In response to questions by U.S. Senator Jack Reed (D-RI), Bernanke joined in the chorus of those predicting skyrocketing interest rates in the United States and abroad if the federal government defaulted on its debt obligations because Congress did not raise the debt ceiling. It was not a given that the federal government would have defaulted if the ceiling had not been raised. But ignoring that fact, Bernanke argued that the “loss of investor confidence [following default] could potentially raise interest rates quite significantly. . . . But if interest rates rise, that’s clearly going to reduce investment, uncertainty will rise, that will reduce the abilityness [sic] of firms to hire and invest. . . . So I can only conclude that this would be very bad for—for jobs.”

Did the person supposedly in charge of determining interest rates in the United States through Federal Reserve credit creation really say that? What was the rationale for QE1 and QE2 (quantitative easing) if not to lower interest rates and promote economic prosperity? And who inspired that mistaken thinking? John Maynard Keynes, of course.

Keynes argued in the General Theory (1936) that interest rates are determined by the supply and demand for central-bank money (cash) and not by the supply and demand for savings (or lendable capital), as his predecessors from David Hume and Adam Smith on down to Alfred Marshall had explained. Therefore, in Keynes’s view, it is the responsibility of a central bank to increase its supply of money enough to depress interest rates to such a low level as to result in the “euthanasia of the rentier, of the functionless investor,” who relies on “the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” to demand interest payments. That is, money should become so plentiful that no one would be obliged to pay interest to borrow it. (Of course, Keynes here confuses money with savings or wealth.)

The money (cash) supply-and-demand theory of interest rates was the predominant view among Mercantilist thinkers from the sixteenth to eighteenth centuries. It was to correct that mistaken view that Hume, in his essay “Of Interest,” explained that although interest rates may be influenced temporarily by the abundance or scarcity of money, they are permanently determined by the flow of savings relative to their demand:

High interest arises from three circumstances: A great demand for borrowing; little riches to supply that demand; and great profits arising from commerce [hence the desirability of demanding more loans]: And these circumstances are a clear proof of the small advance of commerce and industry, not of the scarcity of gold and silver [money]. Low interest, on the other hand, proceeds from the opposite circumstances: A small demand for borrowing; great riches to supply that demand; and small profits arising from commerce: And these circumstances are all connected together, and proceed from the increase of industry and commerce, not of gold and silver.

Hume’s elaboration on that point was the basis of subsequent classical writers’ explanation of interest-rate determination by the supply and demand for savings. Keynes, on the other hand, denied all such explanation and declared in his 1939 preface to the French edition of the General Theory that, in arguing that interest rates rather are determined by “the demand and the supply of money, that is to say [by] the demand for liquidity and the means of satisfying this demand [he is] returning to the doctrine of the older, pre-nineteenth century economists. Montesquieu, for example, saw this truth with considerable clarity—Montesquieu who was the real French equivalent of Adam Smith, the greatest of your [French] economists, head and shoulders above the Physiocrats in penetration, clear-headedness and good sense (which are the qualities an economist should have).”

Has Bernanke now abandoned his adherence to Keynes’s money, or liquidity supply-and-demand, theory of interest rates, or was he merely participating in the debt-default scare to further the federal government’s agenda of raising the debt ceiling to accommodate its profligate spending?

After all, Bernanke also acknowledged to Senator Reed that besides the Chinese, the Fed is “the largest holder of our Treasury debt.” Why wouldn’t the Fed simply cancel the Treasury’s debt and purchase some more to save the federal government from its predicted default? To support the political-posturing view of Bernanke’s statements, one could legitimately cite his similar proclamations in fall 2008 that without the Troubled Asset Relief Program (TARP), giving the Treasury secretary $700 billion to purchase “toxic assets” mainly from investment banks, businesses could not meet their payrolls. The claim wasn’t true. Businesses borrow from commercial banks, not investment banks, to meet payroll. And commercial banks rely mainly on the public’s deposits to lend to businesses. The public would not have stopped making deposits with banks had TARP not passed. Besides, then-Treasury Secretary Hank Paulson didn’t initially use the money for the bill’s stated purposes. But the scare worked to push Congress to vote for the legislation.

More likely Bernanke simply employed the common-sense view of interest-rate determination through the supply and demand for financial assets (interest rates thus being inversely related to the price of financial assets), which is the classical economics view, in contradiction to Keynes, but without consciously intending to be anti-Keynes. Buyers of such assets (IOUs) are the savers while sellers of financial assets are the borrowers. Clearly, many U.S. Treasury bond holders would be inclined to sell them should a default occur. Such selling would reduce their price and thus raise their yield (interest). Therein lies the contradiction of Keynes and the affirmation of the classical principle he denied—namely, that the supply and demand for savings are the principal or permanent determinants of interest rates. Bernanke couldn’t deny the obvious, even as he exaggerated the consequences of a government default.

So what if the U.S. defaulted on its debt obligations and the yield on its debt rose? Must all interest rates rise as a result of the nonzero default risk on Treasuries? Not necessarily. There would simply be a narrowing of the risk premium between U.S. government bonds and other private-sector securities. Treasury securities would lose their default-risk advantage over other securities but retain their liquidity-risk advantage, given the Federal Reserve’s readiness, hence commercial banks’ readiness, to redeem Treasury securities on sight. There is no reason that the default risk of the bonds and stocks of such corporations as Apple, Microsoft, Google, or Walmart should rise just because that of the U.S. government has risen. Thus the yield on private securities may decline (as investors flee Treasuries) while that on U.S. government securities rises, leaving the average unchanged.

Savers are constantly looking for instruments (financial assets) through which they can earn returns on their savings. There may be some diversion of savings into gold, driving up its price further. But investors in gold also know that, like all other commodities, the bubble created by current fears about Treasuries will also burst in due course. Thus the predicted skyrocketing of worldwide interest rates from a possible U.S. government debt default was an exaggeration. If interest rates rise it will be the result of a contraction in the rate of savings worldwide.

