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CHAPTER V

Roll Call of Errors (II)

All of the errors discussed in the preceding chapter owe their existence wholly or in large part to the fallacious basic assumption that there is a limit to the amount of work to be done. In the discussion that follows we will be concerned mainly with a similar family of economic errors stemming primarily from a somewhat vague concept that we may rather loosely express by the statement that “employment creates employment”.

ERROR NO. 7: The multiplier.

In its simplest form, the erroneous basic concept that is the principal subject of this chapter makes its appearance as J. M. Keynes’ famous “multiplier”. Most of the standard textbooks give long and complicated explanations of the so–called multiplier effect, involving the “propensity to consume” and other currently popular economic concepts, but we can find simpler and more understandable definitions elsewhere in the economic literature. Robert Heilbroner says, “The multiplier describes the fact that additions to spending (or diminutions in spending) have an impact on income that is greater than the original increase or decrease in spending itself”26
Joan Robinson puts it this way: “When an increase in investment takes place… employment will increase, and more profits will be earned, in making the… other goods for which the market has now improved… Larger incomes again lead to more consumption, and so on round and round”.27 This is the notorious “pump–priming” theory which Keynes persuaded the Roosevelt administration to use as the primary weapon in combatting the huge unemployment created by the Great Depression, and which proved such a resounding failure in practice. As visualized by Keynes and his disciples, all that is necessary is to make a start by providing some new employment in one place or another – just enough to prime the pump – and this will set regenerative forces in motion that will ultimately result in a very much greater increase in employment.

Theoretically, if this process of increasing employment works out as the sponsors of the “multiplier” contemplate, there shˇuld be no end to the multiplying effect, and once started, even in a small way, it should go on and on until the entire labor force is employed. As Hansen sees the picture:

It is quite clear that any increase in employment in construction work and in the manufacture of materials entering into construction will increase the demand for consumers’ goods and so cause an increase in secondary employment as a byproduct of the increase in primary employment. This is not diffcult to see. Indeed, as soon as one thinks about it, it is much more difficult to see why the “chain reaction” does not go on and on.28
But the reaction definitely does not go on and on, and the “pump primers” therefore recognize that there must be leakages somewhere in the process so that the multiplier has a finite rather than an infinite value. Keynes believed that the multiplier would not be less than 5 in a country such as the United States, and talks of values as high as 10. If “the multiplier is 10”, he says, “the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves”.29

One of the dif icult tasks involved in a presentation such as that in the present work is to place sufficient emphasis on the most glaring weaknesses of existing thought without stepping on so many sensitive toes that the logic of the presentation is lost in the confusion of antagonistic emotional reactions. Ordinarily it is preferable to tone down the discussion, and to treat the prevailing errors somewhat more gently than they actually deserve. In describing the accepted thinking in the employment area, however, it is essential to try to convey to the reader a full appreciation of the almost incredible manner in which far–reaching basic assumptions extracted out of nothing at all have been accepted by economist and layman alike, without any serious attempt to check them against readily ascertainable facts that would have riddled them completely. Here we must emphasize, regardless of how many tender feelings may be bruised, that this is not a case in which the economic profession has considered the situation carefully and has arrived at the wrong conclusions, something that can easily happen to anyone. This is a case where the profession has based its conclusions on assumptions whose falsity is practically self evident under even a minimum of critical scrutiny.

No one who observes the millions of idle workers during a major depression, lacking the goods to make life tolerable, and able and willing – desperately anxious, even – to work to obtain those goods, and who still contends that there is no more work to be done, and hence no potential jobs for these workers, can lay claim to having given any intelligent thought to the situation. He has simply taken it for granted, without doing any serious thinking at all on the subject, that since these idle workers cannot find jobs, there are no jobs, actual or potential. Once this colossal error is accepted, the door is wide open for a whole assortment of fallacious ideas of the kind discussed in the preceding chapter. Before we can even begin to make any real progress toward a solution of the unemployment problem it is absolutely essential to get rid of this pernicious doctrine and all of its derivative errors listed in Chapter IV.

