Sunday, February 28, 2010

Biology and Economics

This essay will endeavour to explore the question: “What is the relationship between human biological evolution and economics, and what can investigations into the former tell us about the latter?” I will explore the way that human preferences are modelled by various economic theories, explain what current theories of human evolution can tell us about the veracity of such models, and why such attaining such veracity is important. 

According to the Darwinian theory of evolution by natural selection, the presence of three mechanisms can be used to explain the complexity of existing biological forms: heredity (e.g. genetic reproduction), diversity (e.g. competing alleles within the same gene-pool) and selection pressures (e.g. natural and sexual selection) (Hodgson 1993). Human beings, needless to say, are a product of these very mechanisms and this has important consequences for the study of economics. Human beings are, after all, the foundation of all economic activity and the primary (or, indeed, only?) actors within any economy. Therefore if we want to understand patterns of economic activity with any accuracy then we need to understand human beings. If we want to understand human begins, then we need to turn to biology.

As a brief (but necessary) aside, there is a long-standing and - at times - passionate debate in the scientific community about the extent to which human behaviour is primarily a consequence of genetic inheritance (Pinker 2002, Dawkins 1976), primarily a consequence of learning and environment (Gould 1981) or some combination of the two, and it is certainly beyond the purview of this essay to take a definitive stand on this issue. It will, however, be necessary for the purposes of this essay to assume that human behaviour is, in a very strong sense, both “adaptive” (in the sense that human beings are capable of adapting behaviour to exogenous circumstances) and “fixed” (in the sense that our evolutionary history is ‘path-dependent’) and this point will be elucidated as the essay progresses.   

A difficulty with many economic models of human behaviour (particularly more ‘classical’ models, as we shall see) is that they treat human behaviour as being “fixed from the outset” (i.e. incapable of being adapted depending on external circumstances), and fail to take into account the “cumulative and irreversible nature of economic change” or, indeed, the sheer varieties of “human agency” (Reijnders 1997, pp. 1-2). That is, the (neo-)classical models presume themselves to hold universally (that is, that they are equally applicable across all populations at all times), when the story of human evolution would seem to imply a different conclusion. If evolution is ‘path-dependent’ and human behaviour inherently ‘adaptive’, then any model that exhibits such inflexibility must be rendered immediately suspect – if economic models are dependent on human proclivities, then the model itself (not merely its variables) should be adapted in recognition of this fact. “The physical properties of the materials accessible to man are constants,” as Veblen (1898) put it, but “the human agent changes”.  Evolutionary economics therefore enjoins us to recognise that human proclivities cannot be modelled in the same way that human materials (such as capital etc.) can, but rather that economic models should be flexible enough to encompass the wide range of possible human behaviours and preferences. 

For instance, in many classical economic models, man is often depicted as a “rational actor”; that is, an agent who is congenitally destined to “maximise his material utility” according to his own rational self-interest, whether he is consciously aware of doing so or not. As Adam Smith writes: “Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention” (Smith 1776). That is, by this conception, economic activity is entirely the consequence of actions by individuals motivated solely by a ‘natural’ inclination to pursue their own rational self-interest.

However, such a model of human motivation and behaviour is starkly challenged by findings in the field of human biology. Political psychologist Drew Westen, for instance, notes that far from being driven by “individualistic assumptions” in which they “weigh the pros and cons of various options and draw conclusions designed to maximise their expected utility”, human beings actually “all start out with strong emotional commitments to communities, tribes, sects [and] nations” which are just as likely to influence economic behaviour as more selfish material concerns (Westen 2007, p. 29-30). This can perhaps be explained with deference to “group selection” (Wilson & Sober 1994) or “kin selection” (Hamilton 1964) theories of evolution, where human beings – like other animals – have been fashioned by evolutionary concerns to consider not merely our own immediate welfare, but the welfare of those around us as well. As Becker (1976) put it: “Altruistic behaviour can be selected as a consequence of individual rationality”.

