts of credit not backed by savings. They do so as a Good Thing in its own right and also as a means of combating various economic problems. According to its proponents, the forced reduction by governments of short-term rates of interest below the rates that would otherwise prevail in the market (thereby scrambling the time preferences of creditors and debtors vis-à-vis one another and confusing the market signals they transmit to one another) enables businesses and individuals to incur more debt more cheaply; this debt, in turn, enables them to purchase goods that they could not otherwise afford; these purchases “create jobs” and encourage spending; and more jobs and spending counteract recession and hasten an eventual return of prosperity. Hence the contention that the creation by government of large amounts of credit not backed by savings neutralises recession and brings forward the resumption of good times.

The method of Crusoe Economics, the examples of Crusoes I, II and III and a moment’s reflection are sufficient to demonstrate that these proposals, too, are self-defeating. As in our first example, let us say that Crusoe III proposes to the tribe on the neighbouring island that a new boat be built; that Crusoe will benefit disproportionately from use of the boat; and that Crusoe lacks the pool of funding, diligence and knowledge to build the damn thing himself. This time, however, he proposes that he receive a “Boat Owner’s Grant” from the tribe, and that the BOG be financed by cheap money generated by the tribe’s Reserve Bank and circulated through its Commercial Bank. As before, the tribe’s elders are not stupid. They agree to underwrite the credit to Crusoe III but stipulate that it will be financed from an additional tax levied upon Crusoe. The elders recognise not only that governments cannot pick winners; they also recognise that losers tend unerringly to seek out governments.

Accordingly, in order properly to account for the risk of default not covered by the loan at a sub-market rate of interest, the elders levy an additional tax upon Crusoe. As before, Crusoe readily agrees: given his high time preference he discounts the present value of the interest payments and the additional tax. Notice, then, that in its essential elements monetary stimulus by government is similar to fiscal stimulus by government. Although it was initially created by the government out of thin air, the credit must eventually come from somewhere, and any miscalculation caused by the obfuscation of this point eventually causes taxes to rise. Indeed, the greater the tampering with reality in the form of a disparity between the subsidised and free market rates of interest, the greater the eventual reckoning. Further, like fiscal stimulus monetary stimulus does nothing either to reduce its recipient’s time preference and propensity to save (indeed, it may shorten time horizons further) or to replenish his pool of funding. Finally, it leads to the production of what are at best unproductive capital goods and what are usually unaffordable (else why the artificially cheap loan?) consumption goods. Whether it is expenditure financed directly via taxation or indirectly via credit creation (borrowing), then, government expenditure is consumption and not investment; and to the very limited extent that it might be construed as investment, it is wasteful investment.

Attribute # 3: The Denigration of Savings

Classical economists, refuting the fallacies of their day, showed that a policy of savings that most advantages one individual (what we have called The Robinson Crusoe Ethic) also advantages other individuals. Austrian School economists have extended and elaborated this key insight. Part and parcel of the contemporary eclipse of classical economics is the glorification of spending on consumption goods. This glorification, whether through fiscal or monetary stimulus or other means, manifests itself in a denigration of private savings. Lord Keynes did not commence this denigration, but his General Theory of Employment, Interest and Money (1936) both cloaked it in theoretical garb and did much to popularise it.

Accordingly, most contemporary economists posit the existence of a paradox of thrift. In the words of William Baumol and Alan Blinder (Economics: Principles and Policy, 1988), “while savings may pave the road to riches for an individual, if the nation as a whole decides to save more, the result may be a recession and poverty for all.” The denigration of saving and The Robinson Crusoe Ethic more generally regularly finds it way into the popular press. In The Australian (17 October 2001), for example, an academic describes the indignity of saving in both a general and a specific sense (i.e., accumulating sufficient frequent flyer points to upgrade to Business Class). On a higher material and social plane than savers, according to the author, are spenders (including those who consume the Business Class tickets granted by their employers). Upon her arrival in the Qantas Club lounge (evidently a place to be seen) the author recounts that “it was obvious that I had saved, whereas the others were spending. Or more likely their companies were. My class background was showing like a dirty slip. The old adage, if you have to ask the price you can’t afford it, has become: if you’ve saved, then you’re not in the same class league. For my parents’ generation there was nothing particularly honourable about saving. It was what one did – the economic fact of life … [But] saving for my generation is either totally far-fetched or it means banking frequent-flier points.”

