In what is surely one of history’s great ironies, today is the birthday of both Adam Smith and John Maynard Keynes.
Smith launched the discipline of modern economics, freeing our thinking about economic matters largely from the misperceptions and prejudices of the ‘man in the street’ whose instincts prompt him to suppose that most economic problems are the result of too little money or too little demand – an instinct that, in Smith’s day, elevated mercantilism into the dominant mode of economic (non)thought. This ‘man in the street’ gives little, if any, thought to the enormously detailed and constantly occurring and largely unseen adjustments that property owners (including owners of only labor services) must make so that the plans and actions of producers and consumers are sufficiently well-coordinated across space and time that prosperity becomes widespread and continually growing. The ‘man in the street’ concentrates his worries on demand – e.g., Will consumers continue buying ‘enough’? Won’t labor-saving technology (including advances in international trade) cause sustained unemployment? What will be the jobs of the future if the familiar jobs of today are ‘destroyed’?
Keynes, regrettably, gave undeserved respect to these concerns of the ‘man in the street.’ The focus of Keynes and his followers was not on how the plans and actions of countless individuals can be reasonably well-enough coordinated, across space and time, so that scarce resources are ever-more-efficiently transformed into goods and services that satisfy consumers. Overlooking – as does the ‘man in the street’ – the importance of the details of this vastly complicated process of on-going coordination, Keynes and his disciples glommed on to what the ‘man in the street’ immediately thinks of as the economic question: is there enough demand to buy stuff? If yes, problem solved; if not, big problem – or, really, not so big if the state frees itself from the prejudices of those damned classical economists (such as Smith) and, adopting the idiot-savant genius of the ‘man in the street,’ augments inadequate private demand with demand that it creates either through money creation or, usually more effectively for Keynesians, through debt-funded fiscal spending.
Smith had no such delusion that economies grow simply because people demand more stuff. The abilities and drive of butchers, brewers, bakers, and other entrepreneurs to earn ever-better livings by ever-better satisfying consumers (as opposed to by securing monopoly privileges from government) is what makes economies grow. Competitively determined prices are important in guiding suppliers to meet consumer demands (and in guiding consumers on how to get the most satisfaction possible from their expenditures). Taxes, regulations, monopoly privileges, and (yes, even for Smith) inadequately supplied amounts and qualities of public goods obstruct the ability of markets to coordinate savings, investment, production, and consumption in ways that keep economies growing. Smith – and, to this day, Smithian economists – concentrate their attention on supply. The problem isn’t to get people to want to consume more of what they want; it’s to get people to produce more of what people want to consume.
John Maynard Keynes, more than any other person, diverted economics from its task of understanding how order emerges unplanned from the self-interested and knowledge-limited choices and actions of countless individuals. Far more than Marx, the consequence of Keynes on economics has been lamentable.
