Mill vs. Keynes

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People are being asked to spend, spend, spend – out of patriotism and to forestall economic depression. But spending in itself does not prosperity make. Consider this advice of 170 years ago:

“Among the mistakes [of the classical writers] … was the immense importance attached to consumption. The great end of legislation in matters of national wealth . . . was to create consumers…. This object … was conceived to be the great condition of prosperity.

“In opposition to these palpable absurdities, it was triumphantly established by political economists that consumption never needs encouragement. … The person who saves his income is no less a consumer than he who spends’ it: he consumes it in a different way; it supplies food and clothing to be consumed, tools and materials to be used, by productive laborers. Consumption, therefore, already takes place to the greatest extent which the amount of production admits of …

‘The usual effect of the attempts of government to encourage consumption is … to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it.

“What a country wants to make it richer is never consumption, but production.” (John Stuart Mill, Essays on Some Unsettled Questions of Political Economy, 1830)

Today’s economists consider themselves more sophisticated than the economists of yore. They would have government play market-manipulator, or God. Government should “I stimulate” the economy by subsidizing some businesses and granting tax breaks to others. Congress has already passed a gigantic many-billion-dollar subsidy to the airline industry. How will it finance this and all other subsidies? It must tax, inflate, and expand credit. If it taxes to get money to pay for subsidies to some persons, the beneficiaries will have more to spend, but taxpayers will have less. No net gain there! Again, if government pays the subsidies by creating new money or expanding credit, the beneficiaries will gain but only by taking purchasing power from all owners of dollars and of fixed-dollar assets. No net gain there either! Or if the government tries to encourage investment by reducing interest rates some firms will be induced to invest at below-market interest rates in questionable, very likely unproductive, enterprises. No net gain there either!

To promote economic recovery, government should remove as much uncertainty as possible from the market. Entrepreneurs should have nothing to worry about but the usual risks of doing business and the unpredictable demands of consumers. Government should protect its citizens not only from the threat of domestic, foreign, and terrorist force and violence, but also from the arbitrary government interferences which will inevitably result from a “stimulus package.” Inflation and credit expansion will distort prices and upset economic calculations; new taxes, controls, and regulations will add to the uncertainty and the costs of doing business.

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