A Five Finger Discount

Pundits of late love to talk about our best dead economists: Adam Smith and John Maynard Keynes. The trouble is, nobody really seems to know what these guys actually said about macroeconomic behavior. Well, as someone who has read both Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations and Keynes’s The General Theory of Employment, Interest, and Money, I know what they did not say.

Essentially, the Obama administration says that they will ratchet up government spending to unprecedented levels to create jobs and prime the pump of consumer demand in the economy. This is basically like pushing Dad’s old Datsun pickup to get it started.

Stimulus opponents argue that the levels of spending will burden the economy with too much debt, the effect will not occur quickly enough to actually have any consequences in the larger economy, and so forth. This is basically saying that it won’t work and will leave our great-great grandchildren with massive debt.

The basic ideas as they are cited today are that Smith said that an invisible hand guides the economy to equilibrium. This is illustrated by the idea of a bubble. When investors begin to irrationally overvalue some asset (such as technology-based start up corporations), the market will self-correct and bring those values back to reality—the bubble bursts.

I don’t dispute this idea. I think a lot of what Smith said is still pertinent to where we find ourselves today. It is precisely because the markets self-correct that we find ourselves perched on the edge of a financial abyss. What Keynes later discovered is that in such extreme cases markets can overcorrect and suppress recovery to an equilibrium level. This happens because of very rational behavior by consumers and businesses in response to an extraordinary phenomenon.
So, as I see, as Keynes saw it, it isn’t entirely necessary to develop a spending package to prime the pump of economic activity. No, you just need to persuade 200 million of your friends not to horde money, delay plans, and proceed extra cautiously in all of their spending decisions. This will have the same effect