The widespread acceptance of the basic fallacy underlying the first group of errors that will be examined in this present chapter, the concept embodied in Keynes’ multiplier, is perhaps a little more understandable than acceptance of the patently false contention that unemployment is due to a lack of potential jobs, because the erroneous nature of this assumption is not quite as self evident, but even so, it would have taken no more than a minimum amount of critical scrutiny to expose the fallacy. The reason why Keynes and his followers who espouse the multiplier doctrine have failed to give the matter this minimum amount of thoughtful consideration is not entirely clear, but we may charitably assume that they simply did not recognize that there was any question involved which required any such consideration. This is obviously true of Alvin Hansen, for example. “It is quite clear”, says Hansen, in the statement previously quoted, “that any increase in employment in construction work… will increase the demand for consumers’ goods”, and since this was so clear to him, he evidently did not consider it necessary to make any careful examination of the proposition to see whether or not it is actually true.

This is a very common error in human thought. Elaborate and carefully reasoned theories are based on premises that are simply taken for granted, because they seem obvious on superficial consideration, and when these theories fail to work out in practice – when the multiplier fails to multiply, for example–their sponsors still cling to them as stubbornly as ever, on the ground, as Keynes once commented in a case of this kind, that the logic of their development is “indefeasible”. But logic involves more than good reasoning. However sound the reasoning process may be, the right answers cannot be obtained from the wrong premises, and a careful scrutiny of the premises upon which these theories are based is therefore essential to a determination of their validity or lack of validity. A thorough, painstaking, and systematic examination of economic fundamentals, and the basic assumptions upon which current economic theory is founded, is one of the principal features of this present work, one of the major items that distinguishes the scientific approach from that of the present–day socio–economist, and the new and different conclusions which are here reached wlth respect to many economic issues are mainly the result of the discovery of serious errors in basic assumptions that have hitherto been accepted without examination.

In the case now under consideration, a critical analysis quickly shows that the central idea behind the concept of the multiplier, the assumption that the payments to those who supply the labor and capital required by an added increment of production will increase the purchasing power available for buying other goods, is completely false. A simple mathematical example will demonstrate this fact. Let us assume, for purposes of this inquiry, that the total production in a certain self–contained community has a value of $1,000,000 per year. This means that the suppliers of the labor and capital services utilized in producing these goods are paid $1,000,000, which is then available for purchasing the million dollars worth of goods that are produced. Now let us assume that a new factory in this community employs hitherto idle labor and starts producing goods valued at $100,000 per year. Since those who supply the labor and capital for this new venture, directly or indirectly, now receive $100,000 annually for their services, the total purchasing power of the community has been increased to $1,100,000. Out of this total an amount of $100,000 is required for the purchase of the products of the new factory, leaving $1,000,000 available for the purchase of all other goods. This, of course, is just exactly where we were to start with.

This example illustrates a general proposition. We can substitute any community for the one specified, with any current rate of production (corrected for external transactions, if any), and assume any addition to production, and we will always arrive at the same answer: the full amount of the purchasing power generated by the production of the additional goods is required for the purchase of those goods. The community has gained to the extent of the value of the additional goods produced, but there has been no addition to the purchasing power available for buying other goods.

The introduction of additional goods into the community by reason of the new employment does have an effect in changing value relationships, and there is always a possibility that some enterprising firm or individual may see an opportunity to take advantage of this change by undertaking some kind of a productive activity. But there is no assurance that this kind of a secondary effect will materialize, nor will it necessarily increase total production and employment if it does, as it may very well take place at the expense of other producers, in which case it may even reduce total employment. The “multiplier” is therefore wholly fictitious. Any added employment enriches the community to the extent of the value of the products of that employment, but it serves no other economic purpose; there is no “pump priming” effect on employment in general. The failure of the pump priming undertaken in the thirties was not accidental; it was inevitable.

ERROR NO. 8: Non–productive employment increases the wealth of the community.