But there are other, more immediate biological impediments to the “rational actor” theory of classical economics. Quattrone and Tversky (2004) point out that “human rationality is bounded by limitations on memory and [neural] computational abilities” (p. 245) – i.e. that the capacity of human beings to “weigh the pros and cons of various options and draw conclusions designed to maximise their expected utility”, as Westen put it, is compromised by our capacity to take into account only a small amount of considerations at once. “Human judgement,” they conclude, “is often inconsistent with the maxims of rationality” (ibid.). But if biologically determined rational self-interest is not the foundation of human economic behaviour, then what is? Why do human economic systems seem to be propelled by maxims of rational utility when human decision-making – on the level of the individual, at least – apparently is not?

As Hayek writes: “The individual with a particular structure and behaviour owes its existence in this form to a society of a particular structure, because only within such a society has it been advantageous to develop some of its peculiar characteristics” (Hayek 1967: p. 76). In other words, human economic behaviour cannot be treated as fixed and timeless as in (neo-)classical economic theory, but rather must be treated as adaptive and contingent on the “structure” of the society (and economy) in which humans find themselves. That is not to say, however, that human behaviour is collectively formless or impervious to economic modelling, because the adaptive spontaneity of human behaviour gives rise to what Hayek calls “social order” (Hayek 1978), an order neither planned nor necessitated, but rather an ‘emergent property’ (see below) of the complex set of interactions made between human beings. Vromen (1995: p. 165-166) suggests that “social order” emerges from a state in which “the actions of the individual group members are compatible with each other” and is therefore an “unintended result of individual actions”. In other words, social order “may be the result of human action, but not human design” (ibid.).

As already alluded to, this theory is redolent of the nascent science of “Emergence Theory”, a theory  devoted to the understanding of “the arising of novel and coherent structures, patterns and properties during the process of self-organization in complex systems” (Corning 2002). The idea of emergent complexity – of simple, unguided processes producing systems of great complexity – is important in biology for explaining how something simple as self-replicating genomes in competition with one another, can account for the complex variety of life seen on our planet. Hayek is proposing a similar mechanism, where complex social and economic systems that appear to exhibit features of rational design, can actually emerge quite by accident. While patterns of individual human behaviour are far too complex to lend themselves to detailed economic modelling, the emergence of a social order allows for the possibility of “pattern predictions” (Hayek 1978) – i.e. abstract and flexible economic models based on the “regular, recurrent pattern of behaviour at an aggregate industry level” (ibid.). But what does it mean to talk of an “industry level”?

In biology, distinctions are often made between different ‘levels’ of selection: for instance, selection pressures have been suggested as applying on the level of groups (or species), the level of individuals and the level of genes (see Dawkins 1982). Similar taxonomical distinctions can therefore be made between different levels of ‘selection’ (and therefore adaptation) in economies as well. Much of the focus of evolutionary economics exists on the level of the firm (the potential comparison between the competitive pressures that exist between biological forms and the competitive pressures that exist between firms has long been recognised), and while the focus of this essay will remain on human beings rather than any “higher” level organisational level, it is important to briefly explore what links – if any – can be made between human biology and the evolutionary pressures that have been suggested to affect firms or any other economic entity.

Ghiselin, for his part, speculates, “in economics, firms are analogous to species, employees to organisms” (1978: p. 237). Vromen goes one step further, suggesting three levels of organisation more directly analogous to the three biological levels, namely: “individuals, firms (and households) and industries” (1995: p. 151). While one must be careful not to overextend the biological analogies, by suggesting – as Ghislein did – direct equivalences between levels of biological organisation and levels of economic organisation, the similarities are too important to ignore. For instance, just as genes are driven by purely mechanical and apparently “selfish” behaviour (Dawkins 1976) into competition with competing alleles within a given gene pool, human beings too may be driven by purely selfish concerns into competition with other human beings (as I have already said, I believe the concept of the “rationally self-interested actor” to be – at best – an over-simplified account of human motivation, but that is not to say that human beings do not possess conflicting goals, such that we can be described as being in “competition” with one another).

At a higher organisational level, however, genes are (without design or foresight) brought into a coalition with other genes to form an “organism” which serves to “maximise the fitness” (i.e. enhance the chances of reproduction) of all the individual genes in within that coalition. Human beings – although they may be competitive, or hostile at the level of individuals – are still capable of organising as a “firm” to the benefit of all. Similarly, just as organisms are in competition with other like organisms for limited resources but still manage to form a “species” that is in competition with other species, so to do firms in competition with one another form “industries” that find themselves in competition with other industries.  