Besides, high interest rates, as Hume explained in his 1752 essay, are not necessarily injurious to a high rate of economic growth. It is high interest rates resulting from a contraction in savings that reduce economic growth. One easily can verify this from the level of interest rates in the United States during the economic boom from 2003 to the fall of 2008. The yield on a one-month Treasury rose steadily from 0.91 percent in May 2004 to 5.16 percent in June 2006 while the unemployment rate declined from 5.6 to 4.6 percent. On the other hand, the one-month rate stood at 0.02 percent in June 2011 because of the Fed’s massive injection of credit while the economy has continued to be mired in anemic growth and the unemployment rate has risen to over 9 percent.

Raising taxes to balance the federal budget would not necessarily lower interest rates. Rather, higher taxes would reduce disposable income and thus the flow of savings. The high level of government spending—financed either by debt or high taxes—would put pressure on interest rates to rise. It also would divert more savings from private-sector investments that would otherwise promote sustained employment and economic growth. These are the insights of classical macroeconomics that Keynes failed to appreciate and his modern followers continue to miss.

Current low U.S. interest rates are unsustainable. They are going to rise with or without an increase in the federal government’s debt ceiling. Savers will not forever endure the current negative real interest rates. Cutting federal spending is the surer path to resumption in robust economic growth and reduction in the rate of unemployment. As David Ricardo acutely observed in his 1810 pamphlet, “The High Price of Bullion”:

To suppose that any increased issues of the Bank [of England] can have the effect of permanently lowering the rate of interest, and satisfying the demands of all borrowers, so that there will be none to apply for new loans, . . . is to attribute a power to the circulating medium [money] which it can never possess. Banks would, if this were possible, become powerful engines indeed. By creating paper money, and lending it at three or two per cent. under the present market rate of interest, the Bank would reduce the profits on trade in the same proportion; and if they were sufficiently patriotic to lend their notes at an interest no higher than necessary to pay the expences of their establishment, profits would be still further reduced; no nation, but by similar means, could enter into competition with us, we should engross the trade of the world. To what absurdities would not such a theory lead us! Profits can only be lowered by a competition of capitals not consisting of circulating medium. As the increase of Bank-notes does not add to this species of capital, as it neither increases our exportable commodities, our machinery, or our raw materials, it cannot add to our profits nor lower interest [permanently].

Experience around the world repeatedly has confirmed Ricardo’s warning against the belief in a central bank’s money creation as the engine of economic growth instead of the pursuit of policies that encourage increased private savings.

In response to questions by U.S. Senator Jack Reed (D-RI), Bernanke joined in the chorus of those predicting skyrocketing interest rates in the United States and abroad if the federal government defaulted on its debt obligations because Congress did not to raise the debt ceiling.  It is not a given that the federal government would default if the ceiling were not raised.  But ignoring that fact, Bernanke argued that the “loss of investor confidence [following debt default] could potentially raise interest rates quite significantly.… But if interest rates rise, that’s clearly going to reduce investment, uncertainty will rise, that will reduce the abilityness [sic] of firms to hire and invest.… So I can only conclude that this would be very bad for  — for jobs.”

Did the person supposedly in charge of determining interest rates in the United States through Federal Reserve credit creation really say that?  What was the rationale for QE1 and QE2 (quantitative easing) if not to lower interest rates and promote economic prosperity?  And who inspired that mistaken thinking?  John Maynard Keynes, of course.

What Keynes Argued

Keynes argued in the General Theory (1936) that interest rates are determined by the supply and demand for central-bank money (cash) and not by the supply and demand for savings (or loanable capital), as his predecessors from David Hume and Adam Smith on down to Alfred Marshall  explained.  Therefore, in Keynes’s view, it is the responsibility of a central bank to so increase its supply of money as to depress interest rates to such a low level as to result in the “euthanasia of the rentier, of the functionless investor,” who relies on “the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” to demand interest payments.  That is, money should become so plentiful that no one would be obliged to pay interest to borrow it.  (Of course, Keynes here confuses money with savings or wealth.)

Indeed, the money (cash) supply-and-demand theory of interest rates was the predominant view among the sixteenth-eighteenth-century Mercantilist thinkers.  It was to correct that mistaken view that Hume, in his essay “Of Interest,” explained that although interest rates may be influenced temporarily by the abundance or scarcity of money, they are permanently determined by the flow of savings relative to their demand:

High interest arises from three circumstances: A great demand for borrowing; little riches to supply that demand; and great profits arising from commerce [hence the desirability of demanding more loans]; And these circumstances are a clear proof of the small advance of commerce and industry, not of the scarcity of gold and silver [money].  Low interest, on the other hand, proceeds from the opposite circumstances: A small demand for borrowing; great riches to supply that demand; and small profits arising from commerce: And these circumstances are all connected together, and proceed from the increase of industry and commerce, not of gold and silver.

Keynes’s Denial

Hume’s elaboration on that point was the basis of subsequent classical writers’ explanation of interest-rate determination by the supply and demand for savings.  Keynes, on the other hand, denied all such explanation and declared in his 1939 Preface to the French edition of the General Theory that, in arguing that interest rates rather are determined by

the demand and the supply of money, that is to say [by] the demand for liquidity and the means of satisfying this demand [he is] returning to the doctrine of the older, pre-nineteenth century economists.  Montesquieu, for example, saw this truth with considerable clarity, — Montesquieu who was the real French equivalent of Adam Smith, the greatest of your [French] economists, head and shoulders above the Physiocrats in penetration, clear-headedness and good sense (which are the qualities an economist should have).

Has Bernanke now abandoned his adherence to Keynes’s money or liquidity supply-and-demand theory of interest rates, or was he merely participating in the debt-default scare to further the federal government’s agenda of raising the debt ceiling to accommodate its profligate spending?

After all, Bernanke also acknowledged to Senator Reed that besides the Chinese, the Fed is “the largest holder of our Treasury debt.”  Why wouldn’t the Fed simply cancel the Treasury’s debt and purchase some more to save the federal government from its predicted default?  To support the political-posturing view of Bernanke’s statements, one could legitimately cite his similar proclamations in fall 2008 that without Congress’s passage of TARP (Troubled Assets Recovery Program), giving the Treasury secretary $700 billion to purchase “toxic assets” mainly from investment banks, businesses couldn’t meet their payrolls.  The claim wasn’t true.  Businesses borrow from commercial banks, not investment banks, to meet payroll.  And commercial banks rely mainly on the public’s deposits to lend to businesses.  The public would not have stopped making deposits with banks had TARP not passed.  Besides, the Treasury secretary, Hank Paulson, did not use the funds immediately for the purpose the bill was passed.  But the scare worked to push Congress to vote for the legislation.

