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Example #5: Worshipping the False God of Consumption
Governments and most market participants have also misconceived, misdiagnosed and prematurely hailed the end of the bust because they have misunderstood, rejected or simply ignored Say’s Law (see Thomas Sowell, Classical Economics Reconsidered, repr. ed., Princeton University Press, 1977, ISBN: 0691003580). According to Paul Sweezy (in Seymour Harris, ed., The New Economics: Keynes’ Influence on Theory and Public Policy, Dobson, 1948), “historians fifty years from now may record that Keynes’ greatest achievement was the liberation of Anglo-American economics from a tyrannical dogma … Yet the Keynesian attacks, though they appear to be directed against a variety of specific theories, all fall to the ground if the validity of Say’s Law is assumed.”
Why Have They All Been Fooled? assumes that Say’s Law is valid and, reasoning from it, restates a series of conclusions that were well known to classical economists but have been ignored or denigrated by their descendents. Seemingly alien to most of today’s economists, policymakers and market participants is the notion that money is no more and no less than a medium of exchange. Money facilitates the exchange of titles to property, and the prices of these titled can be expressed in terms of a unit of currency. But money and wealth are not synonyms: hence the printing of new money per se does not produce wealth.
Equally alien is the principle that capital derives from the fruits of past labour and that credit is based upon the promise of future labour. Not just alien but also subversive to today’s mainstream is the notion that to consume is necessarily to destroy value; and to destroy value is to hinder the replacement and augmentation of the pool of productive resources that enables additional consumption into the future. Heretical and unspeakable, then, is the notion that the consumption facilitated by governments’ increasingly spendthrift fiscal and monetary policies leads not only to the premature destruction of capital which could otherwise have been created: it also hastens the destruction of existing capital derived from past saving. Such policies thus unintentionally encourage Australians to consume their own seed corn (see also Looking Into 2003). Consumption, in short, is not wealth; consumption destroys rather than produces wealth; and consumption never needs encouragement by government. More generally and all else equal, in other words, an artificial increase of consumption, as occurred in Australia during 2002, not only does nothing to make a society richer: as the sorry fates of Mondor and Crusoe III demonstrate, such consumption eventually makes a society poorer (see also GNP and Consumer Confidence in Australia: A Dissenting Argument).
Example #6: Misconceiving Wealth
During the boom and since the bust, governments, central bankers and market participants have also utterly misconceived the nature of wealth. To see this, consider (as do Robert Murphy and Gene Callahan in their excellent article Spilled Milk) a situation in which the price of farm products declines steadily over time and farmers demand that the government maintain the prices of the commodities they produce. “Wealth is being wiped out of the economy they might say, adding “the value of our farms has fallen 50% in the last year. This makes everyone poorer, since we can’t spend as much.” This reasoning is invalid. Under these circumstances no wealth has disappeared. The same fields and the same tractors that were present last year remain present today. Some farms, it is true, have folded and been amalgamated into others; but this is because the larger number of farms could not profitably produce the quantity and quality of agricultural commodities required by consumers.
With respect to the prices of those commodities, according to Murphy and Callahan “all that we definitively can say has occurred is that there has been a change in relative prices. A bushel of wheat buys fewer dollars, but the flip side of this is that a dollar buys more wheat. Those holding wheat are hurt, but those holding dollars, or any other good which did not decline along with wheat, are helped. This constant adjustment of prices by market participants, so as to bring supply and demand into balance, is the essence of the market process. Beyond pointing out this most elementary of economic facts, there is little further we can say about whether ‘everyone’ is better off with the new price configuration than they were with the old one. Certainly, though, we can point out that it will not do to try to maintain the old prices by government manipulation in the face of the new data of supply and demand.”
Murphy and Callahan apply their reasoning to another price level, that of equities, and then ask: “why do so many ‘free-marketers’ have such difficulties when the fall in prices occurs in the stock market, instead of in the market for agricultural commodities or personal computers? When stock indices fall, we hear repeated worries that ‘wealth is being wiped out.’ On the surface, this seems too obvious to argue. With the NASDAQ plunging from 5100 to [1300], the total capitalisation of the index has shrunk by over three trillion dollars. It looks as though this wealth has simply vanished into thin air. However, as we have seen, this view is the result of confusion between the money prices of goods and the amount of wealth in the economy. The NASDAQ decline has not levelled any buildings or rendered any machines inoperable. America is just as full of farms, warehouses, railroads and oil wells as it was when the NASDAQ was at its peak. The dot-com wipeout has not sucked the knowledge of Java programming out of anyone’s head. Certainly, some companies have shut down. But these were the companies that, in light of the new configuration of market prices, it no longer seemed worthwhile to operate.”
Murphy and Callahan conclude: “cries for the government to stop the market decline are no less special interest group pleading than are attempts by farmers to boost wheat prices. Those holding stocks have come to expect that they have the right to see the prices of their assets at a certain level, and call for the government to intervene when this expectation is disappointed. A campaign pitch designed to appeal to the ‘investor class’ is essentially promising that stock prices will remain high and only go higher. Such a political pitch is, in essence, no different from a campaign that promises farmers higher wheat prices or [trade] unions higher wages. It is a promise to use political muscle to redistribute wealth to the favoured group.”
 
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