However, despite the fact the different selection pressures exist at different organisational levels with within biological systems and economic systems, the contention of this essay remains that evolutionary theory can better inform economic theory at the level of the human being. Just as genes are recognised as the driving force of evolution (in the sense that genes are the ultimate unit of evolutionary selection – see, again, Dawkins 1976) so to must human beings be recognised as the driving force of economics. As Hirshleifer (1977) put it, “genetic inheritance is not easily found at the level of the firm, better to look, therefore, at human individuals”. Any economic theory, particularly – but not limited to – those in the field of evolutionary economics, must recognise the full complexity of the human species as a biological entity with a nature that is – in some sense – both fixed and spontaneous.

That, in conclusion, is what economics can learn from investigations into human biological evolution.

References and Bibliography:

Becker, G.S. (1976) Altruism , Egoism and Genetic Fitness: Economics and Social Biology Journal of Economic Literature 14: 817-826.

Corning, Peter A. (2002), The Re-Emergence of "Emergence": A Venerable Concept in Search of a Theory Complexity 7(6): 18-30

Dawkins, Richard (1976) The Selfish Gene Oxford: Oxford University Press.

Dawkins, Richard (1982) The Extended Phenotype Oxford: Oxford University Press.

Ghiselin, M.T. (1978) The Economy of the Body American Economic Review 68: 233-7

Gould, Steven J. (1981) The Mismeasure of Man New York: Norton

Hamilton, W. D. (1964). The Genetical Evolution of Social Behaviour Journal of Theoretical Biology 7(1): 1–52

Hayek, F.A. (1967) Studies in Philosophy, Politics and Economics London: Routledge & Keegan Paul.

Hayek, F.A. (1978) New Studies in Philosophy, Politics, Economics and the History of Ideas London: Routledge & Keegan Paul

Hirshleifer, J. (1977) Economics from a Biological Viewpoint Journal of Law and Economics 20: 1-52

Hodgson, Geoffrey M. (1993) Economics and Evolution: Bringing Life Back into Economics Oxford: Blackwell Publishers

Pinker, Steven (2002) The Blank Slate London: Penguin Books Ltd.

Quattrone, George A. & Tversky, Amos Contrasting Rational and Psychological Analysis of Political Choice. In Political Psychology: Key Readings (Key Readings in Social Psychology), ed. John T. Jost & Jim Sidanius. East Sussex: Taylor & Francis Books, Inc.

Reijnders, Jan (1997) Economics and Evolution Cheltenham: Edward Elgar Publishing Ltd.

Smith, Adam (1776) The Wealth of Nations London: W. Strahan and T. Cadell

Veblen, Thorstein (1898) Why is Economics Not an Evolutionary Science? The Quarterly Journal of Economics 12.

Vromen, Jack J. (1995) Economic Evolution: An Enquiry into the Foundations of New Institutional Economics London: Routledge

Wilson, D.S. & Sober, E. (1994) Reintroducing group selection to the human behavioral sciences. Behavioral and Brain Sciences  17(4): 585–654

Wednesday, February 17, 2010

Is Culture a Source or Symptom of Economic Growth?

Introduction: Defining Culture

In examining the on-going relationship between economics and culture, we must first undertake the difficult task of examining what it is we mean by the word “culture”. The Welsh cultural theorist Raymond Williams once famously described ‘culture’ as “one of the two or three most complicated words in the English language to define” (Williams, 1976, p.76) later offering the provisional definition of culture as “a noun of ‘inner’ process, specialised to its presumed agencies in ‘intellectual life’ and ‘the arts’.” (Williams, 1977, p.17). This definition of culture as exclusively ‘high culture’ is in common usage, but it is one that Williams came to reject and one that will not suffice for the scope of this essay, which is required to examine culture in an economic context.

