If We are in a Depression What Can We Do About It?

Optimism & Pessimism

In my last post in this series, I ended by musing that in reality we are in a depression, that most of the government-led actions to “save the world” have not really helped very much, and that most benefits have gone to the rich and to corporations. Why am I so pessimistic? After all, as Franklin D. Roosevelt put it:

The only thing we have to fear is fear itself

That is very much the message of John Maynard Keynes, the influential British economist whose work provides much of the theory behind economic policy today. He summed up his entire economic paradigm in a simple equation:

AD = C+I+G+(X-M)

AD = Total Output
C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports

So, according to Keynes, it was really very simple: when Consumption and Investment slumped due to a recession, governments could raise Aggregate Demand by increasing Government Spending, which would help things pick up. More money would circulate from increased employment, which would mean more people could afford more things, which would mean more production, more profit and more investment. Many of Keynes’ ideas were to some degree implemented in Government initiatives like the New Deal, and have been popular on both sides of the Atlantic since the Second World War.

The problem with Keynes’ formula, and with Keynesian economics in general is that although it is basically correct at a theoretical level, it does not distinguish between productive circulation, and unproductive circulation. Money can circulate in ways which are extremely unproductive (such as casino gambling), or even counterproductive. Money can circulate without creating any infrastructure, while creating little employment, while leaving millions unfed and unclothed. The result is that the overall GDP figure rises, and corporate profits often rise, without any corresponding rise in wages, employment, infrastructure and well-being. This merely obscures the problem, and delays any appropriate solution.

The Iron Cross

The most obvious example of the unproductive use of money is war. Time, labour, materials, ideas and spending go into warfare, and what comes out? Destruction — bombs are destroyed when they hit the ground, and they destroy  the area around which they hit. They destroy infrastructure, they kill people, and they create hatred and resentment that very often triggers more and greater warfare. President Dwight D. Eisenhower leaving office in 1961, made the following statement:

Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its labourers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. We pay for a single fighter with a half-million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

We spend huge amounts of money on war. This is true throughout the Western world, though especially true in the United States :

I believe that the best kind of stimulus is drastically cutting military spending and spending the money instead on infrastructure — energy infrastructure (including alternatives to oil), education, transport, science, construction, food security. This can be done both through government spending, and by returning some money to the poor and middle class taxpayer to invest or spend.  Achieving that would give us all something to be optimistic about.

In my next post I will talk about the dangers of bailouts and government working with and propping up big business.

That’s all for now.

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6 thoughts on “If We are in a Depression What Can We Do About It?

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