Real growth must be backed by knowledge - not just words

ECONOMIC PERSPECTIVES - 124 [October 2022]

The Truss/Kwarteng brand of aspirational economics was, its critics opine, “stillborn”, dead at birth - with no hope of getting it passed; wrong in principle; unaffordable; appallingly communicated; guaranteed to lose the next election; and, worst of all, failing to tackle the most important targets.

However, a determination to knock something down is always easier than implementing a vision that those same critics have thrust into the archive of failed ideas. It’s early days, and no one actually knows, or is able to predict with any conviction, whether the doomsayers in all precincts of the economic spectrum will prove to have been sages or suckers. 

It’s true that Liz Truss has been uttering some familiar libertarian precepts such as low taxes, low regulation and freeing the markets, all essentially growth-promoting - but the fact that policies based on sound principles have been neither costed nor their benefits quantified within the tiny time-frame so far available, doesn’t detract from their core value as principles worth upholding - still less are her opponents justified in rubbishing them.

Foundations of economic growth

For some reason the catch-phrase that has come in for a special dose of castigation from all and sundry is  “trickle-down” economics, which resides at the centre of Liz’s growth agenda. Her critics have variously moaned that trickling down takes too long; it benefits the wrong people; and  its outcomes  widen the gulf between ‘haves’ and ‘have-nots’. I can only put this criticism down to a classic instance of chronic institutional  myopia - or a complete failure to grasp the true role of this principle in economic development from time immemorial. 

And, incidentally, a failure to understand the workings of trickle-down economics is equally a failure to understand the most basic tenets of evolutionary theory - as explained in Charles Darwin’s “Origin of Species” - notably “descent with modification”. Let me explain.

About five years ago I wrote “Economic Perspectives” 26, which included this anecdote provided by the owner of a shiny new Corvette sports car. It was standing on his driveway, when a passer-by was heard to mutter: “I wonder how many families could have been fed with the money that sports car cost”? To which the owner responded: “I really don’t know the answer to that one. But what I do know is that its production actually did feed many families in Bowling Green, Kentucky, where it was built. It also fed the families of people who make the tires; who make all the components that go into it; who mined the copper for the wires, not to mention feeding the people at Caterpillar in Decatur, Ill., where they make the vehicles that haul the copper ore. It fed the truckers who conveyed the car from the plant to the dealer, and fed the people working at the dealership, and their families.

“So, I admit, I really don’t know how many people could have been fed with the money I paid for that car. But it does tell me what happens at the point of interaction, where economics and human nature meet: when you buy something, you put money in people’s pockets, rewarding their skills and you show them that their efforts have created real value. This occurs quite naturally and is certainly preferable to giving people something for nothing.”

Seen and not seen

This tale also demonstrates an important distinction, highlighted by the 19th Century French economist Frederic Bastiat on the importance of distinguishing between what is seen and what is not seen. The former is simply a flashy red sports car that inspires a jealous itch to have one too, and a snide comment on its owner’s values in buying it. What is not seen is all that flows (rather than trickles down!) from its manufacture.

But how does it all come into being in the first place? Isn’t this the question that should be asked by any politician with aspirations to facilitate growth in a stagnant economy? We all know, and readily dismiss, the anti-growth Keynesian falsity that what’s needed is more demand. Take the case of the desirable sportscar for which there appears to be no lack of demand. Someone with vision recognised the latent, but present, demand for this object of desire. That “someone” must have done some market research on comparable products already available, and at what price; must also have prepared the necessary calculations of required material and labour inputs; availability and source of the myriad components required; estimated time-lapse from start to finish of production; the availability of finance to cover all stages of the productive process; and countless other imponderables - all leading to a decision on whether the Corvette project warrants the green light. 

Government spends only your money

It will be obvious to any true economist that this fundamental process of economic calculation can be made only by the party who is taking the risks, and not by government.  Government expenditure is not susceptible to economic calculation because it  has no money of its own - the only money government can ever spend has been taken from its citizens in taxes; or borrowed with a liability to repay; or printed out of thin air as counterfeit. 

Our true economist is also wise to the old socialist canard - that only after performing that lengthy, at times convoluted, calculation, is the manufacturer able to set a price for the product that will cover all those costs.. Wouldn’t it be a wonderful risk-free world if every producer were able to name a price-tag that will not only cover all expenditure, but also provide a profit? In your Keynesian dreams, maybe - but no. The consumer alone determines the price. No matter how delectable the Corvette, people will not buy it if they can’t afford it.

Encapsulated here is the real meaning of entrepreneur - a “someone” who identifies an unfulfilled need in the market and risks their own capital in attempting to meet it, with a view to profit.

Platonic forms and descent into the gross material world

The true beginning of the Corvette marque is simply an idea - an idea in the mind of that “someone”. Like all objects, creatures and products in the gross material world, its origin is a Platonic “form” that exists in the mind alone, in the unseen causal world of ideas. Hence my reference to Darwinian evolution: the patent granted to Carl Benz in 1886 was the birth certificate of the world’s first automobile, a three-wheeler named “Benz Patent Motor Car, model no. 1”, from which all others are descended, in every instance with modifications that bestow advantage - an exact parallel with what happens in nature. Please understand - it can be no other way. In this process ‘perfection’ has no place - each version of the species “car” is merely an intermediate modification in the movement towards a perfection that can never be reached. 

Think of computers: progenitors like Edsac and Eniac were colossal structures of valves and tubes, two machines typically taking over a four-storey building and weighing up to 250 tons. Yet they provided little more computing power than today’s digital watch - itself an intermediate rather than an end-product, by nature unattainable.

If the intermediate stages that we label innovation and invention are to become the true harbingers of growth in the private sector (the place where savings make that possible) the only role for government is to keep taxes and regulations to a minimum, and to impose a bottom-up process for spending priorities under a vigilant, even ruthless, eye.

[EMILE WOOLF - OCTOBER 2022]

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