Later, in his work Problems in Materialism and Culture: Selected Essays, Williams came to define the nature of culture as being “a (social and material) productive process” (Williams, 1980, p.243), coining the term ‘cultural materialism’ in the process. This is a theory heavily influenced by the ‘historical materialism’ of Marx, who also viewed culture (even ‘high’ culture) as a process shaped entirely by the means of economic production. For Marx, “the class which is the ruling material force of society, is at the same time the ruling intellectual force” (Marx, 1970[tr.], p.64). This conflation of material production with intellectual culture may seem extreme, but what is archaeology – after all – if not the study of culture through the surviving artefacts of material production? Febvre and Martin make an even more evocative link between economics and literary culture: “the printer and the bookseller worked above all and from the beginning for profit” (Febvre & Martin, 1976, p.249).

For Marx, the idealism of the Hegelian dialectic – which was the inspiration for his own materialistic dialectic – could not be part of any theory of human history: while culture was developing via a dialectic process, it was not one directed towards an “absolute idea” as Hegel believed. For subsequent sociologists, however, such as the German Max Weber, Marx’s outright dismissal of idealism was “a one-sided materialistic… causal interpretation of culture and history” (Weber, 1930, p.183). While Weber never went so far as to reject Marx’s historical materialism entirely (or, for that matter, embrace Hegel’s historical idealism entirely) he did believe strongly that intellectual culture has impacted on the development of cultural production as much as any economic processes. This came to be known as the “rationalisation thesis”.

For Weber, culture then has the potential to define the nature of economic production as much as economic production has the potential to define the nature of culture. To invoke Weber’s most famous example of this theory, he argues that the “Protestant Ethic” (i.e. the predominant religious culture in Western Europe from the Renaissance onwards) was instrumental in the emergence of capitalistic culture. This will be explored in greater detail in the section concerning the rise of Protestantism.

For the rest of this essay, I shall attempt to apply the theories of Marx and Weber to examples from history and the present day, exploring the extent to which economic production has impacted on the nature of culture, and the extent to which culture has impacted on the nature of economic production.

Ancient Greece: Cultural Materialism in Action?

While we must be mindful not to impose our modern economic sensibilities on those of ancient people, we can still identify several important economic developments during the time of Ancient Greece (circa 1100-146BC) that impacted directly on the trajectory of Greek culture.

Arguably the most important was the emergence of the polis, the Greek city-state. While the reasons behind the development of the poleis are difficult to ascertain with any great certainty, there is a general consensus among historians (e.g. Dover, 1980) that they were formed by alliances made between neighbouring villages, themselves arguably constructed around the economic development of the shared market-place (Cipolla, 1991).

Whether or not we can confidently say that there was any economic rationale behind the construction of the early poleis, we can certainly say that this decidedly cultural development did greatly influence the spread of economic production during this time, with heavy trade occurring between the cities. In time, the common military threat posed by the great Persian empire to the east caused the poleis to band together in a military “league”, in which funds and tributes were paid to a central treasury, paving the way for the formation of the great Athenian state.

Much to the chagrin of many member states, Athenian generals – most notably Pericles (495 - 429BC) – often spent these war-funds on public works, which produced the most spectacular surviving cultural artefacts produced by this ancient civilisation. In a development which lends great empirical support to Marx’s theory about the link between material production and intellectual culture, the investment of funds appropriated by Pericles into cultural production paved the way for everything from the construction of the Parthenon to the emergence of Socratic philosophy during this period.

But this was not a one-way street: economic development may have paved the way for cultural development, but the material production of the culture itself stimulated economic growth. As the Roman historian Plutarch put it:

“With their variety of workmanship and of occasions for service, which summon all arts and trades and require all hands to be employed about them, they do actually put the whole city, in a manner, into state-pay; while at the same time she is both beautiful and maintained by herself.” (Plutarch, 75).

But if this case study of the ancient Greeks seems to lend support to the Marxist idea of economic production and cultural development being inseparable, the developments in subsequent Western cultures may provide a different lesson.

From Rome to the Late Middle Ages: The Rationalisation Thesis in Action?

When discussing Rome and the indelible contribution it has made to Western Civilisation, it is difficult to separate material production from cultural development. Roads, aqueducts and the other large architectural feats accomplished during this time must necessarily be seen as developments in both a cultural and economic sense. However, there are two examples that offer instructive proof of Max Weber’s theory that material production and intellectual culture are not so easily conflated.

