Making Work, Destroying Wealth

Journalists are telling us that John Maynard Keynes, the intellectual inspiration of the New Deal and its tax-and-spend philosophy, is all the rage again. The Wall Street Journal offers an interesting vignette on Keynes's view of how to create jobs:

Drama was a Keynes tool. During a 1934 dinner in the U.S., after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.

Now I should say that various people report this story, including Ludwig von Mises, but no one cites an original source. Assuming it's true, though, it just seems to underline the absurdity of the whole "make-work" theory that is back in vogue. Keynes's vandalism is just a variant of the broken-window fallacy that was exposed by Frederic Bastiat, Henry Hazlitt, and many other economists: A boy breaks a shop window. Villagers gather around and deplore the boy's vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, "Maybe the boy isn't so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!"

But as Bastiat noted, "Your theory stops at what is seen. It does not take account of what is not seen." If the shopkeeper has to buy a new window, then he can't hire a delivery boy or buy a new suit. Money is shuffled around, but it isn't created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, "Society loses the value of objects unnecessarily destroyed."

And the story of Keynes at the sink is the story of an educated, professional man intentionally acting like the village vandal. By adding to the costs of running a restaurant, he may well create additional jobs for janitors. But the restaurant owner will then have less money with which to hire another waiter, expand his business, or invest in other businesses. Before Keynes showed up in town, let us say, the town had three restaurants among its businesses, each with neatly stacked towels for guests. After Keynes's triumphant speaking tour to all the Rotary Clubs in town, the town is exactly as it was, except the three restaurants are left to clean up the disarray. The town is very slightly less wealthy, and some people in town must spend scarce resources to restore the previous conditions. The man built an economic theory on this!

Now we are told that "Keynes is back," and we need a new New Deal, and the Obama administration is going to create millions of jobs by shuffling money through the federal government. And the theoretical underpinning of this plan comes from a man who thought you could stimulate employment by breaking things.

As Jerry Jordan wrote in the Cato Journal, the real challenge for society is not creating jobs but creating wealth -- that is, a higher standard of living for more people. There are many destructive ways, beyond messing up the towels in a restroom, to create jobs:

I am reminded of a story that a businessman told me a few years ago. While touring China, he came upon a team of nearly 100 workers building an earthen dam with shovels. The businessman commented to a local official that, with an earth-moving machine, a single worker could create the dam in an afternoon. The official's curious response was, "Yes, but think of all the unemployment that would create." "Oh," said the businessman, "I thought you were building a dam. If it's jobs you want to create, then take away their shovels and give them spoons!"

President-elect Obama proposes that the federal government "create or save" jobs by spending upwards of $600 billion. Where would this money come from? If it comes from taxes, it will be taken out of the more efficient private sector to be spent in the less efficient government sector, and the higher tax rates will discourage work and investment. If it is borrowed, it will again simply be transferred from market allocation to political allocation, and our debt burden will grow even greater. And if the money is simply created out of thin air on the balance sheets of the Federal Reserve, then it will surely lead to inflation.

There is no magic road to wealth. You have to work, save, and invest. And when the government lures individuals and businesses into making bad investments with cheap money, the malinvestment has to be liquidated. Avoiding that truth, prolonging the process of adjustment, is a good way to turn a recession into a depression. And you can't get economic growth back by breaking windows, throwing towels on the floor, or spending money you don't have.