One of the things that struck me during the year that I spent in Berlin, just after the infamous wall had been torn down, was the intensity of antipathy, even hatred, I dare say, that some of my West German colleagues displayed vis-à-vis their new East German collaborators. At bottom, it was a matter of Futterneid - literally: jealousy about food. Berlin used to be a place spoiled with lavish subsidies - to make sure people would find it attractive to live, work, invest, and produce in the enclave city. Burdened with the heavy costs of integrating a bankrupt socialist economy into a Western-type society, Bonn decided to cut many of the Berlin-subsidies.
One of the cases I had on my desk was a big-name piano manufacturer, who threatened to go belly up - the music was going to die, basically because the Berlin-subsidies had been withdrawn.
Why do I mention this? I suspect, the Berlin-subsidies were a form of widespread Keynesianism, whereby the idea of a subsidy is enmeshed with other concerns, which in themselves may or may not be objectionable. In other words, there is a human propensity to act like a Keynesian, which to some extent, I think, we cannot or even should not discard entirely.
Could West-Berlin have survived without the subsidies? Would Berlin have ended up a capitalist eyesore, without subsidies; or, contrariwise, had it become the eyesore that it looked to me before 1989 thanks to all sorts of pampering leniency, including easy subsidies? What measures would have made Berlin something like a free-market-shining-city-on-the-hill amidst the communist desert? The Bonn Republic, being profligate herself in terms of handing out countless subsidies, would Berlin politicians have stood a chance by arguing in favour of "no subsidies"? Would a good politician have been better advised to play along with the regime of subsidies, and once elected get some genuinely good policies accomplished, rather than quitting the game for reasons of being strictly principled?
No doubt, there are groups, persons, and politicians of the shamelessly self-serving type, there are the fatuous, and the fatuously self-serving kind; but when the public good is an open issue with many different answers to it, I suppose, sound principles and arguments alone are not good enough to bar excesses or preclude less than meticulous compromises and mixed solutions. Ultimately, it would seem that in a large number of cases there is no hindrance to bad politics that is more effective than better politics.
I just wonder, how hard it is for politicians, especially on the municipal and state level not to avail themselves of public resources. Also, to spend or not to spend public resources, is it always a matter of clear-cut discernment?
This is not supposed to be an argument in favour of Keynesianism; but where public resources are substantial, as they are under modern capitalism, public life tends to get interwoven in countless ways with the Keynesian thread, and people grow accustomed to the gifts of the visible hand. Until the day the music dies.
But in all that confusion and in the face of so many doubts, it is wholesome to get the basics right, and who better to turn to for that than Steven Kates.
Steven, whose Free Market Economics, I strongly recommend for perusal both by layman and expert, has a most readable piece on the fortunes of economics, economies and the Keynesian legacy, the post being part of an exchange with a French Keynesian.
Nothing to lift an economy like public investment! Every business like the post office. Every investment another Solyndra. All subsidised with nothing self-sustaining through the revenues it earns. Dig a hole and get fill it [sic?] in again. Don’t worry about earning a greater return than the funds outlayed. Just close your eyes and spend. Don’t worry, it will all work out once that magic multiplier cuts in. [...]
On this much we can agree, that the world’s economies are in a mess. Consumers deep in debt, savings eaten away by low productivity government spending, and private investment going nowhere. [...]
It is not aggregate demand that matters, but value adding aggregate supply. You must do more than build brick walls, you must build where what is built actually contributes to future prosperity. To think more holes dug up and then refilled can generate recovery because it constitutes “fiscal spending” is the essence of economic illiteracy. [...]
In times gone by, before Keynes, economists talked about “effective demand”, that is, what had to happen to turn desire for products into an ability to buy those products. Now it is aggregate demand – the total level of demand – which has leached the original concept of any understanding that for everyone to buy from each other, they first have to produce what each other wish to buy. If that is not obvious, then common sense has gone from the world.
As for facile references to austerity, Daniel Ben-Ami offers an insightful post on the meme.
See also Government - High-Cost Producer.