On Mistaken Opinions

The Times of India, in a lead editorial aggressively titled “Act Now,” has strongly supported Obama’s “stimulus package” and recommended that our The State do the same. The academic authority on which the editors have based their advice is Paul Krugman, the latest Nobel laureate in Economics, who is an avowed Keynesian.

Yet, almost 300 years ago, thinking on matters such as the effects of an increase in the supply of money, was infinitely clearer.

For example, let us take the case of Richard Cantillon (died 1734). In his famous Essai sur le Commerce, Cantillon starts with the discovery of new gold and silver mines. He then proceeds to show how this additional supply of the precious metals first increases the incomes of all persons connected with their production, how the increase of the expenditure of these persons next increases the prices of things which they buy in increased quantities, how the rise in the prices of these goods increases the incomes of the sellers of these goods, how they, in their turn, increase their expenditure, and so on.

Cantillon concludes that only those persons are benefited by the increase of gold and silver money are whose incomes rise early, while to persons whose incomes rise later the increase of the quantity of money is harmful.

That is, 300 years ago, it was quite clear to thoughtful minds that increases in the supply of precious metals did NOT “stimulate” economic activity. It was also clear that this increase in (hard) money harmed certain sections of the populace. If increases in the supply of gold and silver are NOT uniformly “good” for the economy, surely increases in the supply of irredeemable fiat paper money must be much worse.

Thanks to Keynes, Krugman and their followers, this clear understanding is lost today, and must be painstakingly reconstructed. I hope the editors of the ToI will be prompted to STUDY such matters, so that their highly influential opinions are on the side of truth. The paper’s motto, after all, is “Let Truth Prevail.” Keynesianism is a bundle of lies.

Let us now turn our attention to another editorial, this time in the Indian Express, in which the editors have applauded an 80,000 crore rupee (800 billion) government project to build houses for the urban poor. I would rather spend the 80,000 crores on roads leading out from our overcrowded cities and towns into the hinterland, which is vacant. Only this will increase the supply of urban land, bringing it within the reach of the poor. Note that in New Delhi, where the editors are located, there are only two toll-roads leading out: one, a 4-km toll-road to Noida in UP; and second, a 20 km toll-road leading to Gurgaon in Haryana. If there were toll-free roads to Alwar, Panipat, Sonepat, Saharanpur, Ghaziabad, Meerut, Agra and so on, the housing problem would be solved by the private sector. In my book, therefore, The State should build roads; the private sector should build houses. On the other hand, if The State does not build roads, and builds houses for the poor instead, the cities will be even more overcrowded, the price of urban land would go up even more, and both rich as well as poor would suffer. The editors of the Express should therefore re-think their advice.

Students of Economics should also read Christopher Lingle's latest column in Mint, on the "false logic of rate cuts." He shows how the effect of near-zero interest rates will be fatal for the economy. That is, Keynesianism is dead wrong.