LK, in his or her blog ‘Social Democracy for the 21st Century’, takes aim at the venerable Jesus Huerta de Soto for an interview on the Cobden Centre website. For those who haven’t made the acquaintance of either party, LK is a Post-Keynesian who seeks to demonstrate the empirical failings of other economic approaches in detail ( and is far better at it than Paul Krugman, it seems ) and has a particular animus against the Austrian School. The interview included the assertion, par for the course among Austrians, that the fastest gain in prosperity in history took place from the late nineteenth to early 20th Century. LK disputes this fact using OECD figures quoted below. You have to give it to the Keynesians among us, they know how to select for trends that favour their approach. It’ll be necessary to stretch those thymological muscles here, as this is a question of historical changes and trends, and trying to find their causes. Here we go!

 Let us look at the average OECD real per capita GDP growth rate estimates and data for various periods over the past three centuries:

1700–1820 – 0.2%
1820–1913 – 1.2%
1919–1940 – 1.9%
1950–1973 – 4.9%
1973–1990 – 2.5%
(Davidson 1999: 22).

Uh oh.

Impressive. I can see a much higher value for 1950-1973, precisely as I’m supposed to, but a few tiny little concerns are nagging at me. Off the top of my head, one problem with the figures above is that their time-scales are far from uniform. But we’ll give the OECD the benefit of the doubt on that. But why then? Why 1950-73? Is all the change over time in our lives the result of one macroeconomic policy versus another? Of course not, and LK him- or herself would not argue such a point either. What, exactly, is qualitatively different about the years 1950-1973 versus 1820-1913?

Our domestic lives have changed quite a lot since the Second World War. Hopefully you’re unsurprised at such a remark. A whole new class of household items became ubiquitous in the comely forms of refrigerators, washing machines, tumble dryers, vacuum cleaners, electric ovens, toasters, kettles and irons. These white goods are an entire category of household appliances that we cannot imagine living without, but since the introduction and general adoption of almost all of the appliances we are familiar with today took place after the war, during the period of Keynesian economic policy, surely there is going to be some positive impact. Almost unregulated through the 40’s, 50’s and 60’s, the domestic appliance manufacturers delivered ever better and better value for money. ?But this is not a function of regular government stimulus or make-work industrial policy.

What were the impacts of these innovations? It is quite impossible to say, because the variables of these new, ever cheaper appliances must be weighed against other factors in people’s lives that are ever-shifting – the cultural zeitgeist, the distraction of tax-funded road-building, the massive spending on military hardware, not to mention the subjective commercial and non-commercial preferences of every person with the capacity to make informed choices about what to do next in their lives, from buying an ice cream, to choosing which means to to use to get to work, to taking a holiday, to choosing a major at university.

Two of those points above are rather interesting, because they have to do with government spending (G to any Keynesians reading) and as, no doubt, you all know, G is included in GDP, despite representing almost no value creation whatsoever, or certainly none that can seriously be measured. All that government spending does is reallocate existing spending income that would otherwise have been in the hands of those who knew how to use it, the taxpayers. Keynesians are well aware of the problem of imperfect knowledge, indeed it might be this common thread which caused LK to discover the Austrian school and take offence at its method and observations. Anyway, imperfect knowledge dooms you to make less and less sound decisions about how to respond to situations the further removed you are from them.

This is why modern military doctrine relies on very small teams of combatants taking a great degree of initiative. Quite simply, those in the fight and nearby know better what’s going on than a Colonel or General in a field headquarters removed from almost any combat situation currently underway. The sheer size of a battle makes a mockery of any one strategist’s attempt to take direct command, and this is war I’m talking about, the most statist activity in history! But I digress.

usgs_chart2p22   009_national_defense_1928   010_national_defense_1948

Government spending on warmaking was considerably higher as a share of GDP, and so was contributing far more to this specious aggregate, what with Korea and Vietnam and the Cold War during the period of 4.9% growth, compared to today, even factoring in the War on Terror. But the building of tanks, nukes, submarines and innumerable guns and bullets does not benefit the average consumer all that much. Domestic appliances do, and are widely cited as a reason for many women entering the labour force in the 60’s and onward. There is one other matter concerning the difference between the Keynesian period and those which preceded and followed it that we have not touched upon at all, and this factor, unlike the two I have just discussed, actually topples the Keynesian period from its lofty position in the OECD table above; inflation.

A cute comment on the Cobden Centre page, while still misunderstanding what inflation and deflation are, amusingly mocked the position that prices falling has a truly, meaningfully negative impact on human well-being. The delightful scenario dreamed up here reminds me of a philosopher undoing an irrational position, but such is the inflationist zeal at the heart of Keynesianism that it is appropriate to raise alarm bells like this in response to it.

(Price) deflation occurs if a product goes out of fashion (= less demand), the supply goes up at current demand or incomes get redistributed to similar goods (substitution = again, less demand). But the reasoning of the “inflationists” goes like this: “if people see prices falling, they won’t spend money and the economy will contract [even more]”.

Well, I can see this at my local bakery – starved people, hardly able to stand up due to their emaciation, clutching bank notes and saying “Oh no, I’m going to hold off till tomorrow, rolls might become even cheaper”. Some already have died that way. My neighbor hasn’t gone to work for days, seeing how petrol went down recently. He says “if this continues, I can fill my tank at half the price”. Ok, the employer has fired him meanwhile, but… you DO have to take advantage of TOMORROWS low prices, don’t you?

Mind you, when we had inflation, it was even worse: the guy at the petrol station would not sell petrol. He always kept saying “Tomorrow, folks, tomorrow, when the price is a little higher. Now PLEASE, move along and come back tomorrow, I have to close for today”. Oh, what nonsense – either way! And how gullible people are.

Naturally the commenter got several things wrong, but we won’t hold that against them since they are right in the overall thrust of their argument. But what of actual inflation? We haven’t spoken of that at all so far. What happened to the Dollars in American’s pockets in the late-19 and throughout the 20th Centuries? After all, inflation can be a bit of a big deal, as elucidated by Nick Newell. Sean Aranda gives us the goods we need to implode the OECD data above, a table – using data from gapminder.org – showing change in life expectancy, income per person and purchasing power of the dollar over three periods; 1878-1903, 1946-1971, and 1987-2012.

Courtesy of Gapminder. Notice what happens to these growth stats when you actually bother to include inflation.

So, ouch. Apparently falling prices – referred to as deflation by LK – are actually something to be celebrated. Who’d have thought. Bare in mind how prices are moving every year in the car, electronics, software, web services, media services, and UK telecoms industries. Down, down, down, and yet, as per the quoted comment from Cobden above, the apocalypse is conspicuous by its absence, now or in the late 19th Century. Between them, inflation, defence spending and the mass adoption and increasing affordability of domestic appliances completely explain away any qualitative advantage to a Keynesian policy regime. Thus can we all sleep easy and live long lives of peace and prosperity.