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With Black Friday upon us, here’s something important to remember: you’re not “helping the economy” by spending intemperately and making imprudent impulse purchases. You’re just… spending intemperately and being imprudent. There’s nothing inherently wrong with that. Maybe you have a very high time preference such that you want stuff now now now and are willing to sacrifice future consumption for it, or maybe it’s part of an occasional and considered splurge a few times a year.
You shouldn’t excuse yourself or think there’s a silver lining in extra consumption, because you’re not “helping” the economy more than if you simply saved the money (where it could be lent to people who are expanding our productive capacity) or stuffed it in a mattress (where its removal from circulation would reduce prices).
It’s hard to appreciate if you only account for what you see during the holiday season. I took my oldest child to Walmart near the end of the day on Thanksgiving last year mostly just to see what it was like. I hadn’t really been Black Friday shopping since working at a music store in high school, but this was a lot of fun. We weren’t there for anything (we bought oranges, if I remember correctly). We were just there to observe. And observe we did, joyfully and peacefully (and pleasantly surprised by gratis cookies and coffee). There weren’t any brawls that would end up on YouTube. For the most part, things were extremely orderly. The salespeople were in good spirits, and they had roped off a path through the store with a map to where all the hottest items were. Everyone seemed happy.
In this light, it seems hard to believe that indulgent spending doesn’t stimulate the economy. What about the paradox of thrift, which says that if we all save more (individually rational), the reduction in spending will lead to lower overall output and employment (socially irrational)? It’s true that a sudden increase in saving will cause a reorganization of the economy, but as Friedrich Hayek argued in his criticism of the Keynesian framework in which the paradox of thrift plays a central role, “Mr. Keynes’s aggregates conceal the most fundamental mechanisms of change.”
Or, as I’ve heard Peter J. Boettke put it, most (highly aggregated) macroeconomics is an effort to do economics without prices. Prices change, though. While a derived-demand effect dominates for the Walmarts and Targets of the world, an interest rate effect dominates for firms (like mining concerns) with operations that are well removed from final consumption.
In his 1994 book Ethics and Economic Progress, James M. Buchanan explores the “ethical content” of “puritan virtues” like the work ethic and the saving ethic (Greg Caskey, Zachary Kessler, and I explore Buchanan’s work and its implication for business ethics in this paper). Buchanan argues that, in a world where productivity is determined by an ever-finer division of labor, we are all better off by our own standards when we work more and save more. Hence, he argues, we developed (albeit unintentionally) ethics of hard work and saving that have helped us capture at least some of these gains.
By Buchanan’s logic, it is prudent to refrain from impulsive and imprudent consumption not because material riches are not the same as moral riches (while this is true, Buchanan’s focus is more narrow) but because by our own standards for private consumption, we get higher standards of living if we all save more. The collective action problem is, of course, enormous. However, the development of a strong ethic of work and saving helps us capture at least some of the gains.
Here, then, is what you should think about as you celebrate Thanksgiving and get ready to go Black Friday shopping: you aren’t necessarily stimulating the economy or making anyone better off with that impulse purchase. Don’t feel bad for refraining from that purchase, and, importantly, don’t try to justify your impulse purchase with a story about how you’re taking one for the team and stimulating the economy.
Of course, if you want that bauble, buy it. Do so boldly and unapologetically, because you and your preferences matter, too. Know this, though: if you decide to refrain and save the money, your newfound puritan prudence will, in the long run, benefit everyone else through higher economic growth.
If you want to understand the relationship between saving and standards of living, these videos on the Solow growth model are a good place to start.
Art Carden
Related Articles – Economic Education
Growth Is Good
In his 2018 book Stubborn Attachments, Tyler Cowen defends a thesis that is likely to be as unpopular as it is misunderstood: over the long run, differences in growth rates swamp just about everything. Therefore, increased economic growth is a moral imperative. At the very least, more economic growth should be more of a priority for policy makers and concerned observers than it is now. Nothing less than the fate of the future is at stake. Here’s the summary that begins the book, before we even get to the acknowledgments and table of contents:
Growth is good. Through history, economic growth in particular has alleviated human misery, improved human happiness and opportunity, and lengthened human lives. Wealthier societies are more stable, offer better living standards, produce better medicines, and ensure greater autonomy, greater fulfillment, and more sources of fun. If we want to sustain out trends of growth, and the overwhelmingly positive outcomes for societies that come with it, every individual must become more concerned with the welfare of those around us.
Cowen’s claims remind me of these words from Nobel laureate Robert Lucas, who wrote in 2004:
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the Industrial Revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
“The apparently limitless potential of increasing production” is Cowen’s subject. It’s an exercise in “becom(ing) more concerned with the welfare of those around us,” and Cowen is specifically trying to get people to think of future generations as being “around us” in a lot of morally important ways. If Cowen is right and the proper social discount rate is zero (or at least very, very, very low), then the way we think about what we owe to one another has to change.