One of the well–known apects of erroneous basic ideas is that a logical extension of these ideas leads to absurdities. This is the principle of the reductio ad absurdum, one of the standard tools of logical analysis. The multiplier concept provides a good illustration, as a logical development of the consequences of this proposition leads to the absurd conclusion that assigning individuals to useless work enriches the community.

There is a very strong tendency on the part of the specialist in any branch of human endeavor to belittle the conclusions of socalled “common sense” in application to his field of specialization, even to the extent of ridiculing those who attempt to look at these subjects from a common sense viewpoint. It is true, of course, that in many instances the prevailing common sense conclusion is seriously in error but, in general, such mistakes are due to inadequate or erroneous basic information rather than to anything inherently wrong in the idea of applying common sense to the matter in question. Common sense is essentially the result of a largely unconscious process in which past experience is analyzed and rather hazy generalizations are formulated as guides for the appraisal of new ideas. It therefore does in a loose and unsystematic manner the same kind of thing that science does in an organized and systematic way, and unless it is thrown off the track by a misunderstanding of the true nature of some pertinent factor (which could, and often does, happen to scientific analysis as well) common sense is very likely to arrive at conclusions that are at least a close approximation to the truth. It follows that unless a signiiicant error can be clearly recognized in the premises on which the common sense viewpoint is based, any conclusions that are directly opposed to common sense should be examined very critically and with the utmost care before they are accepted.

This error number eight demonstrates the result of ignoring that wise precaution. Nothing could be more directly opposed to common sense in the economic field than the idea that we can enrich ourselves by doing useless work, yet this is exactly what Keynes, Beveridge, Myrdal, and others of the same school of thought are specifically claiming. Keynes tells us explicitly, “Pyramid–building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen in the principles of the classical economics stands in the way of anything better”.30 Both Keynes and Beveridge emphasize that it is not necessary for the public works programs which they advocate as a cure for unemployment to produce anything of value. Beveridge, in his “full employment” program, flatly proclaims the doctrine that the usefulness of the work is a minor matter, and where other employment is lacking he suggests digging holes and filling them up again.31 Keynes agrees: “Public works even of doubtful utility may pay for themselves over and over again at a time ofsevere unemployment”.32

It is a sad commentary on the state of economic knowledge two hundred years after Adam Smith that leading figures in the economic profession can advance, in all seriousness, such a preposterous contention as this assertion that we can make ourselves prosperous by spending our time and effort on useless tasks. Economists are rather prone to bewail the “economic illiteracy” of the general public which makes them unwilling in so many instances to accept the prescriptions that are handed to them by the economic “authorities”, and to do full justice to all, it must be conceded that in many cases the public would be well–advised to pay more attention to the economists. However, in dealing with many other issues, such as this question of useless work, it is decidedly fortunate for the nation that the lawmakers and the general public listen to the ordinary common sense rather than to Keynes and his disciples.

Both the economists and the nation that they are attempting to serve would be better off if the economic profession would make more use of simple economic concepts such as that of a Crusoe economy, instead of ridiculing and belittling the study of these simple situations. An explanation in terms of these simple concepts would be much more likely to be understandable to the ordinary layman, and the general public would be much more inclined to accept the economists’ recommendations if they were set forth in these terms. If Keynes, for example, were able to show how Crusoe could make himself more comfortable and prosperous by spending his time doing useless work, he would find it a great deal easier to convince the general public of the validity of his contentions with respect to the virtues of pyramid building by modern society. On the other hand, if the general practice of his profession were such as to require him to study the applicability of his theories to a Crusoe economy before publicizing them, there would be far less likelihood of his bringing out any such fantastic idea.

It cannot be too strongly emphasized that whatever economic benefit we get from any work that we do, public or private, is confined entirely to the value of the product. There is no gain to any other segment of the economy. If we undertake a public works project, we simply buy that project, just as we buy anything else. If we build pyramids, as Keynes suggested, then we are buying pyramids. We pay a certain price, and for this we get the product, the pyramid, or whatever it may be. If this product has little or no value to us, then we have simply wasted whatever we put into it. The widespread impression that putting men to work on public projects “increases purchasing power” and improves general business conditions is a delusion: a very costly delusion. The full amount of the purchasing power paid out to those who supply the labor and capital for a public project is required to buy (that is, to pay for) that project itself, and there is nothing left over for buying anything else.

