Man vs. The Welfare State (LvMI)

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Mises Daily Articles

Naive advocates of this theory assumed that more government spending was the whole answer. The more sophisticated advocates saw that the increased spending would not give people more purchasing power if the government kept the budget balanced and took it all away again in higher taxes.

The thing to do was to spend more without taxing more. The trick, in other words, was deliberately to unbalance the budget — to run a deficit. Most of the champions of deficits — including the eminent John Maynard Keynes himself, the theory's chief architect — at least publicly professed to believe that the required deficit could be financed by selling bonds directly to the public, to be paid for out of savings.

Man vs. the Welfare State

In short, he loses just as much buying power as the government gains. On net balance, no new buying power has been created. How, then, can the government "create" new purchasing power?

It can do so only if it does not increase taxes at all, but "sells" its bonds to the banking system, and if the banks "pay" for them by creating deposit credits on their books in favor of the government. This leads to an increase in "the money supply" — that is, an increase either in the amount of currency or of demand bank deposits. If the government's new bonds are sold directly to member banks, there tends to be a dollar-for-dollar increase in the money supply compared with the amount of new bonds. But if the government's securities get into the hands of the Federal Reserve Banks, they are used to create what is called "high-powered" money.

It is not easy to give a satisfactory but short explanation of the reason for this to readers without any previous knowledge of monetary theory. When member banks "buy" government bonds and "pay" for them by creating a deposit credit on their books against which the government can draw, they are adding to the nation's supply of purchasing media.

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They are creating money out of government promises, and some would say they are creating money out of thin air. Now if a member bank that has bought such government bonds sells them to its regional Federal Reserve Bank, it can ask that Reserve bank to credit the proceeds to the member bank's reserves with that Reserve bank. This means that the member bank is entitled to lend, and so create demand deposits for, about six times the amount of its reserves with the Federal Reserve Bank.

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That is why money created directly or indirectly by the Federal Reserve Banks is called "high-powered" money. Thus new "purchasing power" is brought into being. Thus people have more money to buy more goods, create more jobs, stimulate more output, and restore prosperity. If there have been heavy unemployment and much "idle capacity," the new monetary purchasing power in the system, by increasing the demand for commodities, may indeed lead to an increase in production, and hence to an increase in employment.

This has been hailed as the great Keynesian contribution to economic theory and policy. But there are fatal flaws in it. Unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other — the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play.

The reason the Keynesian medicine can work — under special conditions and for short periods — is that by increasing monetary demand and prices it may increase both sales and profit margins, and so restore production and employment.

Yet this could be done even more effectively — and without the poisonous side effects and aftereffects — by restoring freedom of competition and individual coordination of prices and wages. The Keynesians think in terms of aggregates. Their remedy is to increase the total money supply, and thereby to bring the price "level" sufficiently above the wage "level" to restore or maintain profit margins and so keep the wheels of industry spinning at full speed.

This remedy is defective in two respects. It tacitly assumes that there is a uniform discrepancy between prices and wages and a uniform percentage of "idle capacity" throughout industry. If we try to expand the money supply enough to return industries A and B to full capacity, we may completely "overheat" industries M and N and produce serious productive distortions and bottlenecks.

What is more, an increase in the stock of money, contrary to Keynesian theory, will begin to force an irregular increase in prices long before "full capacity" has been reached and the "slack" taken up — if only for the reason that the "slack" is never uniform throughout industry. In a very short time, also, with the increase in prices and the increase in the demand for labor, wages will start climbing too. Then, if the previous trouble was that most wages were already too high in relation to most prices, there will again be discoordination between wages and prices; and the Keynesian prescription will call for still further doses of government spending, deficits, and new money.

So the Keynesian medicine must lead to chronic deficits and chronic inflating of the money supply. This publication makes a speciality of the economics of economic details and the way microstructure instruments support to explain the categories of data so much correct to replace charges. Get Which Way Goes Capitalism: A lucid and balanced assessment of the present monetary turbulances that experience hit the constructed economies.

If the government then tries to prevent this discouragement to the production of the controlled commodities by keeping down the cost of the raw materials, labor and other factors of production that go into those commodities, it must start controlling prices and wages in ever-widening circles until it isfinallytrying to control the price of everything.

Download PDF by Henry Hazlitt: Man vs. The Welfare State (LvMI)

But if it tries to do this thoroughly and consistently, More On Price Controls 41 it will find itself trying to control literally millions of prices and trillions of price cross-relationships. The statistical evidence showing that the minimum wage has caused unemployment among Negroes and the unskilled is extensive. It is gratifying to report that some of the country's outstanding academic economists —Professors Yale Brozen, Arthur Burns, Milton Friedman, Gottfried Haberler, James Tobin, to mention a few —have gathered this evidence and presented a conclusive case against a statutory minimum wage.

Yet successive Administrations and Congresses have persistently refused to accept their logic or to face the glaring facts.

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If there are 8, different items in the average supermarket today as compared with 2, some years ago," testified Arthur E. No one of those 8, items will continue to be produced and occupy shelf space if the customers don't take it off the shelf Who Protects The Consumer?

Each product must win its right to survival. By Henry Hazlitt During this paintings, Henry Hazlitt explains why politicians who promise salvation via executive are risky.

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