has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work
this winter.” – Washington
Dispatch, 21 October 1930
There’s an old joke about economists. An economist, a lawyer, and an engineer fall
into a pit. Not having a way out, each one
sets about solving their problem.
Unfortunately, they don’t have any materials to build a ladder. Thus, the lawyer’s rhetorical skills and
legal knowledge are useless. The engineer
can design a ladder but has nothing with which to build it. The economist, however, fails to see a
problem. He just assumes that they have
Obama’s advisors are assuming that Keynesian economics will
be the ladder that allows the U.S.
to climb out of the hole into which the Keynesians pushed us in the first
Perhaps if the good professor had studied Austrian economics
he would realize that his entire statement rests on a fallacy. People do act rationally. They act in ways in which they believe will yield
the greatest utility—i.e., satisfaction of their most important needs and
desires. Whether their decisions prove
to be good or bad is another story. No
one has perfect knowledge and, thus, ex ante we can only speculate on
the end result of the decisions that we make.
It is not until after the decision is made, ex post, that we can
determine if our action was sound. Even
then, whether the decision was sound or not depends on the subject valuation of
the individual; not on some objective measure applied by another individual.
Since we all have different value scales, what may be a good
decision for one person will seem stupid to another. For example, Warren
Buffet is advising that folks buy American stocks
. Good decision for Mr. Buffet. He can afford to lose a few billion dollars
waiting for a stock market recovery. However,
the average person who could not afford to lose a few thousand has already seen
his savings decimated. He’ll choose to
keep his money where it is perceived to be safe, in cash or perhaps government
securities. Although this may prove detrimental
in the long term, is it really irrational?
Of course not; the individual is doing what he thinks is in his own best
Alan Greenspan summed up the elitist economist attitude when
he coined the phrase “irrational exuberance.”
According to Greenspan, it is irrational exuberance on the part of
investors and consumers leads to bubbles and then to busts. Sorry, Maestro, you’ve got it backwards. “Irrational exuberance” is simply people
trying to take advantage of your irresponsible policies. It’s not irrational exuberance that causes
the business cycle; it’s the central bank’s inflationary monetary policy. For instance, is it irrational for folks not
to save when interest rates are set near zero so that there is no reward for
saving? Is it irrational to think of
your home as an ATM when home prices are skyrocketing due to fiscal and
But, hey, don’t blame Greenspan. His policies would have worked if only
everyone had acted in ways he thought prudent—if they’d only been
Mainstream economists assume that people are robots and that
they will act in predictable ways. In
reality, people act in ways which they believe will best satisfy their needs
and desires. Since we all have different
needs, desires, abilities, and resources, it is impossible to accurately
predict how individuals will act.
Economic models are based on aggregates. But the aggregate is composed of diverse
individuals acting in their own self-interest.
In order to address this contradiction, economists make assumptions—they
assume there is a ladder where there is in fact none. Thus, while economic models work well in the
laboratory, they are virtually useless in the real world.
However, there are some assumptions which we can make about
Obama’s stimulus plan:
up government spending will crowd out private investment.
and capital will be transferred from the productive sectors of the economy
to less or non productive sectors.
job “creation” will mean that fewer jobs are created in the private
used the New Deal for political patronage; there is no reason to believe
Obama’s administration will be any different.
government economic control will mean less individual liberty in all
Finally, and most importantly, the free market—the one
ladder which would allow us to escape this morass—will be crippled by more
regulation, intervention, subsidies, and taxation. A real economic stimulus package would
unfetter the market, bringing about real growth and real prosperity. Unfortunately, unleashing the market would
mean that politicians would have to relinquish their power and control, and
elitist economists would have to admit that their models are a fraud.
Don’t count on that happening any time soon. Indeed, because the market is not under their
control, policy makers and their statist advisors regard the free market as out
of control and thus as the enemy. Instead
of allowing the free market to work, the Power Elite will do everything they possibly
can to demonize and eventually kill it.
By the way, Colonel Arthur Woods established his Emergency
Committee for Employment at the behest of President Hoover in October of 1930. By 1931, the unemployment rate had doubled,
mostly thanks to Hoover’s
President-elect Obama has better luck with his incessant interventions.