Thursday, August 1, 2013

Best New York Times Economic Analysis. . . . .Ever

Well that might be hyperbole. Henry Hazlitt used to write economic commentary for the New York Times. But still Casey Milligan's post "Consumer Spending and Economic Growth" is very impressive.

He takes Jared Bernstein to task, for which I am glad, because I do not have time right now to do it. Bernstein asserted in vulgar Keynesian fashion that consumer spending is what drives the economy, which is why he trumpeted President Obama's most recent speech on the economy.

Mulligan is right on the money when he counters that economic growth is the product of investment not consumption. As he says, "High levels of consumer spending are a consequence of economic growth, not a cause of it."

Mulligan later turns to the received economic wisdom of economic growth textbooks:
I went back to check the economic growth textbooks. My favorite was written by Robert Barro and Xavier Sala-i-Martin; I also looked at the latest editions of three books recommended by Tyler Cowen of George Mason University.
All of the books look closely at investment. All of them note the three flavors of investments: physical, human and ideas. None of them say that a high marginal propensity to consume might be a way to create sustained economic growth.
Alas, Mulligan did not consult of my Foundations of Economics, but he might have. The final chapter of my work is devoted to applying various economic principles to answering the question how do we have dominion and fill the earth in a world of aggravated scarcity without either killing one another or starving to death. As I explain, economic expansion and prosperity is the result of an extensive division of labor in which accumulated capital is invested wisely by entrepreneurs.

This conclusion of sound economic theory has strong implications for social institutions. As I explain in my book:
Our survey of the engines of economic development allow for drawing some conclusions regarding conditions necessary for such development. Institutionally, there must be a market economy. Even in a market economy hampered by various government interventions there can be some amount of economic expansion. The freer the market is the more economic expansion it can achieve. In order for economic expansion to be realized, people must be able to engage in social cooperation based on private property. Private property is necessary for voluntary exchange, and it is voluntary exchange that opens the door for the division of labor to develop. Private property also reduces the risk of saving and investment because in an environment of private property rights investors can keep whatever positive return they earn without fearing that it will be confiscated. Additionally, private property allows for the development of money and results in money prices that entrepreneurs use to calculate profit and loss. Hence, private property makes possible the productive use of factors of production.

1 comment:

  1. Great article. I think non-economists don't really imagine the reasons why the Bernsteins and Krugmans of the world would even want to engage in such intellectually dishonest "economics" writing. Calling out the incentives for these persistent Keynesian myths will be as important as pointing out the truth to win in the public arena of ideas.