In the last post I discussed why Keynesian economic stimulus has not worked but how creating policies that increase production would. Today I though I’d expand on this idea a little bit and take it down to the small scale to show why this is true.
Let’s say that there are two frontier families isolated from everyone else. Normally both families are doing what is necessary in order to provide for their needs. They are growing large gardens and canning or freezing a lot of the produce so they have food for the winter and spring. They are growing cotton and raising sheep, using the cotton and wool to make thread and yarn, and then using the thread and yarn to make clothing. They are cutting down trees and using the logs to make houses, furniture, and fences. At times they are trading to get things they cannot make themselves, like maybe gun powder, nails, and steel, but in general they are self-sufficient most of the time.
Now let’s imagine that there is a “downturn in the economy” and one of the families stops working. They are no longer making food, clothing, and producing wood to repair their home and their other structures. Their livestock are dying from lack of care and their land is becoming overgrown, increasing the chances of tick bite and lyme disease, rodent infestations, snakebite, and other issues.
Keynesian theory would say that the government should borrow money and provide it to the family that is not producing. Perhaps in this case they could get vouchers for food, clothing, and wood. They would then spend those vouchers, which would increase trade and lift the economy. When the economy recovered and everyone was working again, the government would then tax both families to repay the debt with interest.
At this small scale, the issue with this philosophy becomes really obvious. Even though the family may have vouchers for food and other necessities, this doesn’t mean that there would be more items to go around. The first family is probably doing all that they can do to provide for themselves, so they would require a lot of vouchers before they would give up some of their goods than they would if there was a surplus of goods. This would lead to inflation because the vouchers would be far less valuable than the goods they could purchase. In the case of a national economy, these vouchers would be money.
Because one family is not producing, there is less to go around. Perhaps the first family would feel charitable and share what they could with the second family. If they didn’t you could have the government come in with guns or the threat of jail time and take a share of the goods and give them to the other family. This is taxes. Whether the goods are given by free will or taken by force, however, there is less to go around and both families are poorer than they would be if they were both doing all that they could to produce the supplies they needed. Taking from the first family by force would also discourage them from producing more than the bare minimum since the surplus would just be taken from them if they did.
What you really want is for the second family to do what they could to at least take care of their basic needs since they would then be producing things, making more to go around. It would therefore be more effective to only give goods to the second family after they have done all that they could. In most cases people can take care of their basic needs if they have the freedom to do so. In the case where people are physically or mentally disabled, obviously there is a need for others to help since the alternative is not allowable in a moral society.
The best way to motivate people to work is to reward them for doing so and to not provide an easy path for them to get what those who are working have without working themselves. This means having desirable things available that can only be had through work and not providing for those who could take care of themselves but choose not to.
For example, in America those who have a low income or no income at all receive a debit card that allows them to purchase most foods in a grocery store. Many checkout clerks will tell you that many of the people using these cards will have their carts loaded with sodas, expensive packaged/processed foods, and expensive junk foods that middle income families who are livign on a budget will not have. Certainly there are individuals who use the welfare wisely and buy responsibly, but there are a lot of individuals who do not. This would make sense since often the reason people are in this situation long-term is a lack of good economic choices.
If instead only the purchase of basic necessities was allowed (rice, beans, milk, vegetables), there would be motivation for people to earn an income so they could buy other things they desired such as meat and sodas. You need to motivate people to produce and do things that are good for society by aligning their personal interests with the greater good of others. This is why Capitalism has been so successful while other economic systems like Communism have not.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.