Wednesday, June 13, 2012

Demand - A Consequence Not A Cause

Cafe Hayek — where orders emerge
It’s the unreflective businessman’s economic algorithm: ‘the key to my success is higher demand for my output; therefore, the key to the economy’s success is higher demand for the economy’s output.’  Period.  Little thought is given to the complex institutional details that in fact are the keys to sustained and widespread economic growth.  Are markets sufficiently free to set prices that accurately reflect resource scarcities?  Are property rights sufficiently secure to encourage long-term investment?  Are monetary and fiscal policies sufficiently prudent so as not to discourage households, entrepreneurs, and investors from making sensible plans over appropriate time horizons?  And as Deirdre McCloskey asks, does the culture encourage commerce and innovation by adequately dignifying the bourgeoisie?

The stunner for me is why so many choose to believe in Keynesianism when there's truly no proof that it works, or ever worked, or even should work.  Why then do people bow down before the alter of Keynes, and shout "amen!"?  Best guess: it makes it easy to justify government action, and there's nothing that solidifies the significance of a politician like being needed for action to save the economy.

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