He notes that a lot of observers tend to dismiss the huge effects of seemingly small differences in economic growth rates. The difference between 1 percent growth and 2 percent growth is the difference between having grandchildren who, in 70 years, have twice our incomes and having grandchildren who, in 70 years, have four times our incomes. When I think about a lot of the immediate problems our family faces, a lot of them — the occasional leaking faucet, for example — would basically go away with higher incomes. Even experiences that cultivate the mind and spirit, like the visits to the Van Gogh museum and the Heineken brewery in Amsterdam that are on our bucket lists, would be a lot easier if we had more money. Material wealth cannot buy us inner peace, and it cannot solve our deepest and most fundamental problems, but it helps.
Cowen, in any case, is unimpressed with the ascetic aesthetic of professional chin-strokers and finger-waggers who are forever prophesying doom and decrying the shallowness of bourgeois modernity. First, he accounts for this by talking not simply in terms of wealth but in terms of what he calls wealth plus, which includes leisure time and environmental amenities. In Cowen’s framework, he wants us all to be able to buy more roses, but he also wants to make sure they are grown and harvested sustainably and that we have time to stop and smell them. Second, Cowen acknowledges that the world has a lot of very serious problems but denies that making people poorer will fix them. As I tell my students, per capita gross domestic product is not all there is to life, but it is very highly correlated with the things we think are important (health, longevity, literacy, and a host of other things). As Deirdre McCloskey and I argue, good societies get rich, and rich societies can be good.
Cowen imports a mental device, the Crusonia plant, from Frank Knight’s discussions of capital and investment. The Crusonia plant grows and bears fruit, which germinates and bears fruit, which germinates and bears even more fruit. An innovation or change that raises the economic growth rate is akin to a Crusonia plant. If we aren’t discounting the future, finding Crusonia plants dominates pretty much everything.
Cowen describes himself (with tongue in cheek) as a “two-thirds utilitarian,” where Crusonia plants and the prospect thereof resolve a lot of otherwise-sticky moral questions. Rights and rules are nonetheless of paramount importance, and they are especially important as we try to navigate a future of radical uncertainty filled with “unknown unknowns.” In light of the incomprehensible “froth” confronting us as we try to look into the future, a lot of small changes to the moral calculus are not decisive. In this paper, which was published in Utilitas in 2006 and which forms part of the basis for his argument, Cowen defines what he calls “The Principle of Roughness”:
Some of our choice options will differ in complex ways. We might nonetheless, ex ante, make a reasoned judgment that they are roughly equal in value, and that we should be roughly indifferent across the two options. After making a small improvement to one of these choices, we still might be roughly indifferent to which option is better.
Eventually, an accretion of small changes will be decisive, but the addition of a tiny bit of information to an otherwise radically uncertain process need not be sufficient to cause us to depart from conventionally understood rules and conventionally understood ideas of rights.
People nonetheless decry “economic growth” and say that the notion of endless economic growth is preposterous. I think this stems from a misunderstanding. A lot of these criticisms, it seems, think of economic growth as the piling up of stuff for stuff’s sake. Growth is synonymous with more, measured materially. However, I think we would do better to follow the lead of Florida State University economist Randall Holcombe, who in his 2006 book Entrepreneurship and Economic Progress distinguished “economic progress” from “economic growth” by defining the former as better stuff whereas economic growth is simply more stuff. As I’ve argued a couple of times, economic progress is unlimited. I think we could resolve at least a few sources of confusion by changing our terminology slightly.
Stubborn Attachments is Cowen at his best, and he makes a brief but tight argument that reinforces my conviction that “Why are people in some places very rich while people in other places are very poor?” is the most important question in the social sciences. Cowen works to bring economic growth back to the front and center of the conversation. He does so in a book that, in my opinion, deserves your careful, thoughtful attention.
Cowen recently explained his argument while giving the Kenneth Arrow Lecture at Stanford University. It is a good place to start:
Art Carden
Related Articles – Books, Economic Growth
The FCC’s Treatment of Huawei Is a Tremendous Embarrassment
It’s said about Baltimore Ravens quarterback Lamar Jackson that he’s a particularly challenging opponent. With Jackson there’s no preparing for the run or pass; rather there’s preparing for the run, pass, along with the horrifying possibility that Jackson himself will run the ball. With only eleven defenders, opposing coaches seem to be implying that they don’t have enough players in position to respond to the myriad things Jackson might do with the football.
The immense challenge that comes with playing against Jackson came to mind while reading some of the latest news about the Trump Administration’s efforts through the FCC to cripple China-based communications giant Huawei. Up front, these actions meant to neuter Huawei are nakedly protectionist, and speak to how far Republicans have slid as the party of “limited government.” It’s truly sad to witness.
