Tag Archives: Economics

The Irony of “Buy Nothing Day”

There is an event/group on Facebook calling itself “Buy Nothing Day”, in regards to Black Friday. The idea is to, well, not partake in the rampant consumerism that characterizes the day after Thanksgiving. Of course, as should be obvious, the majority of people participating in this event are leftist college students. They rage against the mindless individualism and greedy consumerism of modern day capitalism. The very idea of spending money on cheap foreign products makes them sick.

So, to combat the capitalist machine, they will all refrain from spending money whilst wearing their Che shirts and waving the Communist Manifesto proudly through the air. The irony, of course, is that these capitalist-hating individuals have implicitly rejected today’s dominant leftist economic theory which states that consumer spending is what drives the economy and leads to our high-standard of living. The typical narrative goes something like this: “Consumer spending makes up 70% of our GDP! The only way to get out of the recession is to increase spending, which puts money into businesses, who then ramp of production, which requires them to hire more workers, and suddenly the economy is back on track!” Now, as Dr. Robert Higgs points out here, consumer spending has not been the problem. Consumer spending only fell a few percentage points since the recession began back in 2008. It’s investment that really took the hit.

In more formal economic terms, many economists today (those calling themselves Keynesians) believe the problem with the economy today is that aggregate demand has fallen and, in order to get the economy back on track, aggregate demand has to be boosted. There are two ways this could be done: Government spending, and consumer spending. If consumers would only go out and began spending once again, businesses would hire more people and the economy would right itself. Unfortunately, this doesn’t happen because consumers fear uncertainty, and so begin saving. This increased savings (non-consumption) further depresses the economy. At this point, government is supposed to pick up the extra slack in the economy and spend enough to get businesses hiring again.

If the Keynesian theory is to be believed, “Buy Nothing Day” can only further deteriorate the state of the economy. At any rate, it certainly won’t help. These people’s decision to not consume is going to contribute to lower wages, more unemployment, and further depressed housing prices. Not good, right?

I would argue, however, that there is nothing economically harmful when it comes to “Buy Nothing Day”. Indeed, I don’t believe the problem is with a lack of aggregate demand. Spending does not drive the economy, savings does. One cannot consume oneself into prosperity. Prosperity and rising living standards require that some people putting aside some consumption today in order to consume more tomorrow. If we imagine a man, alone, on an island with some fruit trees, we know that he can either consumer all of the fruit on the trees, or he can consume some of the fruit and plant more fruit trees for the future. If he consumes all of the fruit today he will certainly be well off for a short period of time. Perhaps until the next evening, or so. But after that he will have nothing left to eat until the trees grow more fruit. Clearly, if this man wants to have something to eat for the future he will engage in some non-consumption in order to consume more later.

To the extent that “Buy Nothing Day” leads to less consumption today (savings) and more consumption later, I think it will be a good thing. I doubt it will have much effect on the economy, but in principle it sounds right. The economy needs more savings to finance greater output in the future. The irony with this whole thing, however, is that the people participating in this event are probably the same people calling on the government to spend more money in order to get us out of the recession. Is spending the problem, or is spending the solution? Which is it, guys?

The Problem of Farm Subsidies for the Environmental Movement

“Free-markets” and “environmentalism” aren’t terms normally thrown together in conjunction these days. If you’re well enough in tune with various right-wing and free-market think tanks you will no doubt be aware of institutions like PERC (Property and Environment Research Center) which offer a free-market look at environmental issues. But all in all environmentalism, the green movement, and locovores are usually seen as the domain of the left, not the domain of the right or even those with a libertarian bent.

For that reason I was pleasantly surprised to meet a libertarian the other week who was quite interested in the concept of sustainable farming (in fact, her desire to one day run a sustainable farm influenced her towards libertarianism). A Political Science major at Boise State, she was quite knowledgeable about the ways in which government was, paradoxically, holding back the green movement in favor of large corporate farms.