Furthermore, it should be recognized that while the nation as a whole gains a pyramid, if workers who would otherwise be idle are assigned to pyramid building, the ability of regularly employed workers and other recipients of normal incomes to buy consumer goods is reduced by the difference between the cost of the pyramid and the cost of maintaining the workers.in idleness. The taxpayer must simply accept his interest in the pyramid in lieu of the consumer goods that he would otherwise be able to buy. In order that there may be any gain to the taxpayers by reason of providing employment for those who would otherwise be idle, the employment must be self–supporting; that is, the marketable values produced must at least be commensurate with the net cost.

ERROR NO. 9: “Getting money into circulation” improves business conditions and creates employment.

This is the crude form of the multiplier theory, a form in which it is doubly dangerous because it is so vague that it can be applied to almost any kind of economic quackery, ranging all the way from Beveridge’s “useless employment” and Keynes’ “wasteful expenditure” to such economic absurdities as Social Credit and the Townsend Plan. Those employed on useless work, contends Beveridge, will give employment to others “through what they earn and spend”. The basic idea behind this statement is absolutely false. If men who would otherwise be idle are given employment on useless work and are paid from government funds, the only economic result is that those who are regularly employed are forced to share their earnings with the erstwhile unemployed. The total real income, the value of the useful goods produced, is not changed in any way; it is merely divided into more and smaller shares. A job is self sustaining only if it produces marketable values at least equal to the compensation paid to the worker. Whenever we create jobs that are not self sustaining, the income of the regularly employed members of the community has to be reduced to make up the difference between the values produced and the amount that the workers are paid. There is no magic by which the deficiency can be met in any other way. Plain ordinary common sense will tell us that much, and the most elaborate and exhaustive study of the economic system cannot do anything but confirm it.

All of the consumer subsidy programs that aim to bolster the economy by payments to the aged, to the indigent, to some other special group, or to the population at large, from government funds, have exactly the same economic standing. These schemes for “getting money into circulation” create nothing, and since “something for nothing” is a delusion, whatever gains accrue to the recipients of the subsidies must come out of the pockets of the other members of the community. All that such programs accomplish is to transfer purchasing power from one group of consumers to another. They have no effect, favorable or otherwise, on the general operation of the economy.

ERROR NO. 10: High wage rates increase consumer buying power, and therefore increase employment.

One of the amazing features of present–day thought with respect to employment is that such a large proportion of the most widely accepted ideas are not merely incomplete or subject to minor errors; they are completely and utterly wrong. None of the concepts discussed thus far in this chapter is even partially correct. Not one has any validity at all. The same is true of this error number 10, and here again, there has been an almost incredible failure to look at the facts which so clearly show that the prevailing belief is untenable. The most obvious and most utterly conclusive of these facts is that this alleged method of increasing buying power and employment does not work when it is deliberately utilized for the purpose. There is probably no country in the world where this has not been tried time and time again. If high wage rates were the answer to the major economic problems, these problems would not long endure; raising wages is one of the easiest, most popular, and most commonly invoked of all of the measures that are employed by nations in their attempts to get out of economic difiiculties of one kind or another. But the result is always inflation, not more buying power. And, of course, it could not be otherwise. The buying power of a nation, in real terms, is equal to its production, and the money wage rate simply establishes the ratio between money purchasing power and real purchasing power. Changing this ratio by increasing wages does not alter real purchasing power in the least.

