10 Economic fairy stories that people need to stop believing in

A blog by Thomas G. Clark as an interesting article 10 Economic fairy stories that people need to stop believing in .

In a generally good article, there is one section that I want to try to correct.

5. Everyone maximizing their self-interest promotes wellbeing

This section makes a weak case for what is wrong with this myth. John Maynard Keynes made a much stronger argument against this myth. He showed why everyone maximizing their own self-interest could lead to problems for society as a whole. There is no logical way for individuals to act on their own to overcome the problems. Only a coordinated action by a large enough economic entity like a national government could solve the problem.

In an economic depression like the one in the 1930s that followed the bubble economy of the roaring 1920s, many people trying to maximize their own self-interest try to cut back spending and increase saving to ward off financial ruin. (Of course the maximizing self-interest in the roaring 1920s was an example of collective action that lead to a bubble.)

In the depression situation, the attempt to cut spending by the public causes job losses and even a deeper recession. No economic entity smaller than the national government is large enough to take action by itself to turn the trend around. If such an entity tried to counter the trend by themselves, they would likely go bankrupt trying to do it. The federal government the size of the USA or of Great Britain has the taxing, spending, and money creation authority to counter the depressionary trend and staying power to overcome the depression. These entities alone have enough power to replace the missing consumer demand to keep the employment level up. In fact, these entities can invest in economic development projects that can increase the size of the productive economy so that their countries can come out of the depression in better shape than they went in.

Of course, these government entities had the ability to prevent the bubble of the 1920s, but they didn’t do that either. The same thing holds for the bubble that led up to the 2008/2009 economic crash and the ensuing great recession.

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