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Quote of the Day: Robberies Don’t Make Riches
In 1874, the economist John Stuart Mill commented on what is now called Keynesian theory — the idea that government spending can, and must, stimulate the economy in order to prevent or end recessions. He wrote:
The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained…. It is no longer supposed that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasonings of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves … that the man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune. (Mill, 1874 [1974])
Why did Mill write that this central idea [1] of the later economist Keynes, was “no longer maintained” in 1878?
In 1820, the world’s pre-eminent political economist, Thomas Malthus published a famous book promulgating the idea that capitalist societies tend to fall into a state of “general glut” because of a lack of aggregate demand. Mill and Malthus were key figures in the debate over the general glut and the cause of recessions that raged among political economists from 1820 to 1838, when Mill’s counter-theory won the day. Thus, “Keynesianism” went into a long slumber, only to be awakened by Keynes himself a century later.
So the quote about the silliness of the benefits of serial armed robberies was written forty years after it had been discarded by the community of economists.
The source for this Conversation is Steven Kates, “Why Your Grandfather’s Economics Was Better than Yours: On the Catastrophic Disappearance of Say’s Law,” a lecture given at the Ludwig von Mises Lecture Austrian Scholars Conference, 2010.
[1] This is the theory which Keynes rediscovered in 1932 by studying Malthus. It became the basis for the Keynesian revolution, which began in 1936 with the publication of “The General Theory of Employment, Interest, and Money”.
The theory was popularized by the textbook author Paul Samuelson, and taught to every economist from the 1960s on. It has formed the basis of economic policy of the administration of every president since that time, including Barack Obama and Donald Trump. It is the basis of the model of the economy, and its “needs” for stimulus, of every popular writer on economics, from leftists like Paul Krugman to conservatives like James Pethokoukis.
References:
Published in GeneralMill, John Stuart. 1874. “Of the Influence of Consumption on Production.” In Essays on Some Unsettled Questions of Political Economy. 2nd ed. Clifton, New Jersey: Augustus M. Kelley, 1974, pp. 47–74.
He’s also famous for the Malthusian theory that population growth will outstrip food production. Not a completely ridiculous idea, looking at the London slums of the 1820’s.
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Great post.
That quote from Mill should be reprinted thousands of times, tied to thousands of bricks, and thrown through thousands of windows in Washington DC. Those that haven’t read my Uncle Fred will be pleased by the economic stimulus that produces.
Great quote. Neatest little argument against economic stimulus I have ever seen.
Yet here we are at 12 years since the last recession. I think Keynes gets a bad rap. Spme people use his name to justify reckless spending. Others slam him for promoting reckless spending. But he didn’t promote that and he really didn’t contribute that much and he should have a neutral reputation. He was just a flashy guy that rehashed the work of others. Hayek, while less flamboyant, produced work of greater importance.
Yes, I believe that that was in “On Population,” 1798, and that it is how he got famous, and why his ideas about inadequate aggregate demand got so much attention.
There is at least one proper government roll to stimulate the economy – good infrastructure spending. For example, a third interstate route south off Chicago that bypasses I-80 between Valparaiso Indiana and Joliet Illinois. In personal finance, if you borrow money for a car to get a better job, everyone wins. Without proper infrastructure, the US would be a third-world country. But forced monetary transfers between citizens should be reduced.
We need to distinguish between two meanings of economic stimulus.
Infrastructure spending by government creates public capital goods: its intent is
We could say that capital goods “stimulate” the production of final consumption goods.
Keynesian spending, or “stimulus” spending in the sense I used it, is not particularly intended to create useful goods. According to the Malthusian/Keynesian theory, it is even okay if it causes gross destruction of goods–broken windows, to pick Dr. B.’s favorite example.
The thing about Keynesian economics is not whether is it works but whether is creates a glorious policy-making role for economists. If the government spends with the intent of fostering growth the theory can take credit for any economic gains that accrue even if the stimulus demonstrably had nothing to do with it. If it fails to achieve growth, then the stimulus was not large enough. It is a non-falsifiable theory that leads to big programs and prominent employment positions.
As a lobbyist, I was involved in hiring experts and it has occurred to me that in many fields, the dominant theory seemed to be the one that made the expert more valuable to the political order. Think of it this way: which of these two guys is more likely to score with an attractive woman he meets in a bar? (a) The physics nerd who builds mathematical models of weather changes over time, or (b) the guy whose work is read by Congress and the UN in a desperate battle to save the planet. (Ever notice that in every movie where the hero who has the solution always has a major babe in tow as he races to save us?) It’s the same guy but with a sexier career narrative.
Dramatic narratives about health, poverty, education, climate, sexuality etc. that foster interest by media and funding sources in the purveyors of the theory tend to prevail even if weak.
Actually it should be tattooed on the forehead of every economist.
Yes, don’t you just love the positive economic outcomes of natural disasters? If it doesn’t kill too many consumers you get all this great demand for replacement stuff. Oh, that’s paid for by others who then can’t spend it on personal consumption? Darn.
Thank you.
yw. Most folks have thought only a little when they say only a little but you ain’t one, so thank you too.
The sad truth is that I only have one bullet point on Mill and economics. I could really learn something from all this.
Economics is hard. The more of it I learn, the less I know it. The more of it I understand, the less I understand it.
One can progressively learn theology or physics by studying the course of development of intellectual ideas, by reading books. In economics, the records of the progress of past intellectuals are continually being lost or forgotten, or counterfeited, or burned. I exaggerate the distinction, of course.
In Steven Kates’s paper I suddenly found myself reading the work of a true intellectual and scholar of economics. I hadn’t even known his name. Unlike Mises, he knows I don’t understand what he understands, and he knows that I haven’t read what he has read. So he mentions no obscure scholars, and explains everything so clearly that I think if I read it twelve more times over the next six months, I will understand it.
The government should only produce obviously needed, actual “public goods”. It has a definition.
Kevin Williamson says that some economist think that 80% of government spending is for nonpublic goods.
I really wish Republicans would use those words more. Same thing with changing “progressivism” to “statism”.
Also, central banks all they do is guess at an interest rate when they try to supposedly ‘help’ us avoid whatever the hell they are avoiding. It’s all BS that makes people vote socialist.
There are now two of us! It’s a movement.
I didn’t know that anyone cared, let alone tried to quantify the problem. Kevin and that economist are in our movement, so we have four.
Me too. Anyone who thinks otherwise isn’t in the movement.
I try to use “statism”, a superclass of the Progressive philosophy introduced by Hegel, when the more general term applies. If I am referring to oppression by the likes of King George III, who was anti-Progressivist, and Stalin and Hitler, who were leading apostles of left- and right-Progressivism respectively, I use “statism”.
Exactly. And even if they had any way of determining the natural rate of interest with reasonable accuracy and confidence, they still wouldn’t be able to control market interest rates through open market operations or the current operating system without damage, due to the Cantillon effect. But that’s another article.
Four, but I’ll bet I’ve been there longer, once I used the real world, some 30 years of it to figure out the obvious. We weren’t taught Hayek and I’m slow.
You beat me on years, I’m a rookie. I’m old to be learning this stuff. I wish I’d studied Hayek and Mises and all starting in high school.