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May 23, 2012 1:57 pm

Stop Drinking the Moonshine on Prosperity

avatar by Gabriel Martindale

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European Central Bank in Frankfurt. Photo: wiki commons.

Everyone wants prosperity. As von Miseslong ago observed, even those political movements that vehemently decry modern materialism never promise their supporters anything other than increased wealth. With regard to social affairs people have profound and irreconcilable differences about what kind of world they would like to see, but no-one openly admits to wanting the general run of humanity to be poorer, however much they talk about the disease of “affluenza“.

Given this near unanimity about the end sought, it is odd that there is so little agreement about economic policy. How is it that intelligent people of good will who want the same thing can disagree so much about nearly everything? Surely, if they are both trying to reach the same conclusion, one side should be able to win over the other by force of evidence and reason and then we can all get down to realizing our shared goal. This conundrum is a lot easier to solve, I think, once we realize that two people talking about ‘prosperity’ are often not talking about the same thing at all.

The simple and ancient way to think of prosperity is plenty, the abundance of things we want, so that in the utopic situation, there is enough of every good thing for all who want it at a price they can afford. This is the ideal we see time and again in the Tanach, for example in last week’s parsha Bechukotai, which talks of harvests so abundant that they take months to gather in and storehouses overflowing with produce (Vayikra 26:5, 10) as a reward for observance of the Torah. However, this, surprising as it may seem, is often not what economists mean when they talk about prosperity; rather, their definition is embedded in concepts like “full employment”, “booming business”, “rising wages” and “growth”. They are concerned not so much with how much stuff there is, but how much stuff is going on.

Now, of course, these things are not at all incompatible with prosperity according to first definition. Ordinarily, if an economy is producing the goods people want, businesses will be making profits, they will employ people and total production will grow. However, the situation changes when we stop thinking of these as things that accompany prosperity, but as the essence of prosperity in and of themselves. This takes us, in the end, down a very strange road.

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Take, for example, falling prices. If there is more of something the price tends to go down and, when that happens, more people will be able to afford it. According to our first definition of prosperity, then, falling prices are both an indication of something good and a good in themselves. However, for those trained in modern economics, they are quite disastrous. If prices fall, so the argument goes, then people will delay their purchases until they fall even more; businesses won’t be able to sell their products and will have to cut their worker’s wages or fire them; these workers will then cut back on their purchases causing further price drops leading us back to stage one of a disastrous “deflationary spiral”. SeferMelachimrecords “two seahs of barley for a shekel, and a seah of fine flour for a shekel” as a joyous event (II 7: 1, 18), but for Keynesians, including Jewish and Christian ones, the price-deflation prophesied by Elisha is one of the worst economic disasters imaginable. (Of course, according to their logic, the manufacturers of personal computers, digital cameras and mobile phones should all have gone out of business decades ago, but this never seems to bother those allegedly empirically minded and non-dogmatic economists).

Another test case is the idea of under-consumption or, what is the same, over-production. According to the ancient idea of prosperity the very idea of there being too much stuff per se is complete nonsense. Stuff is what we want. This intuition was confirmed by “Say’s Law”, one of the most profound achievements of economic thought. Essentially, this law shows that, since people buy goods with other goods, through the medium of money, total demand in an economy is equal to total production; since supply is also, by definition, equal to production, supply always equals demand. There can be no such thing as total “demand deficiency” leading to recessions, but only cases where producers are making too much of some things people don’t want and not enough of the things people do. The answer is not either to decrease production willy-nilly (as governments used to do) or to try to get people to consume more willy-nilly (as they generally do now), but to create the conditions whereby businesses accurately match the structure of production to the structure of demand.

The irrational fear of the gentle giant, price-deflation, and the imaginary goblin, demand deficiency, can lead to conclusions that, one would hope, any half-way attentive person could see are insane. Every time a hurricane, flood or earthquake occurs, impoverishing countless people, lunatics (for that is what they are) appear on TV to comment on how the economy will get a boost, as if expending labour and resources on cleaning up a mess makes us better off. The archbishop of lunatics Paul Krugman opines that if only someone could fake a space invasion and trick people into wasting their time building a giant laser the economy would be saved.Franklin Delano Roosevelt, a hero of liberals and neoconservatives, was so in thrall to his imaginary terrors that he ordered hundreds of thousands of gallons of milk to be poured down drains and countless animals to be slaughtered and burnt just when millions of people could not afford food. What’s more, he did this act of near-fiendish wickedness in the name of prosperity and social justice!

Such patently mad conclusions seem rational according to the alternative view of prosperity. If hundreds of people dig a ditch and then fill it up again, unemployment goes down. If food is made artificially scarce then grocers make bumper profits. If people are manically buying and selling houses with artificially cheap borrowed money then the economy has “grown”, even if ordinary people can no longer afford rent. The simple answer to such crazy ideas is that though such things as growth, employment and increased trade are in healthy conditions a sign of prosperity, they aren’t always.  Most normal people retain the common sense that the products of extensive university training so sorely lack and can see the sheer craziness of the more extreme manifestations of Keynesian theory; unfortunately the state has been successful enough in propagating vulgarised versions of its shamanic doctrines that the general public puts up with the exact same craziness in smaller, manageable doses. As I write, the voices calling on the European Central Bank to abandon all restraint and pump out money like it’s going out of fashion are becoming deafening. Pulling the western world back from the brink will take a lot of work, but the first step along the way has to be purging our minds of the sort of moonshine that will have us believe that by jerry-rigging the side-effects of prosperity we can have the real thing, as if you can have all the benefits of a 5 course meal simply by giving yourself a stomach ache.

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