In the previous post I tried to demonstrate how unintended consequences on the part of a central government can have negative results. Unintended consequences can sometimes have positive results. Adam Smith used the term “invisible hand” in his work on free market economics. What he said, in effect, was that individuals when taking responsibility for their own welfare and working for their own interest could help the general economy un-intentionally. We started out in this country with a free market economy, and it has worked pretty well for many years. Individuals produced things that other people wanted to buy. They produced these things in order to provide for themselves and their families. If they did not produce things that others wanted then their would be no sales, no revenue and no profits. In providing goods that others wanted and valued they helped themselves. So in helping themselves, they also helped the overall economic well-being of the whole even though that was not their primary intention.
That doesn’t mean that we did not have some problems. As Charles Kindleberger in his book “Manias, Panics, and Crashes” pointed out is that sometimes people become part of a Mania. They buy stuff because everybody else seems to want it and the price goes too high. When a lot of people start to believe that the price will go up forever, it will not end well. It’s worse for those participating in the mania, but that doesn’t mean that other non-participants won’t be hurt by the overall economic effect as well. His example of the first mania was the Tulip Crises in the 1400’s. That one primarily effected people who bought into the tulip bulb mania. As we have become more economically connected, more us are no doubt effected. The 2000/2001 crash brought the stock market down pretty sharply which did harm to a lot of people who did not invest in World Com or Enron. But those of us not invested into those type stocks recovered pretty quickly. The Sarbanes-Oxley legislation was passed by the government to us from another recession? Did it work? We had a worse one in 2007, but the subject of the mania was different. The answer then was the Dodd-Frank legislation. Will that work to prevent another one? Maybe we learn from our mistakes, but we seem to find new ones. We’ve never had another “Tulip Crises” and most, if not all of the other manias have only happened once.
In the U.S., we had a free market economy without a lot of government intervention until the depression of the 1930’s. Not that we did not have business cycles. My father graduated from college in 1932 with a business degree. In the business school they taught students how they should learn to deal with business cycles because we would always have them. Then we had the “New Deal” followed by a “macro-economic” theory book by John Maynard Keynes. The result was we began to think that the government could control the economy. Our fore-fathers thought that each state should manage the rules of business in their state and the federal government should stay out of it except for regulation of “interstate” commerce. With modern technology and more goods moving “interstate” our federal legislature seems to have ruled that everything is “interstate” commerce and therefore subject to Federal regulation. And with Keynesian economic theory they can “manage” the economy so that we will never have another recession. Right????
When I was in college in the late 1960’s we learned “macro” economics and were told that “micro” economics was not worth the time to study. Adam Smith’s invisible hand free market economy is “micro” economy. Keynesian economic theory has always seemed to me to have been inspired by the New Deal. Did the “new deal” end the depression? That is something that has been subject to debate since the 1930’s. A couple of months ago, Robert Samuelson – who writes an op-ed syndicated column – had a piece in the Tulsa paper. In it he said he had recently discovered that there had been a severe down turn in the economy about 1920, and it appeared from the data to as bad or almost as bad as the depression that happened 10 year later. The 1920 down turn was over in about a year to 1.5 years and was followed by the “roaring twenties”. The government had not tried to manage the 1920 recession, but the recovery was very much quicker than happened in the 1930’s. Maybe he thought the “New Deal” had made the made the 1930’s down turned not so severe to individuals, but had made the recovery much longer.
So why do our government leaders and economists think that macro-economics is so good for us and that the government should be able to manage our economy? For starters the theory is very appealing. Who wants to trust “an invisible hand” ? It’s more comforting to think someone has control and wants to help our well-being. From the politicians standpoint it makes their job more important and gives them something to promise the electorate during campaigns. (And even if it doesn’t work, they can promise the voters that they tried by passing “comprehensive” legislation.) For the economists it also makes their job more important. They can now get appointed to important staff positions in Washington. For those not going to Washington, they get questions and interviews in the local news media that they would not get otherwise. They can become well-known even without going to Washington. For the news media, it probably makes their job easier because they have some “knowledgeable” individuals to talk to that they can quote as an authority in the news. And if there is disagreement between experts, the news media has conflicts to report which no doubt draws readers and viewers.
So what do you think? I think Samuelson is probably right the government may be able to mitigate the pain, but that may cause the recovery to take longer. Is that good or bad? It probably depends. But I think that a key is not so much the idea of an invisible hand vs. governmental intervention, but the belief that I have to take responsibility for my own well-being. A lot of the government well fair programs put in place to help people hurt by a problem that’s not their fault, give them money, but do not do other things to help them get back on their on two feet. Giving people money without requiring anything from them tends to create dependence, when they really need help to get back to independence in a reasonable period of time. With where we seem to be today, there are too many people who think that the government should be at least partly, if not fully responsible for their well-being. Without people taking responsibility for their own well-being, we are going to have problems regardless. Private non-profit agencies generally do a much better job than the government, because they know the individuals and provide help beyond the money.