Republicans excuse their embarrassing behavior by claiming that “China” is “communist,” and Huawei has close ties to the communist regime. It’s a reminder that modern Republicans are either ignorant to history, willfully blind to simple economics, or both. Simply put, to visit China is to see it’s “communist” in name only. Anyone with even the slimmest memory of the 20th century knows that communism is defined by relentless misery, starvation, murder, and other horrid things. The latter doesn’t much describe modern China. It’s an economically vibrant country that’s thick with American businesses.
After which, state-run companies generally aren’t thriving businesses, and their products generally can’t be found around the world. That’s how we know Huawei is run for profit, as opposed to it being run by China’s “communist” regime. Its wares can be found in 177 different countries, and its technology is very popular with cellular companies in the United States, particularly smaller communications companies in rural parts of the U.S. Since the GOP base is increasingly rural, one would think Republicans in Washington would want to know why Huawei technology is so well-regarded by carriers in red states, and also how cripplingly difficult it would be for rural telecoms to shift to other providers if forced to by “limited government” Republicans.
Of course, all of this would require Republicans to meddle less in the operations of private businesses. Sorry, but that’s your dad’s GOP. The modern and rather paranoid GOP thinks businesses are strengthened by government protection, and as a consequence modern Republicans are using the force that is government to try to neuter Huawei.
The stated reason for federal limits erected to Huawei technology stateside has been “national security.” Try not to laugh, but in an effort to limit Huawei’s prospects so that U.S. communications companies can catch up in the “race” to roll out 5G, federal officials are claiming that broader Huawei market penetration in the U.S. would make it possible for this alleged organ of the state to “spy on Americans.” Where does one begin?
For one, it should be stressed again that if Huawei were a tool of the Chinese state then it wouldn’t have any products and services worth selling to begin with. Republicans used to know this basic truth.
For two, assuming Huawei is a worthy company, which it must be based on its global footprint, its owners wouldn’t risk market stature born of endless hard work by angering a crucial market like the United States. And for those who are willfully ignorant, and who believe Huawei’s “owners” are the Chinese communist party, well, there’s really no hope for you.
Which brings us to basic common sense. Stated rather simply, if you’re spying on everyone you’re spying on no one. As is, overnight China critics in the U.S. want to believe that the communists in China are operating a massive surveillance state there in which they know all and see all, at which point they’ll do the same stateside? If so, fear not because you can’t spy on everyone. Goodness, coaches can’t even figure out Lamar Jackson but pundits want us to believe the Chinese aim to figure out all 330 million of us Americans? And they’d like to learn what? The information would overwhelm them as opposed to making their allegedly devious vision for the future more of a reality. If foreign policy deep thinkers are really looking to trip the Chinese up, they should invite them to bug all of our phones. We’ll know the Chinese aren’t a threat if they actually lunge for the fool’s bait.
At which point it’s got to be remembered that the Chinese aren’t even very good at policing their own people. Indeed, it’s long been pointed out that Facebook, Google and other sites like it are banned in China, but only to the technologically ignorant. As for journalistic types, yours truly has been to China countless times only to see U.S. journalists access the sites mentioned through the use of a VPN. In short, the information blackout only shields those who want to be shielded from information. Kind of like routine watchers of CNN and MSNBC on the left, or Fox on the right.
What about access to real news? Some like to point out that Chinese history is scrubbed of information relating to the Tiananmen Square massacre in 1989. No doubt that’s true on the surface, but as Evan Osnos points out in The Age of Ambition, his spectacular book on modern China, basic computer skills make it simple for readers to find out the much uglier truth online. In China.
Osnos goes on to point out that by the time the censors are made aware of information or statements they don’t like reaching the public, it’s too late. Information, and the technology that spreads the information, is much faster than the government officials who vainly presume to limit its dissemination. In short, technology created in the free market will outrun what government officials might use to limit information flow, or attain it. Repeat yet again, if they’re spying on everyone they’re spying on no one.
Which brings it all back to what’s brought on the federal government’s vicious attack on Huawei. It’s once again protectionism, plain and simple. Federal officials and U.S. businesses fear they can’t win the alleged “race” to 5G supremacy in the marketplace, so they’re resorting to government. It’s the only answer to the Huawei riddle, and it’s sad.
Republicans who used to cheer China’s shedding of its statist past, and who used to venerate free trade, are running from it. The whole world is watching as they embrace the mathematical equivalent of 1+1 equaling a thousand. It seems free markets can really only be free if “America” is winning. Lost on the GOP is that such a strategy is for losers.
This piece originally ran in RealClearMarkets
John Tamny
John Tamny, research fellow of AIER, is editor of RealClearMarkets. His book on current ideological trends is: They Are Both Wrong (AIER, 2019)