Common Sense

More likely, Bernanke simply employed the common-sense view of interest-rate determination through the supply and demand for financial assets (interest rates thus being inversely related to the price of financial assets), which is the classical economics view, in contradiction to Keynes but without consciously intending to be anti-Keynes.  Buyers of financial assets (IOUs) are the savers while sellers of financial assets are the borrowers.  Clearly, many U.S. Treasury bond holders would be inclined to sell them should a default occur.  Such selling would reduce their price and thus raise their yield (interest).  Therein lies the contradiction of Keynes and the affirmation of the classical principle he denied, namely, that the supply and demand for savings are the principal or permanent determinants of interest rates.  Bernanke couldn’t deny the obvious, even as he exaggerated the consequences of a government default.

So what if the U.S. defaulted on its debt obligations and the yield on its debt rose?  Must all interest rates rise as a result of the nonzero default risk on Treasuries?  Not necessarily.  There would simply be a narrowing of the risk premium between U.S. government bonds and other private sector securities.  Treasury securities would lose their default-risk advantage over other securities but retain their liquidity-risk advantage, given the Federal Reserve’s readiness, hence commercial banks’ readiness, to redeem Treasury securities on sight.  There is no reason why the default risk of the bonds and stocks of such corporations as Apple, Microsoft, Google, or Walmart should rise just because that of the U.S. government has risen.  Thus the yield on private securities may decline (as investors flee Treasuries) while that on U.S. government securities rises, leaving the average unchanged.

Savers are constantly looking for instruments (financial assets) through which they can earn returns on their savings.  There may be some diversion of savings into gold, driving up its price further.  But investors in gold also know that, like all other commodities, the bubble created by current fears about Treasuries would also burst in due course.  Thus the predicted skyrocketing of worldwide interest rates from a possible U.S. government debt default is an exaggeration.  If interest rates rise, it would be the result of a contraction in the rate of savings worldwide.

High Interest Rates and Economic Growth

Besides, high interest rates, as Hume explained in his 1752 essay, are not necessarily injurious to a high rate of economic growth.  It is high interest rates resulting from a contraction in savings that reduce economic growth.  One easily can verify this from the level of interest rates in the United States during the economic boom from 2003 to the fall of 2008.  The yield on a one-month Treasury rose steadily from 0.91 percent in May 2004 to 5.16 percent in June 2006 while the unemployment rate declined from 5.6 to 4.6 percent.  On the other hand, the one-month rate stood at 0.02 percent in June 2011 because of the Fed’s massive injection of credit while the economy has continued to be mired in anemic growth and the unemployment rate has risen to 9.2 percent.

Raising taxes to balance the federal budget would not necessarily lower interest rates.  Rather, higher taxes would reduce disposal income and thus the flow of savings.  The high level of government spending — financed either by debt or high taxes — rather would put pressure on interest rates to rise.  It also would divert more savings from private-sector investments that would otherwise promote sustained employment and economic growth.  These are the insights of classical macroeconomics that Keynes failed to appreciate and his modern followers continue to miss.

Current low U.S. interest rates are unsustainable.  They are going to rise with or without an increase in the federal government’s debt ceiling.  Savers will not forever endure the current negative real interest rates.  Cutting federal spending is the surer path to resumption in robust economic growth and reduction in the rate of unemployment. As David Ricardo in his 1810 pamphlet, “The High Price of Bullion,” acutely observed:

To suppose that any increased issues of the Bank [of England] can have the effect of permanently lowering the rate of interest, and satisfying the demands of all borrowers, so that there will be none to apply for new loans, … is to attribute a power to the circulating medium [money] which it can never possess.  Banks would, if this were possible, become powerful engines indeed.  By creating paper money, and lending it at three or two per cent. under the present market rate of interest, the Bank would reduce the profits on trade in the same proportion; and if they were sufficiently patriotic to lend their notes at an interest no higher than necessary to pay the expences of their establishment, profits would be still further reduced; no nation, but by similar means, could enter into competition with us, we should engross the trade of the world.  To what absurdities would not such a theory lead us!  Profits can only be lowered by a competition of capitals not consisting of circulating medium.  As the increase of Bank-notes does not add to this species of capital, as it neither increases our exportable commodities, our machinery, or our raw materials, it cannot add to our profits nor lower interest [permanently].

Experience around the world repeatedly has confirmed Ricardo’s warning against the belief in a central bank’s money creation as the engine of economic growth instead of the pursuit of policies that encourage increased private savings.

Why would increased saving reduce GDP? Saving, correctly understood or defined, is the acquisition of interest- or dividend-earning financial assets, such as bank deposits, certificates of deposit, mutual fund shares, bonds, and stocks. Thus saving is not cash hoarding but the transfer of funds from income earners to borrowers who spend the funds. Savings are the source of loanable capital sought by businesses, as Adam Smith in the Wealth of Nations well explains: “By what a frugal man saves, he not only affords maintenance to an additional number of productive hands, but like the founder of a public workhouse, he establishes as it were a perpetual fund for the maintenance of an equal number in times to come.” Also, “Capitals are increased by parsimony. . . . Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits.” Indeed, increased savings make increased borrowing at lower interest rates possible.

In his concluding paragraph, Gibson also quotes an explanation from Ludwig von Mises that is in accord with Smith’s argument and in contradiction to his earlier income-lowering claim: “There is but one means to improve the material well-being of men, viz., to accelerate the increase in capital accumulation as against population.” Gibson goes on to state: “Capital accumulation requires saving, saving requires confidence. . . .” I think he needs to acknowledge the error of attributing an income-lowering effect to savings or else explain the contradiction in the two paragraphs. We cannot get rid of the Keynesian nonsense that increased saving causes poverty—the so-called paradox-of-thrift proposition—by continuing to employ Keynes’s misconceived definition of saving to mean cash hoarding.