Sustainable farming is the idea that farming today should leave future generations better off. It emphasizes environmental sustainability, animal welfare, biodiversity (many sustainable farms do not use any chemical pesticides), and so forth. In other words, it’s a popular buzz-word amongst the left and something you would likely hear tossed around casually at one of those hip downtown coffee shops that all the fashionable liberals like to frequent. Not that there’s anything wrong with that, of course. Sustainable farming is certainly a viable alternative to large-scale agribusiness, at least in theory.

Although one could no doubt argue back and forth about how efficient or realistic organic and sustainable farming really are, that isn’t the point of this post. As my libertarian friend went on to point out, due to the system of agricultural subsidies in the U.S. large, well established farming corporations are continually subsidized by the Department of Agriculture at the expense of smaller farms (many of which practice sustainable farming). As it turns out, the top 10% of the largest farms received close to 75% of all subsidies from 1995-2009. The USDA has shelled out close to a quarter trillion during that time period.

Aside from the fact that these subsidies lead to huge amounts of surplus agricultural products (inefficient use of resources) at taxpayer expense, they also directly destroy the livelihoods of third world farmers the world over. The U.S. Government, through its incredibly dubious “Food for Peace” program, buys this surplus food from U.S. farmers and sends it into third world countries at very low, discounted prices thereby ensuring small indigenous farmers are unable to make a living. The entire system is quite plainly awful.

But back to the subsidy’s effects on the domestic market.  What USDA subsidies do is not only encourage inefficiency through an ex ante declaration of market winners (those farms that get the subsidies), but they also ensure that Joseph Schumpeter’s creative destruction never happens. Creative destruction, remember, is a the idea that capitalism is constantly reinventing itself through the process of competition. Goods and services come and go; old businesses die while new ones are born, and so forth. USDA subsidies have the effect of maintaining large agribusiness while new, innovative farming firms (like those engaged in sustainable farming) flounder because they just cannot compete. It is not only a complete injustice- it is completely wrongheaded from an economic perspective. Not because sustainable farming is better than the traditional large-scale corporate farm, but because we don’t know which one is better. The only way to know is to let the market process work. If those subsidies are never removed, consumers will never know if my libertarian friend’s sustainable farm will be able to better satisfy their demands, as well as help the environment. USDA farm subsidies are neither fair nor efficient.

The Problem is Structural…

Martin Wolf, a British journalist, recently commented on the Austrian Business Cycle Theory (ABCT) at his Financial Times blog entitled the Martin Wolf Exchange. While he acknowledges that much of what the Austrians say could very well be correct, he disagrees with their view that markets should be allowed to liquidate without government intervention.

But Austrians also say – as their predecessors said in the 1930s – that the right response is to let everything rotten be liquidated, while continuing to balance the budget as the economy implodes. I find this unconvincing.

The problem here is that while he may agree with Austrians that fractional-reserve banking could be inherently unstable, he misses the real heart of the theory: malinvestments within the capital structure. During the boom stage of the business cycle capital is misallocated into sectors of the economy it otherwise would not have been were it not for the artificially low interest rates that misled entrepreneurs. Roger Garrison, in his book Time and Money, says

…credit expansion sets into motion a process of capital restructuring that is at odds with the unchanged preferences [of consumers] and is ultimately ill-fated.

The problem, then, is structural. It is a structural problem within the production process that ultimately leads to the bust. Now, I realize most mainstream economic theories typically think of capital as a homogeneous “k” where a “structure of production” is ultimately meaningless. But just for a moment take the ABCT on its own terms. If the problem is ultimately structural and not simply a lack of effective aggregate demand than it becomes immediately apparent why government attempts to boost aggregate demand will end in failure. Increasing aggregate demand is not going to help the production process straighten out its  structural problems. In fact, it will probably exasperate it.

I should point out that if Wolf’s concern is for the general population most effected during the “liquidation period” than I can see no serious objection within Austrian economics to providing some sort of short-term safety net. Of course many Austrian economists would object to a government safety net out of hand, but that would be more as “libertarians” than “Austrian economists”. While there are good economic reasons for being wary of the long-term effects of unemployment insurance and other safety nets, used sparingly I can’t see this as halting, in any meaningful sense, the capital restructuring necessary for the economy to get back on its feet.