It is true that this is not an economists’ error; it is a popular error, one that is most aggressively promoted by the labor unions, whose members definitely do profit, at the expense of all other workers, if their wages can be raised earlier and higher than the others. Few present–day economists, aside from those in the employ of the labor unions, lend any support to the popular opinion that the high standard of living in the United States is due to the high level of wages. Anyone who has given the subject even a minimum amount of careful study realizes that it is a high rate of productivity that makes a high standard of living possible, not a high money wage rate. But the economists are not able to perform their function of straightening out the warped thinking on this subject because the economic theories to which they subscribe do not enable them to understand just what a change in money wage rates does do to the economy in general. “The consequences of general wage change remain among the most controversial and least understood subjects in economics”,33 admits Lloyd G. Reynolds. In the first edition of his popular textbook, Paul Samuelson also made a revealing statement on this subject:

The only formally satisfactory theory of determination of factor prices for the economy as a whole is one of “general equilibrium”, in which there is a simultaneous interplay of the supplies and demands for all economic magnitudes under conditions of either perfect or imperfect competition as the case may be. Unfortunately, there is little that can be said about this general supply and demand problem which is very useful in understanding the distribution of income.34
These words not only admit inability to understand the wage situation but also, quite unintentionally, reveal the reason for this inability. Samuelson characterizes the determination of “factor prices”, including wages, as a “supply and demand problem”. This is another of the serious errors in present–day economic thought, an error which was pointed out specifically by Keynes, but persists, seemingly as widely accepted as ever. As Keynes demonstrated in his analysis, the determination of the real wage level is not a supply and demand problem, and it cannot be solved by supply and demand methods. Average real wages under any given set of economic conditions are determined solely by productive efficiency, and they cannot be altered by any change in money wages. This means that the true price of labor cannot be changed by any manipulation of the money wage rate, and it is recognized by all that unless the price can be varied, supply and demand considerations are not applicable. There is no expedient, Keynes insisted (correctly), by which labor as a whole can change its real wage “by making revised money bargains with the entrepreneurs”.35

ERROR NO. 11: Foreign trade is a source of productive employment.

If foreign trade is conducted on an “even exchange” basis, without any residual balance of trade one way or the other, it is a profitable activity for all concerned, but it is not a job producer. On the contrary, the gains made by exchanging products which we produce efficiently for others which can be produced at lower cost in foreign lands enable us to maintain the same standard of living with less labor, if we choose to take the benefit in this way. If we maintain a so–called “favorable” balance of trade an excess of exports over imports – the foreign trade creates employment, but, to the domestic economy, it is non–productive (useless) employment, the equivalent of Beveridge’s digging useless holes. Of course, the foreign recipients of the products of this employment benefit from them, and if our citizens wish to donate their labor as a form of “foreign aid”, they get whatever satisfaction may be derived from helping their neighbors, but the “favorable” balance is a burden on the domestic economy, not something beneficial.

ERROR NO. 12: Unemployment is an unavoidable product of the business cycle.

It is true that any business recession, whether or not it actually reaches depression proportions, has an adverse effect on employment under the conditions that now exist, and in a serious depression the fall in employment is catastrophic. This reduction in employment, and consequently in production, is the most serious feature of the depression – the thing that occasions the widespread distress and hardship that have placed depressions next to wars as the greatest of national calamities – and it is only natural that this should come to be regarded as the essence of the depression. But, in fact, as will be demonstrated in the pages that follow, the current stage of the business cycle is only one of many items that have, or could have, an effect on the controlling factor that determines the amount of unemployment. Thus, there is no direct and necessary connection between the stage of the business cycle and the rate of unemployment. By utilizing measures of the kind described in Part Two of this work full employment could be maintained even in the most severe depression.

ERROR NO. 13: We cannot have full employment without some inflation.

Here is a strange outgrowth of error number 12; doubly strange in that it is not only wildly implausible in the light of economic experience as a whole, but cannot be logically derived from the premises on which it is based. Nevertheless, it is widely accepted, and freely asserted in the most uncompromising manner. “The lesson (from experience in the post–war years) is that there can be full employment only at the expense of monetary stability, and reasonable monetary stability only at the expense of some unemployment”.36 So says the summary of an appraisal of the problem that appeared in the October 1966 issue of Fortune. Walter Heller expresses the same idea in asserting that “there is no earthly way… to achieve price stability or to disinflate without knocking people out of jobs”.37