Attribute # 4: The Fetish About Technology

We have seen that successful entrepreneurial experimentation plays a significant role in the accumulation of capital. The role of technology, however, is less important than and very different to that is usually supposed. Time preference, savings and the pool of funding are necessary conditions for entrepreneurial experimentation and hence of capital accumulation. Entrepreneurship, then, is an “intervening variable” whose extent is to at least partly explained by savings and the pool of funding and whose success in turn helps to account for the depth, breadth and structure of capital. Accordingly, entrepreneurship is not (as it usually assumed) an exogenous variable with a life and importance of its own. Confusion with respect to the role of technology arises because is seldom recognised that there will always be superior inventions, productive techniques, etc. that are available “on the shelf” but unused by entrepreneurs. Why? Because the supply of savings is far more finite than the supply of inventions and techniques. Under most conditions, then, the imputed market value of savings will exceed that of technology. It is the present structure of capital goods that determines which of the various “on the shelf” techniques are likely to be taken off the shelf. A demonstrably-superior technique may not be utilised because the plant and equipment it requires do not exist and because the plant which can support another technique is available. It is thus the generally-higher opportunity cost of to-be-created capital goods vis-à-vis already-existing capital goods that prevents entrepreneurs and investors from removing inventions and more productive techniques from the “shelf” in a willy-nilly manner. On the other hand, the expectation that much higher profits will be derived from new plant, new location, etc., will increase the demand for inventions and techniques. (This, by the way, tends to happen when governments depress market rates of interest below their natural rate; hence the Internet Bubble of the late 1990s).

This view of the structure of capital and production – which stresses the time preference of buyers and sellers and creditors and debtors, the knowledge-generating functions of markets and the intricate linkages between capital goods – thus accords a much more modest role to technology than does the conventional wisdom. The received wisdom ignores the complexity of capital and gives us the “knowledge class” of concentrated information producers and recipients. This class of salaried scientists, technicians, academics, etc., requires elaborate think tanks, massive outlays of R&D and (in Australia) public sector finance. Like most public sector expenditure, and as detailed in Terence Kealey’s outstanding book The Economic Laws of Scientific Research, more often than not this class and its thinking about technology gives us bureaucracy, perversity, profligacy, inefficiency and waste.

A Dour and Ironic Conclusion

We can now draw the large number of loose ends from Parts I-V to a succinct close. Although most politicians, bureaucrats, academics, consumers and taxpayers seem blithely to assume that there is, the plight of Crusoe III (and, apparently, of rapidly growing numbers of white collar workers in Australia) demonstrates that there is nothing automatic about the maintenance of gilded living standards. Crusoe III’s apparent incomprehension about the cause of his plight (i.e., high time preference, poor savings, depleted pool of funding and decadent lifestyle), together with his demand for and the government’s supply of fiscal and monetary demands that are likely over time to worsen that plight, also indicate that an accurate diagnosis of The Distemper of Our Times will be extended and hardly effortless.

The diagnosis, nonetheless, is simple: Crusoe III and his government must abandon their high time preference and return to The Robinson Crusoe Ethic. At the moment this is clearly an exceedingly difficult thing to envisage. Hence the disconcerting irony at the heart of The Distemper of Our Times: despite their fictional status, isolated existence and presently-unfashionable habits and attitudes, Crusoes I and II live in the real world; in sharp contrast, and despite the close correspondence to contemporary mores that their majority status affords them, Crusoe III, politicians, bureaucrats, academics and many of today’s salary earners and debtors inhabit Fantasy Island.

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