Warren Gibson replies:

Professor Ahiakpor quite reasonably questions my assertion that an increase in saving could temporarily suppress GDP. I lacked the space (and inclination) to explain this assertion in the article, but here it is: I agree with him that savings are invested in real assets, and I am willing to stipulate no growth in cash balances. And of course new investments do add to GDP. So it looks like a wash: some consumption is simply shifted to capital goods. But I suggest that if we consider the time structure of production we see a difference. Capital goods are priced at the estimated discounted value of the final products they are intended to produce, and because of this discounting the present value of new investments could well be lower than the consumption goods they replace. Only in the fullness of time will the productivity of the new capital work its way down to consumption, at which time we would expect increased GDP, other things being equal.

So why don’t they apply the same logic to the economy as a whole? The only tenable answer is that they are under the spell of the economic miseducation inflicted on the minds of economists and many among the general population by John Maynard Keynes. They believe that consumer spending drives the economy, without having stopped to consider from where consumers get the means to spend.

Consumption Doesn’t Need Stimulation

On their own—that is, in the absence of government handouts in the form of welfare payments or unemployment compensation (funded by taxpayer money)—people acquire the means to spend by earning income from producing and selling goods and services or directly selling their labor services. If they borrowed the money to spend, it must be from someone else who has earned income from production. And as Adam Smith long ago noted in The Wealth of Nations, “[C]onsumption is the sole end and purpose of all production. . . . The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it.”

Why else does anyone work other than to acquire the means to purchase goods and services? That is why consumption spending does not need stimulating. What we currently save out of our incomes is to enable us to smooth out our consumption spending over time or to acquire the means to increase consumption and/or our income-earning capacity in the future.

Such household investments may take the form of bank accounts or bonds to earn interest income, stocks to earn dividends, or educational skills to earn higher future wages and salaries. The only part of our unconsumed income that we do not devote to increasing our future capacity for increased consumption spending is cash hoarding; cash does not earn interest or dividends. But in normal times, when we are not too scared to keep our savings in bank accounts or to purchase stocks or bonds, cash hoarding constitutes a very minor part of our unconsumed income. Meanwhile, what we save is spent by borrowers of our savings, mostly producers of goods and services.

On the basis of these fundamental truths about how people manage their financial affairs and drawing on the wisdom of Adam Smith, Jean-Baptiste Say constructed the thesis now named after him, Say’s Law of Markets, in his 1803 Treatise on Political Economy. It is from production that people earn incomes to purchase those goods and services they themselves don’t produce:

Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have [acquired] this money itself by the sale of productions of our own. . . . It is then in strict reality with their productions that [people] make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands.

The law simply says that “productions can only be purchased by productions” (Say, Letters to Malthus, 1821).

Regarding the need for savings rather than consumption spending to promote economic growth, Say noted that:

The public interest is . . . not served by consumption, but it is served and served prodigiously by saving, and though it seems extraordinary to many persons, not being any the less true as a consequence, the labouring class is served by it more than anyone else. These persons think, perhaps, that the values which the wealthy save out of outlays on their personal pleasures in order to add to their capitals are not consumed [spent]. They are consumed; they furnish markets for many producers; but they are consumed reproductively and furnish markets for the useful goods that are capable of engendering still others, instead of being evaporated in frivolous consumption.

Failing to understand all this, Keynes made a fetish of consumption spending as the engine that drives an economy during the 1930s, especially in his famous book The General Theory of Employment, Interest, and Money (1936). He argued that Say’s Law applies only to an economy in which there is no unemployment or one in which money is not used as a means of exchange. Neither claim is true. However, many an economist has been hooked on Keynes’s miseducation ever since. In macro models legislated unemployment compensation is listed among “automatic stabilizers.” The thinking is that paying the unemployed so they would keep spending will sustain the economy’s so-called aggregate demand. Even if proponents of that view recognized that the government would have to pay the unemployed from its tax revenue (or borrowed funds), they still do not realize that total spending would not change. But unless the government borrowed the additional funds from outside the domestic economy, what it takes from purchasers of its bonds will not be available for private borrowers to spend on investment projects or for their own consumption. Put differently, variations in the level of government spending, besides the portion funded by external borrowing, do not change total spending in the domestic economy.

The Need for New Production

As for stimulating economic activity, it is not the level of consumer spending but new directions in production that make the difference. Entrepreneurs conceiving of new ways to meet economic necessities or desires in the marketplace create new incomes with their positive ripple effects in the economy. Meeting such needs requires that entrepreneurs find the savings, or loanable funds, to acquire the resources to engage in production. Of course, followers of Keynes’s mistaken 1937 view—“The investment market can become congested through the shortage of cash. It can never become congested through the shortage of saving. This is the most fundamental of my conclusions within this field”—do not recognize the necessity of savings to fund investment expenditures. But the fact is that the government’s taxing the employed or borrowing the community’s savings to pay people who are unemployed does not help entrepreneurs in their socially useful task of new wealth creation. This is also how we should recognize the failure of the $787 billion so-called stimulus of February 2009, the subsequent Cash for Clunkers program, and the first-time home purchasers’ subsidies of 2010 to stimulate economic recovery. The money to fund such programs has to be taken from the economy: There is no injection of new money by the government; it effects only a transfer.

Specialization and Trade

Adam Smith in The Wealth of Nations made the salient point: “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” The prudence is in the fact that households typically do not aim to be their own tailors, shoemakers, wine makers, homebuilders, or producers of all the numerous things they need, but rather specialize in those things they can produce at the cheapest cost and buy the others in the marketplace—the advantage of specialization and trade. That’s how Smith came to urge nations to adopt the wisdom of households in the management of their production and consumption activities and to reject mercantilist restrictions on trade and opt for free trade instead.

We can apply the same wisdom of households to the question of paying the unemployed. Just as no household would expect that giving money to any of its members to spend would stimulate wealth creation for the household, so it is for the economy as a whole. An economy is little more than the collective activities of households. It is ultimately the aggregation of household production and consumption expenditures that is called gross domestic product, GDP.

We also can learn from the experience of Europe. Its greater “generosity” in unemployment compensation does not produce less unemployment and greater economic growth but higher levels of unemployment and relatively poorer economic growth than in the United States. Extending the period of unemployment insurance compensation only assures that the unemployment rate stays permanently higher than the 4 to 7 percent range within which it fluctuated over the last 20 years or so until 2009. Arguing about the ballooning deficit may help stop the extensions, but that really is a side issue. The real point is that paying people who are unemployed simply discourages them from seeking and/or accepting alternative job offers quickly. And such payments do not change total spending in the economy.