As indicated in the first of these quotations, the economists’ conclusion as to the existence of this dilemma is based on empirical studies, although the interpretation of the results of those studies has been influenced to a major degree by the economic theories of J. M. Keynes. The prevailing tendency is to discuss the problem in terms of the “Phillips curve”, an empirical relation between wage increases and unemployment formulated by A. W. Phillips of the London School of Economics. “The existence of Phillips curves”, says G. C. Archibald, “in the sense of well–established relations between the rate of change of wages and the level of unemployment, is fairly clear for the post–war period”.38

The Phillips curve can also be expressed in the more significant form of a relation between price increases (inflation) and unemployment, and modified curves of this nature can also be found in the economic literature. (See, for instance, the curve by Samuelson and Solow in the issue of Fortune mentioned above.) A few investigators working with the empirical data have even gone so far as to derive a specific numerical value for the relation between the rate of unemployment and the rate of inflation. Klein and Bodkin, for example, in a study prepared for the Commission on Money and Credit, conclude that every additional million persons added to the unemployment rolls would reduce the rate of inflation by about ¾ index points.39

The identification of empirical relationships of this nature is a basic technique in science, and information thus derived plays a significant role in scientific research. But the interpretation of the empirical findings, particularly with respect to whatever limitations may exist on the generality of the observed relations, introduces many opportunities for error, and even in the scientific field, where the ever present hazard of misinterpretation is clearly recognized, and rigorous precautions are observed, investigators are often led astray by misjudging the meaning of the empirical results. It is not surprising, therefore, that the economists, to whom this is a relatively new field of activity, have made some serious errors in their interpretation of the results of the employment studies.

What the studies by Phillips and others have actually demonstrated is that during a certain selected period of time – one in which governmental policies, labor relations, and other influences, aside from the normal fluctuations of the business cycle, that might be expected to have a bearing on employment, were reasonably stable – there has been a relation of an inverse nature between inflation and unemployment. The conclusion that we are justified in drawing from the observed facts is that under some circumstances inflation has a beneiicial effect on employment. There is nothing in the observations that warrants concluding, as the economists have done, that this is a general relationship: one that holds good under all circumstances. The experience of the last few years, in which high rates of unemployment have coexisted with high rates of inflation, merely emphasizes what should have been clear from the start; that is, extrapolating a very limited experience into a general relation is unsound practice.


History shows the instability of the Phillips curve tradeoff – if, indeed, there is any effective trade–of.40 (George L. Bach)
 
The empirical observations provide still less justiiication for the prevailing opinion that inflation is the only means by which employment can be increased. Obviously, inability to detect the effects of other employment factors during the relatively short period under consideration (a period deliberately selected because of the apparent absence of some of the influences that may have affected employment at other times) does not even demonstrate that no such factors were operative during this period. It merely shows that the net effect of any favorable and unfavorable factors that may have existed was not great enough to be detected. The empirical evidence provides no assurance that these factors, if they exist, will always be negligible in their net effect, nor does it exclude the possibility that under different conditions there may be still other factors that enter into the employment situation.

Furthermore, conclusions derived from experience during a period in which employment was allowed to drift with the economic tides, and was not subjected to any significant degree of deliberate control, cannot legitimately be applied to a program such as that contemplated in this work, in which it is proposed to create conditions that will result in full employment. Thus, in spite of the contention that it is grounded in experience, the current belief that full employment cannot be attained without inflation is wholly unfounded. The mistake in this instance is not drawing conclusions out of thin air, the practice that is responsible for so many of the errors discussed in this and the preceding chapter, but reaching conclusions that are far wider than anything the evidence will support. The relation between inflation and employment, and the significance of
J. M. Keynes’ theories in this area, will be discussed further in Part Two, after some theoretical groundwork has been laid in Chapter VI.

