We All Prefer Growth to Austerity
By Anthony de Jasay
Galactic Happiness Consultants L.P. have just released the results of a survey of ten thousand adults in 27 European countries who were asked to rank chocolate cake and thin gruel in order of preference. 72.6 per cent chose chocolate cake, 4.3 thin gruel, 23.1 thought the question was daft. The Scientific Advisory Board recommended that the latter be considered as preferring chocolate cake.
These startling findings provoke a train of further thought. The common people all over Europe complain bitterly about having to get by on the thin gruel of austerity. Their governments point to the debt mountain that must at least be stopped from growing faster than incomes, and if possible stopped altogether from growing, in order to remain bearable at all. Professor Stiglitz, the most popular oracle these days, tells Europeans that they are about to commit suicide, for austerity will only increase their debt load; only economic growth of some vigor can stop it from rising. At present, Europe’s economies bar one or two are stagnating. Quarterly changes in output of plus or minus 0.3 are well within the margin of error of official statistics. How to get growth going? Knee jerk economics would spend more, increasing consumer demand and initiate infrastructure projects. However, this is precisely the policy of the last twenty years, and look where it has got us; to a debt mountain that is still growing and to output that is not. Growth, it seems, must be got going without relaxing austerity; one foot pushing the accelerator, the other forcing down the brake to the floor. Unsurprisingly, nothing much happens. Governments in their awkward posture must face an electorate reluctant to be deprived of chocolate cake.
Reaching the end by acting on the means
John Stuart Mill believed that the pursuit of happiness was a mistaken notion, for happiness was not reached by pursuing it.1 There is a commonsense test: ask passers-by on the street where they are heading. One is going to the football match, the other to meet his wife, a third to a job interview and the fourth to get a cup of coffee. In fact, they are pursuing happiness and using for that the means that seems best to each at the moment. In fact, there is simply no real activity called “pursuing happiness”.
Much the same is true of another famous abstraction that is a cornerstone of economic theory, namely maximization. A rational agent may be said to seek the highest indifference curve he can reach, or the outcome offering the greatest mathematical expectation of “utility”, or aim at the maximum present value of all future profits. But none of these activities exist as such; each is the purpose of activities intended to reach it. The rational agent does his shopping, takes a risk or declines it, and runs his business the way he thinks best. The best way may be the most likely to maximize his profit, but we cannot say that he is maximizing his profit. All we can observe is his use of the means that may produce such an end.
John Kay is a British management expert and a popular newspaper columnist. He knows that if you correctly define some hitherto ill-understood phenomenon, people will at best nod and then forget you, but if you give the phenomenon a name, people will remember you as the inventor. Perhaps with this as his motive, he explains that firms attempting directly to maximize their profit tend to fail, for the way to maximization is not the direct, but the “oblique”. What he must be saying is that there is no direct way to attain such an aim for, like the pursuit of happiness, profit maximization is an abstraction. He cites the example of Imperial Chemical Industries that had set out to build up a world-class pharmaceutical research capability and by so doing, have maximized their profits. There was nothing “oblique” about this. If you think some merchandise will sell well, there is nothing “oblique” about organizing facilities to produce and market it. It is the direct way to profit maximization. There may be alternatives: buy a stock of the stuff for resale, become a wholesale distributor, develop a brand name that earns your stuff a premium price; but none of these means to the end is “oblique” if the word means anything we can recognize.
A Board of Directors would look silly as can be if it devoted its meeting to “profit maximization”. (This is not to deny, though, that Boards sometimes have agendas that are as silly as can be.) A serious meeting must devote itself to serious matters that have a serious chance of enhancing profits or reducing losses.
The same must apply to the Ecofin2 and heads-of-government “summit” meetings that are about to be devoted to the objective of re-starting growth. The Maastricht Treaty that snapped shut the trap of the euro and laid down rules of good budgetary behaviour that Germany and France predictably proceeded to break before their signature had the time to dry, was initially called the Treaty of Stability. It was then remembered that everybody wants growth, and the treaty was renamed Stability and Growth—the stability prescribed in the treaty hopefully serving as the means to the desired growth.