It is truly a pity that followers of Keynes’s mistaken understanding of how a monetary economy works now claim the relevance of his ideas to our current economic situation and are implementing some of his misconceived policies.

That the Obama administration based its policy on the assumption that every dollar of government expenditure has $1.50 worth of impact is a remarkable testimony to Keynes’s observation in that book: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

So it is that Keynes’s false expenditure-multiplier argument, severely criticized by his contemporaries, can now be invoked in support of massive spending.

The argument is founded on two key assumptions that turn out to be false. First is the notion that savings are not spent but rather are withdrawn from the expenditure stream. That assumption prompts stimulus proponents to believe that taxation or government borrowing expands total spending, while leaving the money in the private sector retards it. The flaw is the equation of saving with hoarding. People save their unconsumed income in bank deposits and mutual funds, purchase bonds (private or government) and stocks, or some combination of all of these. Thus savings are the sources of funds spent by borrowers. And as the classical economist most admired by Keynes declared: “No political economist of the present can by saving mean mere hoarding.”

That was Malthus, who was reaffirming Adam Smith’s explanation in The Wealth of Nations that “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people.” Note that “to consume” does not only mean “to eat.” It also means to “use up.” Thus John Stuart Mill elaborates Smith’s explanation: “The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and while hoarded, is not consumed at all.” And when savings are borrowed by businesspeople, they are “all consumed; though not by the capitalist. Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product. The remainder is paid in wages to productive laborers, who consume it for their daily wants; or if they in their turn save any part, this also is not, generally speaking, hoarded, but (through savings banks, benefit clubs, or some channel) re-employed as capital, and consumed.”

Keynes’s lack of formal training in economics, besides his eight weeks of tutorials from Alfred Marshall, may explain his failure to interpret correctly Marshall’s own restatement of the meaning of saving, which Keynes himself quoted: A man “is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labor and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”

The Government Spending Shuffle

The multiplier’s second incorrect premise is that government expenditures are “autonomous”; that is, government spending does not depend on current income. It may be true that politicians pay hardly any attention to the level of income in the economy when they choose how much government should spend. That it planned to spend $787 billion when the economy was in a recession is ample testimony to such an inclination. But the amount the government spends comes primarily from taxes paid out of the public’s current income. Furthermore, government expenditures above tax receipts have to be paid for through the sale of bonds, purchased out of the public’s savings. Thus increased government spending simply shuffles around currently earned incomes and savings without adding anything to total spending. And when government shifts more of current income toward its favored expenditures, the economy’s future functioning is impaired because such spending yields less than would have resulted had the income earners spent the money themselves.

Borrowing from the rest of the world may add to total spending in the United States at the expense of spending in some other countries. But it is hard to conceive of foreign savers eager to send their unspent incomes to the United States when their own economies are experiencing recessions. Besides, the Keynesian multiplier idea is supposed to hold in every country. Thus it is unrealistic to expect that all governments would be able to increase their borrowing from “the rest of the world” in order to increase total world spending.

Borrowing from a central bank (inflation) may increase total spending beyond currently generated incomes. However, the stimulative effect can only be temporary, until nominal wages adjust to the resulting rise of prices and participants in the capital markets have taken measures to hedge against future capital losses. This is the classical forced-saving doctrine that Keynes read but failed to interpret correctly, thinking it applies only to an economy operating at full employment.

Indeed, David Ricardo described as an “absurdity” the belief in the ability of a central bank to promote lasting economic prosperity by issuing paper money. The belief, he said, attributes “a power to the circulating medium which it can never possess.” Keynes encountered a similar warning about the futility of a central bank’s money creation to promote prosperity in Ricardo’s Principles but unwisely dismissed it as having relied on the assumption of full employment. The Federal Reserve evidently has been attempting to prove Ricardo wrong with its reckless money creation, especially since the third quarter of 2008. It has lost so far.

Production Drives Economies

A fundamental flaw of the Keynesian multiplier argument, besides the two faulty premises, is its failure to recognize that consumption spending follows production and the earning of income. It is incorrect to think of spending as one consumer handing over a fraction of her income to another to spend. Rather, individuals engage in production from which they earn incomes by selling what they do not consume. From the incomes thus earned, individuals purchase goods and services they themselves do not produce. The remaining income may be held in cash (hoarding) or turned over to others through purchasing interest- or dividend-earning assets (saving). That is why the classical economists emphasized that production, rather than consumption, drives an economy, another explanation Keynes encountered from Mill but could not interpret correctly:

What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because everybody would have twice as much to offer in exchange.

Before Keynes borrowed Richard Kahn’s formulation of the expenditure multiplier, founded on consumption expenditures, other analysts had argued the “multiplying effect” of production, as Mill explains above. The argument is that increased productivity or a surge in production within one sector of an economy stimulates increased production in others as a result of the additional demand or income generated by that sector. Thus the discovery of high-yielding varieties in agriculture or the introduction of more advanced information-processing technologies into computers may have multiplying effects on production in other sectors of an economy. That explanation is a far cry from the Keynesian belief that by taking some of the public’s income to subsidize the arts, pay the unemployed over an extended period, or cover children’s health care, government will stimulate increased production in the rest of the economy. Even necessary expenditures on infrastructure entail forgone production. For a correct analysis, one always has to keep in mind the displacement effect of government spending.

Among Keynes’s contemporaries who criticized his multiplier argument most consistently was R. G. Hawtrey, who declared it variously as “practically untenable, . . . nonsense, . . . [and] fallacious,” and said that it does not represent “a correct account of the sequence of events.” (See more of such criticisms in my “On the Mythology of the Keynesian Multiplier,” American Journal of Economics and Sociology, October 2001.) Evidently, those who recommend massive government spending have paid little heed to previous criticisms of the multiplier argument. They presumably were impressed by its expression in algebra and geometry in modern macroeconomics textbooks. They also have not learned from the failure of former President Bush’s tax cuts of 2008, which were meant to stimulate consumer spending and spare the economy from a downturn. Cutting taxes, only to borrow from the public to fund the increased deficit, could not have increased production. Perhaps the failure of the so-called stimulus to bring economic recovery will finally teach the right lesson on the impotence of increased government spending.

