As Labour pours another £11bn of poison into the wells, I find myself reflecting on the economics of the Left, people who seem to be lamenting coming “Tory cuts” after so much “Labour investment”.
In the first place, Labour plan their own substantial cuts. More to the point, Labour’s spending was funded not by sustainable prosperity, but by one long credit expansion unbacked by real savings, which has now, inevitably, come to an end.
Left-wingers’ admirable intentions seem to be unmatched by a reasonable understanding of the means to bring about the good ends they intend.
The shortest and surest way to understand basic economics is, purportedly, Henry Hazlitt’s famous Economics in One Lesson:
Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed.
From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Nine-tenths of the economic fallacies that are working such dreadful harm in the world today are the result of ignoring this lesson. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups.
Hazlitt is infinitely quotable, so I recommend you buy the book, but I must add this, which is particularly relevant today, on the subject of government debt and inflation (in the sense of an increase in the supply of money):
If no honest attempt is made to pay off the accumulated debt, and resort is had to outright inflation instead, then the results follow that we have already described [but see below]. For the country as a whole cannot get anything without paying for it. Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. Or it might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man.
But the situation is even worse than this, because, as we have seen, inflation does not and cannot affect everyone evenly. Some suffer more than others. The poor maybe more heavily taxed by inflation, in percentage terms, than the rich. For inflation is a kind of tax that is out of control of the tax authorities. It strikes wantonly in all directions. The rate of tax imposed by inflation is not a fixed one: it cannot be determined in advance. We know what it is today; we do not know what it will be tomorrow; and tomorrow we shall not know what it will be on the day after.
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.
And so the conclusion is this: the critical error of the left is to think of politics and of utopias but without an understanding of basic economics. Their impatience to help their fellows is perhaps the greatest source of our difficulties and of the further impoverishment of the poor.
It’s no good just wishing the world were otherwise and voting for fantasies. If we are serious about human welfare and social progress, we must do better: we must save and invest.
In the meantime, an anthem for a dying government:
These two works from Mises are particularly relevant: