Friday, February 13, 2009

Uncle Sam, Cousin Maynard, and the miracle seeds

A recent post of mine over on the Blog at

Uncle Sam, Cousin Maynard, and the miracle seeds

Jim Fedako

When trying to explain complex economic situations, it sometimes best to abstract from money and look at a simple economy -- a barter market. Assume that the only market for a society is its Saturday farmers market. Folks come from far and wide to exchange goods (that which they can produce efficiently for that which they cannot).

One day, Uncle Sam and Cousin Maynard come to town with their wagon of stuff. In it, they have miracle seeds, which they exchange for real goods. The locals are excited; Cousin Maynard says these miracle seeds will triple the harvest next year.

Everyone goes into a frenzy based on these future crops -- farmers trade for all kinds of current goods, using lines of credit based on next year's abundance.

Everything goes swimmingly. The local economy appears to be booming. Then, a new visitor with a strong accent comes to town. Since this gentleman -- who goes by the name Ludwig -- is a horticulture specialist from a far-off society, the locals rush to show him a few of their miracle seeds. Ludwig takes a look, and then a second one. He laughs, "These are junk seeds. They won't grow anything."

With that, the economy goes into a tailspin. The farmers recognize that they will not be able to payoff their lines of credit as there will be no harvest next year -- or, if there is time for a second planting, a small harvest at best.

Everyone is angry and scared. They turn to Uncle Sam. He smiles and opens the wagon once more to show an abundant supply of paper notes. "Don't worry," he says, "These can paper over any mess."

We all know that this society has to go through some real pain. And we know that there is no way to paper over the mess. So why do folks continue to believe that things change when the numbers get bigger and the economy more complex?

Expecting the stimulus package to be the solution is a chasing after the wind -- no matter what Uncle Sam and Cousin Maynard claim.

note: Cousin Maynard is JM Keynes; Ludwig is Ludwig von Mises; and, Uncle Sam is the power drunk spender.

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