Economic recessions typically are the result of a mismatching of production with consumer demand. Given the incentives of producers to correct their own mistakes to recover profitability, economies sooner or later recover from recessions on their own. But recovery can be forestalled when governments undertake expenditure or regulatory measures that frustrate the corrective actions of private producers and consumers. Massive, diversionary spending by government does not help the recovery process.

Mainstream economics uses the upward-sloping supply and downward-sloping demand curves simply to reflect the basic self-interested pursuit of net gains by market participants: sellers looking for higher prices in order to offer more quantities for sale per unit of time, and buyers looking for lower prices in order to purchase more quantities per unit of time. All such bargains are made by the market participants with as much knowledge as they may possess, but there is no insistence on complete or perfect information on the part of sellers or buyers.

Thus to say that there is an upward-sloping market supply curve for “capital” or savings in the financial market simply means that people or financial institutions would be willing to offer more funds on loan if offered higher interest rates. Similarly, to draw a downward-sloping demand curve for “capital” or savings is to suggest that more loans would be taken by borrowers if they were offered at lower interest rates. It is from such contrary tendencies of lenders and borrowers that classical and neoclassical economists explain that the rate of interest is determined by the supply and demand for “capital” or loanable funds (an explanation many Austrians fail to recognize^[3]). The same model of supply and demand may be used to explain the determination of wage rates in different occupations or rental rates in different housing markets, but without invoking the assumption of perfect knowledge.

Few mainstream economists believe that the model of price determination in a “perfectly competitive” market is a satisfactory representation of real market situations, and few invoke the assumption of perfect knowledge. Rather, they consider oligopolistic and monopolistic competition as the norm. As George Stigler points out, “it seems improper to assume complete knowledge of the future in a changing economy. Not only is it misleading to endow the population with this gift of prophesy but also it would often be inconsistent to have people foresee a future event and still have that event remain in the future.”^[4] Several textbooks now talk about price-taking firms rather than perfectly competitive firms. Paul Samuelson and William Nordhaus, after teaching the perfect competition model and without invoking the assumption of perfect knowledge, also remark, “By the strict definition, few markets in the U.S. economy are perfectly competitive,” and “If you look out the window at the American economy, however, you’ll find that such cases [of perfect competition and complete monopoly] are rare; you are more likely to see varieties of imperfect competition between these two extremes. Most industries are populated by a small number of firms competing with each other.”^[5]

Marshall and Mill

Classical economists and such early neoclassical economists as Alfred Marshall also discussed equilibrium market-price determination by the forces of supply and demand but without invoking the assumption of “perfect competition.” Thus, summarizing classical value theory, J.S. Mill notes that:

if a value [price] different from the natural value [long-run average cost, including normal profits] be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time; for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit; which, under free and active competition, cannot long continue to be the case.^[6] (emphasis mine)

Marshall talks about “free competition, or rather, freedom of industry and enterprise” and by “competition” means “the racing of one person against another, with special reference to bidding for the sale or purchase of anything.”^[7]

It is also well known that the modern perfectly competitive model is one in which firms or sellers do not compete—they can’t change prices or product quality, two of the principal means of competition: “it is one of the great paradoxes of economic science that every act of competition on the part of a businessman is evidence, in economic theory, of some degree of monopoly power, while the concepts of monopoly and perfect competition have this important feature: both are situations in which the possibility of any competitive behaviour has been ruled out by definition.”^[8] Moreover, “the theoretical concept of [perfect] competition is diametrically opposed to the generally accepted concept of competition.”^[9]

For his strictures to be useful, Kirzner needs to justify his insistence that the use of market supply and demand curves to illustrate equilibrium price determination in mainstream economics always must entail the assumption not only of perfect competition but also of perfect knowledge.

Notes

1. See Israel M. Kirzner, “The Law of Supply and Demand,” Ideas on Liberty, January 2000, pp. 19-21.
2. See Israel M. Kirzner, “Entrepreneurial Discovery and the Law of Supply and Demand,” Ideas on Liberty, February 2000, pp. 17-19.
3. James C.W. Ahiakpor, “Austrian Capital Theory: Help or Hindrance?” Journal of the History of Economic Thought, Fall 1997, pp. 261-85.
4. George J. Stigler, “Perfect Competition, Historically Contemplated,” Journal of Political Economy 65 (1) 1957, pp. 1-17.
5. Paul A. Samuelson and William D. Nordhaus, Economics, 16th ed. (New York: Irwin-McGraw-Hill, 1998), pp. 155, 170.
6. John Stuart Mill, Collected Works, vol. 3, J. M. Robson, ed. (Toronto: University of Toronto Press, 1965), p. 457.
7. Alfred Marshall, Principles of Economics, 8th ed. (Philadelphia: Porcupine Press, 1990 [1920]), pp. 10, 4.
8. Paul McNulty, “Economic Theory and the Meaning of Competition,” Quarterly Journal of Economics 82 (4) 1968, p. 641.
9. S. Charles Maurice, Christopher R. Thomas, and Charles W. Smithson, Managerial Economics, 4th ed. (Homewood, Ill.: Irwin, 1992), p. 431.

The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred, but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and while hoarded, is not consumed at all. But if employed as capital, it is all consumed [spent]; though not by the capitalist.^[9]

Understood as the classical economists taught, and the general public means in common usage in the marketplace, increased saving does not depress total spending, but only shifts the composition of spending more towards investment or producers’ goods and less towards immediate satisfaction of consumption demand. Such understanding helps easily to set aside the analytical fable called the paradox of thrift, promoted to a great extent by Paul Samuelson’s best-selling textbook, Economics, by which increased saving depresses aggregate demand or total spending and causes a fall in subsequent level of income.

The great teachers of economics sought to communicate ideas in the language of the marketplace. Indeed, Alfred Marshall urges economists to do the same, arguing in regard to the term “capital” that “economists have no choice but to follow well-established customs as regards the use of the term capital in ordinary business, i.e. trade-capital.”^[10]

Keynes is known to have made up his own meaning for terms in ordinary usage, much to the confusion of his audience. And many of Keynes’ modern-day followers continue with his distortion of language, as in the case of associating saving with the hoarding of cash, and hence a refusal to spend or “a withdrawal from the spending stream.” Accordingly, modern Keynesians derive some surprising conclusions, e.g., Samuelson and Nordhaus’ warning against “President Reagan’s tax cuts put forth as a means of promoting [private sector] saving” in the United States, and that governments should promote consumption, not saving.^[11]

But saving is not hoarding. It is what most people understand it to be: buying or investing in financial assets issued by banks and other borrowers or investors. This is why savings promote economic growth, as the classical economists taught before Keynes changed the language of modern economics so drastically to the detriment of meaningful dialogue or communication between economists and the rest of the public. []

1.   John Maynard Keynes, The General Theory of Employment, Interest and Money, paperbound ed. (London and Basingstoke: Macmillan, 1974 [1937]), p. 30.