Making it or Letting it Grow?
Europe’s economy subjected to the good ideas of overriding governments armed with the power of collective choice, fits well enough the metaphor of a human body under perfusion subjected to the good ideas of a well-meaning but hapless quack. The body is covered by a thicket of red and blue plastic tubes, the red ones siphoning off its vital juices, the blue ones drip-feeding them back in. The man under such perfusion is not doing too well, and the quack, desperate to improve matters and bring about recovery, keeps adding more red and blue tubes to the bewildering tangle.
The plastic tubes are symbols of good ideas in matters of fiscal and monetary policy and the perfection of welfare entitlements. Each is meant to correct the perverse effects of the previously installed jungle of tubes. Each is destined to help, or at least not to hinder, the resumption of economic growth. As a rule, each is largely ineffective, for the thicker the tangle of tubes, the less responsible is the body to further tubes meant to stimulate it.
For the last quarter of a century, the Japanese economy was ceaselessly stimulated by profusion of public works until there was hardly any space left for more new bridges that nobody needed and new roads that led nowhere, yet growth has never taken off.
There is an obvious alternative to the self-contradictory policy of austerity combined with spending to stimulate growth. It is not to make growth, but to let it happen by resolutely taking off the tubes. The recipe is to apply that almost forgotten arch-simple medicine, rhetorically called liberty.
The labour laws of most European countries run to several thousand pages and in at least three major ones, France, Italy and Spain, they provide job protection of such severity that in terms of severance pay and judicial process, dismissing an employee is almost prohibitively expensive and complex. Risky as filling a vacant job is made by job protection, employing the unemployed demands reckless courage. For every hundred jobs benefiting from job protection, ten or more new jobs may fail to be created due to the risk built into hiring labour. Yet the greater the resulting joblessness—now having passed the 10 per cent mark in the Eurozone—the more electorally suicidal it seems for a government to relax job protection. Similar, though less strong, reasons perpetuate government regulation of the minimum wage, the “legal” work week and the “legal” retirement age, all of which violate elementary freedom of contract and obstruct growth.
Some people are no doubt flabby and let themselves be carried by the flow, but most try to better themselves as they know how. For this very fundamental reason, an economy where the rule of law and the freedom of contract are not wholly absent, has a natural bias to grow. There is a presumption that if a largely free economy existed, it would grow briskly and be resilient to shocks. There is, alas, also a presumption that although we all prefer growth to stagnation and chocolate cake to thin gruel, we are stubbornly inclined to use political power to try and make growth by multiplying the plastic tubes of policy instead of letting it happen by not standing in its way.
In “Utilitarianism” (1861) J. S. Mill states “If by happiness be meant a continuity of highly pleasurable excitement, it is evident enough that this is impossible. A state of exalted pleasure lasts only moments, or in some cases, and with some intermissions, hours or days, and is the occasional brilliant flash of enjoyment, not its permanent and steady flame. Of this the philosophers who have taught that happiness is the end of life were as fully aware as those who taunt them. The happiness which they meant was not a life of rapture; but moments of such, in an existence made up of few and transitory pains, many and various pleasures, with a decided predominance of the active over the passive, and having as the foundation of the whole, not to expect more from life than it is capable of bestowing.” In The Collected Works of John Stuart Mill, Volume X—Essays on Ethics, Religion, and Society, ed. John M. Robson, Introduction by F.E.L. Priestley (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1985). CHAPTER II: What Utilitarianism Is. Online at http://oll.libertyfund.org/title/241/21504/762304.
“ECOFIN”, or the Economic and Financial Affairs Council, is made up of the Economics and Finance Ministers of the 27 member states of the European Union.
*Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.
The State is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.