Friday, February 20, 2009

Why "Stimulus" is Wrong

A strident response from an adherent to the Austrian School of Economics to my last post, Multipliers, Imbalances and Weights, Oh My!, suggests to me that choosing the terms of debate is at least as important to the outcome as choosing the field of battle. In this case, the term "stimulus" is a poor choice as it has become "loaded." It connotes the worst elements of Keynesian Economics- that the state should "goose" the economy to increase stalled growth through unproductive, make-work jobs.

Decades ago the preferred term for such policies was "intervention" perhaps with the hope that the state could be conflated with the divine- a conflation which acted as stimulus to the polemics of the Austrian School, notably from Mises: in face of the modern tendencies toward a deification of government and state, it is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the state all the attributes of God.

Even von Mises, however, did not fall into the trap of assuming that all state actions were "interventions" or "stimulus" and thus doomed to failure. Mises was no anarchist, he merely wished to find an intermediate position from which to argue the virtues of limiting the scope of government action: But he who correctly perceives the impracticability of anarchism and seeks a state organization with its apparatus of coercion in order to secure social cooperation is said to be inconsis­tent when he limits government to a narrow function.

Mises' argues, and I agree, that the state should operate within the structure of the market, and not try to impose its "will" thereupon. This was the thrust of my endogenous vs. exogenous conceptions of government. An intervention, as Mises argues in his Critique of Interventionism: is a limited order by a social authority forcing the owners of the means of production and entrepreneurs to employ their means in a different manner than they otherwise would.

We must distinguish between two groups of such [limited] orders. One group directly reduces or impedes economic produc­tion (in the broadest sense of the word including the loca­tion of economic goods). The other group seeks to fix prices that differ from those of the market. The former may be called “restrictions of production”; the latter, generally known as price controls, we are calling “interference with the structure of prices.”

Mises goes on to detail what qualifies as an "intervention" (in our case "stimulus") and what does not:

Measures that are taken for the purpose of preserving and securing the private property order are not interventions

Partial socialization of the means of production is no intervention in our sense. The concept of intervention as­sumes that private property is not abolished, but that it still exists in substance rather than merely in name. Nationaliza­tion of a railroad constitutes no intervention; but a decree that orders an enterprise to charge lower freight rates than it otherwise would is intervention.

Government measures that use market means, that is, seek to influence demand and supply through changes of market factors, are not included in this concept of intervention. If government buys milk in the market in order to sell it inexpensively to destitute mothers or even to distribute it without charge, or if government subsidizes educational in­stitutions, there is no intervention.

In more concrete terms, Eisenhower's Interstate Highway Project was not, with some exceptions, an intervention or stimulus. Laborers were paid the going wage, supplies were purchased at market prices, most (but not all, thus creeps in an intervention) land was purchased at going rates. To the extent that Obama's infrastructure projects are implemented with the same philosophy, they too would not constitute an intervention in the Misesean sense.

Historically, such projects often, but not always, prove wildly profitable. Persian Qanats and Roman Aqueducts are early examples of state driven projects with huge multipliers on growth (we'll leave aside the issue of Roman slave labor, which would constitute an anachronistic intervention). The point being, so long as the state facilitates projects the private sector is happy to supply and work on, this is not an intervention.

Bridges to nowhere would be an intervention, profitable high speed rail would not. We will see where the Obama plan falls between these 2 extremes.

In my next post I'll turn to the interventionist aspects of Obama's plan, much of which deals with finance.

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