2.   See, for instance, J. Vernon Henderson and William Poole, Principles of Economics (Lexington, Mass.: D.C. Heath, 1991), pp. 279-81, and Michael Parkin, Macroeconomics, 2nd ed. (New York: Harper and Row, 1993), pp. 224-25.

3.   See Henry Hazlitt, The Failure of the “New Economics” (Princeton, N.J.: Van Nostrand, 1959) and Economics in One Lesson (Westport, Conn.: Arlington House, 1978 [1962]). Also see Mark Skousen, Economics on Trial (New York: Irwin, 1991), ch. 5, and Dissent on Keynes (New York: Praeger, 1992), ch. 5.

4.   Axel Leijonhufvud, Information and Coordination (New York: Oxford University Press, 1981), p. 197.

5.   Alfred Marshall, Money, Credit and Commerce (New York: Kelly, 1960 [1923]), p. 46

6.   John Maynard Keynes, A Treatise on Money makes a similar claim in his General Theory (London: Macmillan, 1930), vol. 1, p. 172, emphasis in original. Keynes makes a similar claim in his General Theory (p. 210).

7.   Hazlitt (1959, p. 218) makes the point that “people in a modern economic community do not simply hoard money in a sock or under the mattress,” but does not focus on Keynes’ distortion of saving as defined by the classics.

8.   Quoted in Mark Blaug, Economic Theory in Retrospect, 4th ed. (Cambridge: Cambridge University Press, 1986), p. 166.

9.   John Stuart Mill, Collected Works, vol. 2, ed. by J. M. Robson (London: University of Toronto Press, 1965), p. 70.

10.   Alfred Marshall, Principles of Economics, 8th ed. (London: Macmillan, 1964 [1920], p. 647. See James C. W. Ahiakpor, “On Keynes’s Misinterpretation of `Capital’ in the Classical Theory of Interest,” History of Political Economy, Vol. 22, Fall 1990, pp. 507-28. Ahiakpor explains how Keynes’ failure to follow this meaning of “capital” led to his inability to recognize Marshall’s explanation of the theory of interest, that is, the rate of interest is determined by the supply and demand for “capital.” In place of that valid explanation, Keynes then substitutes the supply and demand for liquidity (cash) as being the determinants of interest rates, a confusion which continues to plague economists.

11.   Paul A. Samuelson and William D. Nordhaus, Economics, 12th ed. (New York: McGraw-Hill, 1985), pp. 171-74.

Many African governments and leaders of thought fear increased marginalization and neglect of their continent in the so-called New World Order following the collapse of Communist regimes in Eastern and Central Europe and the former Soviet Union. This fear has been triggered by the enthusiasm of governments in the industrialized West to help financially the former Communist countries develop into democratic and private-enterprise economies.

Africans believe that the countries of Europe and the former Soviet Union receive far more sympathy in attracting funds from governments of the industrialized countries than their own. After all, it has been suggested frequently in the West that helping the former Communist countries financially is in the West’s own security interest. Such help, it has been argued, is far cheaper than spending on armaments to protect against renewed Communist threats, should these countries revert to their bad old regimes. This is why President Yeltsin, for example, receives billions of U.S. aid money while little by way of serious economic or political reform takes place in Russia.

Africans also have heard or read such comments as “It would be far easier to absorb people from Europe into American society than, say, a thousand Zulus from South Africa.” In sum, many African governments and their Western sympathizers believe that given the closer ethnic affinity between peoples of the former Communist countries and the industrialized West, help to Africa is liable to receive little consideration on the international agenda. The recent withdrawal of U.S. troops from Somalia adds to this fear.

But the anticipated neglect of Africa has potential benefits for Africans that are seldom discussed. The benefits include (a) a much better functioning of their economies, (b) escaping from further international indebtedness at the governmental level, and (c) relief from their countries being used as proxies to fight East-West ideological wars. Consider these points in turn.

Deteriorating Economies

Most African economies took a turn for the worse during the 1970s, and many continued on that path throughout the 1980s. Today many are characterized by inadequate production of food and other basic necessities, high rates of inflation, low interest rates that penalize saving (nominal returns are wiped out by inflation), official currency exchange rates that bear little relation to the demands for their currencies in international exchange, severely under-utilized capacity in public sector manufacturing industries (less than 50 percent), large and persistent government budget deficits, and bloated government bureaucracies. These features are, of course, the creations of African governments, although Marxists and neo-Marxists may claim otherwise. But the conditions also have been exacerbated by governments of the industrialized West as well as international agencies, even if unintentionally.

Inadequate production of food and other necessities, which is really part of a general decline in production, has arisen mainly from African governments’ misguided attempts to make food available cheaply to urban populations by dictating low, unrewarding prices to their rural food producers. (Many Western governments do the opposite, subsidizing their farmers and storing up excess produce, later to be used as foreign aid.) Farmers have reacted predictably by cutting back their production, some turning to subsistence cultivation.

Enter Western governments and other international “donors” with food aid (e.g., the World Food Program) and loans to alleviate the shortages created by the price controls. This international “good will” also attempts to alleviate the shortage of savings by granting loans at below-market rates of interest and on easy repayment terms. The loans are also meant to fall the so-called foreign-exchange gap incorrectly believed to be responsible for the countries’ inability to import enough raw materials to increase capacity utilization in industrial production.

Indeed, some of those responsible for these unwise international “assistance” programs truly believe that market forces do not work well in the less developed countries. They are unable to make good meaning of trading on black markets in food, foreign currencies, gasoline, or spare parts in Africa. Others correctly understand that the black market reflects the economic rationality of its participants, but nevertheless feel constrained by their relations with African governments, or the dictates of their agencies, not to focus on removing the injurious policies themselves. When pressed on the ineffectiveness of their actions for the overall good of the economies, international “helpers” plead the necessity of going slow or employing palliatives lest the host governments are overthrown by their own people. Thus one now reads excuses from the International Monetary Fund (IMF) and the World Bank about not insisting on the quick removal of bad economic policies as a condition for granting “Structural Adjustment Program” loans in the Third World.

