Times of crisis are when we must guard our liberties most. The State invariably uses these times to bloat its scope of power, and in the heat of crisis those who dissent are often labeled unpatriotic and even treasonous. Along with the State's calls for more power and market intervention comes a host of economic fallacies that are perpetuated in an attempt to show the people how granting bureaucrats more power over their lives will actually be beneficial to them.
Lately, three fallacies have arisen, fallacies that have surfaced again and again in past decades. All three have roots in Keynesian theory that, although long since discredited, manage to live on through institutionalized statism in universities and in the press.
The first of these fallacies is that destruction is good for the economy. This destruction can take place in two forms: destruction of infrastructure or war. For the former, the argument is that buildings and bridges that are destroyed will have to be replaced. Therefore, new jobs will be created that will help everyone. The construction workers, contractors, and engineers who receive the new jobs will have money that they would not have otherwise had, and they will help other industries when they purchase goods and services from them. In this manner the benefits are spread to everyone participating in the division of labor.
However, as Frederic Bastiat and Henry Hazlitt have both famously illustrated with the broken window analogy, this line of reasoning only takes into account the visible effects of the destruction. Just as important, though, is how resources would have been used had the destruction not occurred. Somebody, either the property owner or the general public through taxation, is going to have to pay for the projects, which means that individuals must divert resources away from activities that they anticipated would satisfy their wants to activities that bestow no further satisfaction to them. While it is true that the arrival of new jobs benefits one group of people, it comes only at the expense of others, and overall, resources are not as efficiently utilized as they would have been.
The argument that war helps the economy is the same argument as above but presented over a much larger scale. The arrival of war, it is said, brings with it miracles of production and heightened demand. However, wars divert capital from lines of production that would have been used to satisfy individual's wants to lines of military production.
The physical damage that war entails results in the destruction of capital, and the only "good" that results from war is if the government obtains whatever goal it set forth in making it. If indeed, the destruction of infrastructure and war were beneficial to the economy, why not just go around and randomly blow up buildings and set missiles to explode over the oceans daily? It should be clear, both from common sense and economics, that such a practice would be a colossal waste of resources and human energy.
The next economic fallacy that is often espoused in bad times is that the government can help the economy by industry bailouts and general intervention into the market. Politicians claim that a certain industry must be saved because we all need it. If the airline and vacation industries are not making profits though, that means that the resources that are used by them would be better spent elsewhere.
The beauty of the price system and profits is that they serve to measure where producers are efficiently using capital and where capital should not be used at all. By artificially supporting industries that would have otherwise liquidated a portion of their capital, the government supports the inefficient use of resources, which would have otherwise been used to better satisfy the demands of the people. Again, we must look not only at the visible effects of government intervention but at the secondary effects: where the money must come from and what it would have otherwise been used for.
The last economic fallacy is repeated not only in times of immediate crisis but at any time the economy slows down. This is that economic busts are caused by a lack of consumer confidence, or by a decrease in aggregate demand. According to Keynesian theory, the trade cycle (also known as the business cycle, boom/bust cycle, etc.) is caused by the fleeting animal spirits of the general public.
Mainstream economists are often quoted as saying such silly things as "We do not want to predict an economic slowdown because that might help bring it about." Such reasoning recalls Neil Young's efforts to stop a thunderstorm during a concert on the album Live Rust: "Maybe if we all think really hard, we can make this rain go away!"
Keynesians turn to central banks to try to spur on consumer spending, while they are at a loss of words to explain in real terms why the economic slowdown has occurred. However, the origins of the trade cycle have been thoroughly explained by Ludwig von Mises and the Austrian school of economics. Although there is not enough room to go into detail of the theory here, the general principle is that central banks cause the trade cycle through their practice of dictating interest rates and inflation.
The combination of these controls results in a distortion of the planning schedules of individuals, and this leads to two things. One, resources that would have been saved to satisfy the wants of others in the future are instead transferred to present spending, and two, marginal borrowers who would not have otherwise borrowed money are impelled to enter the market under the assumption that there exists more capital than there really does. The result is a boom, but eventually the economy must adjust for the malinvestment of capital and the fact that saving has been sacrificed in favor of spending, and the result is the bust.
All three of the above fallacies are particularly pursued in times of hardship. War, when it cannot be given a moral rationalization, is given an economic rationalization. Politicians and bureaucrats decide for everyone what lines of production are most wanted and needed. The economic bust is blamed on the fickle public, and calls are made for the Fed to encourage spending.
In defending our lives from the ever-expanding reach of the government, we must also attack the fallacious economics by which statists operate. Otherwise people might start thanking the government when their house burns down, food is rationed to support the war effort, airlines are paid to fly empty planes, and credit expansion prolongs the recession.
Jacob Halbrooks is a senior majoring in electrical engineering.