ERRORS: General comments

This long list of errors in current thought with respect to employment should be sufficient, even without the further evidence of a similar nature that will be forthcoming later in the discussion, to confirm the earlier assertion that current thought on this subject is almost totally wrong. It must be conceded that such a conclusion is difficult to accept, in spite of the fact that the evidence in its support is simply overwhelming. On first consideration, the possibility that a large por~ion of the extensive and detailed structure of employment theory laboriously erected by generations of competent and conscientious economists could be totally erroneous seems hardly credible. But a closer examination of the factors involved, giving due weight to the known characteristics of human thought processes, makes it evident that such a result is not only possible, but inevitable, under the circumstances that have existed during the time that this system of theory has been developed.

To begin with, it should be realized that every basic error in a theoretical development gives rise to a great many derivative errors. Most of the items discussed in this and the preceding chapter, for example, are simply variations or logical consequences of two basic misconceptions. Hence, instead of saying that a very large part of the existing structure of theory is wrong, we can make the same point by saying that the existing the oretical structure contains two serious basic errors: a statement that is more readily acceptable, even though it amounts to the same thing. Furthermore, there is a very good reason why we can expect to find some such mistakes in the foundations of existing theory.

The key factor here is the well–known tendency of the human individual to believe that which he wants to believe, and to reject that which is emotionally distasteful to him. One of the principal reasons why physical science has progressed so much faster than other fields of endeavor is that comparatively few scientific items excite any significant emotional reaction. No one is much concerned, for instance, whether “quarks” exist or do not exist, and the current issue as to their existence can be pursued on an open–minded basis, at least until some definite opinions are reached one way or the other. From this point on, there will be a tendency on the part of each individual investigator to accept any evidence confirming his opinion more readily than any evidence against it. Ultimately, when an idea achieves wide acceptance, and the opinion that it is correct becomes general, the bias in its favor increases to the point where it constitutes an obstacle to further progress, as any innovator in the scientific field can testify. But as long as a person is biased in favor of an opinion merely because it is his opinion, and not because of any emotional attachment to the underlying ideas, the obstacle is not insurmountable.

However, in the non–scientific fields, including economics, the emotional factor is dominant. Man wants to live better with less effort, and he therefore has a built–in bias toward any theories or proposals that promise more for less – the contention that raising wages improves the economic status of the workers, for example – and a similar bias against all attempts to point out the painful realities, such as the fact that the citizens of the nation can have more goods to enjoy only if they produce those goods. In the absence of any professional commitment to submit all conclusions to an adequate test of some kind, such as the agreement with the observed and measured facts which is, at least in principle, required by physical science, this bias in favor of the pleasant dreams and against the hard realities of economic life extends to the professional economists as definitely as to the ordinary layman.

But economics in its entirety is based on the unwelcome fact that man must work to produce that which he wishes enjoy, and the laws and principles by which the economy is governed are, by and large, nothing more than the details of how this edict is enforced. The bias against the unpleasant and the disagreeable, which the economist shares with the man–in–thestreet, is therefore a prejudice against economic reality: an attitude that is bound to lead to a great many wrong conclusions. It should be no occasion for surprise, therefore, when a coldblooded scientific analysis of economic processes, such as that carried out in this work, imds the existing structure of theory honeycombed with error. Under the circumstances this result was inevitable.

Efforts to evade the “work or starve” edict, the decree that man can have what he wants in the economic field only if he earns it, usually take the form of more or less elaborate programs designed to get something for nothing, and one of the principal tasks carried out in the study here being reported was to remove the wrappings and the ornamentation from the most popular of the current theories and proposals for economic betterment, and to verify that at bottom they are nothing but schemes that attempt to circumvent the natural law which prohibits something for nothing by approaching their objective in a circuitous manner. However ingenious these schemes may be, whether they take the form of subsidies, wage or price manipulation, monetary devices, or more complicated economic contrivances of one kind or another, they never work. The result is never that which the originators promise; it is always inflation or some other undesirable product. We may epitomize the existing situation by stating that the greatest error of modern economic thought, the illusion that underlies most of the specific errors that have been discussed in the last two chapters, as well as those considered elsewhere in the pages of this work, is the widespread and persistent belief in the reality of “something for nothing”.


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