Facing Up to Reality

But suppose these governments do not receive any “food aid” or concessionary term loans to deal with their economic hardship. A few may stick with their unwise policies if they are strong enough to contain their citizens’ anger, as countries such as North Korea and Myanmar (Burma) have done. But most would finally face up to reality and take the necessary painful steps toward an efficient economic system.

Take the case of Ghana, for example. While the country’s economy tumbled during the mid- 1970s in response to several unwise and inward-looking government policies, external aid increased (from $40 million in 1970 to $82 million in 1978, and to $129 million in 1980). But there was a sharp drop in 1982 (to $94 million) when Marxist rhetoric-reciting radicals took over the government. Failure of the government to acquire as much aid as they demanded from the World Bank and the IMF, and the sharp contraction in the economy that year (negative 7 percent in real terms), finally forced some dramatic changes in economic policy in 1983, particularly with respect to rigid price controls. Although international financial assistance later increased, those reforms culminated in the removal of practically all price controls by 1988. Today open markets in foreign currencies (a phenomenon abolished by law in 1961) flourish in Ghana and more private funds flow in than out.

Some of the international aid money has gone to finance government budget deficits in Africa. In some cases, such foreign financing amounts to more than 75 percent of the budget deficit, e.g., in Burundi, Cameroon, Chad, Congo, Gambia, Madagascar, Mali, Mauritania, Nigeria, Senegal, Togo, and Zaire during the 1980s.[1]

Now anyone who runs the family budget on such a principle must soon be burdened with unmanageable debt and go bankrupt. Indeed, some of these countries in 1990 had debt greater than 100 percent of their national income, including Mali (101 percent), Nigeria (101 percent), Madagascar (I 34 percent), Congo (204 pereen), Mauritania (227 percent), and Somalia (277 percent).[2] Others with equally disturbing amounts of debt as a percentage of income in 1990 include Zaire (141 percen0, Zambia (261 percent), Tanzania (282 percent), and Mozambique (385 percent). And who bears the burden of repayments? Not the governing elite, but the poor producers of export crops such as cocoa, coffee, peanuts, palm oil, and in some cases local labor employed in oil and other mineral extracting industries. This is why General Olusegun Obasanjo, a former military ruler of Nigeria, believes that the “most humiliating index of [Africa's] decline is the increase in infant and child mortality resulting directly from our debt problem.”[3]

Although the peace dividend from the end of the Cold War may have evaded the people of the United States, for example, Africans stand to gain a great deal from the New World Order, if they could be left alone. Several of the civil wars in Africa, including those of Angola, Ethiopia, Mozambique, Somalia, and Zaire, really have been proxy ideological wars between the United States and its allies and the former Soviet bloc. Indeed, it was to contain “Marxist” Ethiopia that the United States sustained the Somalian dictator, Siyad Barre, in power with military and financial support until the end of the 1980s. Thus, “Operation Restore Hope” may justifiably be considered an atonement to the people of Somalia for past collaboration in their repression and economic ruin, rather than mainly altruism.

A Soviet academic put it best when he suggested, at a Soviet-Canadian African Studies conference held in Moscow in 1990, that debts owed by their African clients, especially Angola and Ethiopia, be canceled since they took the form of armaments with which those countries destroyed their own economies. The same can be said for Somalia and Zaire with respect to their governments’ debt to the United States.

Bad Advice

What about foreign economic advisers as part of foreign aid to Africa? Would African economies still benefit if Western governments and international financial institutions such as the IMF and the World Bank did not send them technical advisers? In the first place, these advisers must be paid for by the recipient countries, and thus are part of their international indebtedness. Second, they may offer good advice but cannot force their implementation. Third, many of them offer bad advice. And in the case of Africa, as Mahbub ul Haq of the United Nations Development Program (UNDP) was recently quoted in The Economist to have observed, the continent “has perhaps received more bad advice per capita than any other.”

A recent autobiographical account of foreign advising by Benjamin Higgins tells it all.[4] His client states included Lebanon, Haiti, Sri Lanka, Brazil, Indonesia, (pre-oil) Libya, Malaysia, Mauritania, Morocco, and the Philippines, mainly during the 1950s, 1960s, and 1970s. Other international development experts have focused on Bangladesh, India, Pakistan, Mexico, Kenya, and Tanzania. But when one looks for success stories in economic development, one finds Hong Kong, Singapore, Taiwan, and South Korea—countries that largely escaped the attention of development experts during the 1950s through the 1970s.

The experience of Eastern and Central European countries that followed advice from Western economic experts during the 1990s is not encouraging either. This is why it is most instructive that Higgins rates the success of the “international development effort” not in terms of how countries most affected have fared, but by the establishment of a “genuine ‘international civil service,’ of which the top members are of very high quality and thoroughly committed . . . . and who have achieved a certain unity of ideas . . .” and against whose policies and proclamations, “governments the world over are reluctant to be in open opposition.”[5]

Besides some specific details of implementation, the kinds of economic policy that encourage economic growth and development in a country have been outlined in Adam Smith’s Wealth of Nations. These have been restated time and again by the likes of Milton and Rose Friedman and Peter Bauer. Governments around the world have resisted heeding such policy prescriptions because they do not suit their interventionist tastes or political ends. This is why foreign economic experts frequently are of little help in the Third World.

Of course, the flow of aid money to African governments will not cease in the New World Order. Donor countries still want to retain their spheres of international influence. But the adoption of efficient economic policies that would likely follow the curtailment of Western aid would be good for the continent. []

1.   World Bank, African Economic and Financial Data, 1989.
2.   World Bank, World Development Report, 1992.
3.   O. Obasanjo and H. d’Orville, eds., Challenges of Leadership in African Development (New York: Crane Rus-sak, 1990), p. 28.
4.   Benjamin Higgins, All The Difference: A Development Economist’s Quest (Montreal & Kingston: McGill-Queen’s, 1992).
5.   Ibid., p. 267,