The first concerns the nature of money. For Weber, “the cultural element of an economic action has to do with the fact that (1) anything economic is typically viewed as being either positive or negative, and (2) economic phenomena, like all human phenomena, have somehow to be pieced together in the human mind in order to make sense and acquire a distinct Gestalt” (Nee & Swedburg, 2005). In other words, the nature of economic activity is always largely determined by common understandings reached by members of that culture. Money is an example of the second point: “the exchange of pieces of metal only becomes an exchange of money under certain cultural conditions” (ibid).

In Rome, the valuation of money – and therefore the price of goods – was a matter of ongoing concern. During the ‘Years of Anarchy’ (circa 235 – 285), inflation (and the imperial solutions to it) was the cause of great unrest, particularly concerning the payment of wages and provision of armaments to Rome’s military. If the military is the defender of a given culture, then it is not difficult to see how military revolts caused by disputes over the valuation of money could threaten cultural stability. Historian Roger Collins cites inflation (among other financial problems) as a significant contributory factor to the decline of Roman culture (Collins, 1991).

On Weber’s first point (that “anything economic is typically viewed as being either positive or negative”) we can find our second example from Roman history of Weberian conflict between intellectual culture and material production. Rome was ruled by a “patrician” class of senators, land-owners and generals, leaving all the labour to the “plebeian” underclass. This distinction made between culture and material production in Roman society was heavily emphasised, as detailed by the historian Cicero:

“… Vulgar are the means of livelihood of all hired workmen whom we pay for mere manual labour, not for artistic skill; for in their case the very wage they receive is a pledge of their slavery.” (Cicero, 1913, I.150).

This cultural disparagement of labour and economic enterprise continued long after the Romans. In the Manorial system, which gradually emerged in Europe after the fall of Rome, there was a similarly ingrained cultural aversion to the use of labour for economic gain. As R.H. Tawney puts it:

“To found society upon the assumption that the appetite for economic gain is… to be accepted, like other natural forces… would have appeared to the medieval thinker as hardly less irrational or immoral than to make the promise of social philosophy the unrestrained operation of such necessary human attributes as pugnacity or the sexual instinct.” (Tawney, 1937, p.31-32)

It should be noted that the Roman disparagement of economic enterprise was secular in nature and the medieval disparagement was religious in nature, but both serve as examples of Weber’s theory that the cultural milieu necessarily shapes (in this case, constrains) the nature of economic growth.

In the early medieval period “economic activity is still inextricably linked with social and religious activity”, Heilbroner writes (1968, p.36), due to the pervasive influence of the Catholic Church, which funded most of the major “high-cultural” projects during this period. As the church’s influence began to wane, however, during the Renaissance and the reformation period that marked the end of the medieval period, such cultural impediments to economic enterprise were slowly lifted.

The Rise of Protestantism: A Cultural Chicken or an Economic Egg?

In the centuries after the medieval period, many major cultural and economic changes occurred in Western Europe. In most cases, it is difficult to distinguish between cultural reforms and economic reforms and the extent to which each caused – or was caused by – the other.

From his materialistic perspective, Marx could have argued that the changes which occurred during the Reformation Period were in the first place economic and that the cultural changes were merely a consequence of economic revolution. During this time, the Manorial system of production was slowly supplanted by haphazard systems of mercantile enterprise, and – as was possibly the case in Ancient Greece – towns and eventually cities were founded as central trading-hubs and market-places. This process of economic “urbanisation” gradually paved the way for cultural reform.

In these nascent cities, “there was no way of applying the time-hallowed rule of ‘ancient customs’ in adjudicating disputes, since there were no customs in commercial quarters” (Heilbroner, 1968, p.47). In other words, as a consequence of this socio-economic reform and its attendant moral ambiguities, culture on the level of cities was developed in isolation from the influence of the Catholic Church. This cultural autonomy would have paved the way - in a Marxist conception of cultural progress - for religious autonomy, and thus for the Protestant Reformation.

Weber, as mentioned, was inclined to the opposite view: that it was the cultural shift towards Protestantism (and the “Protestant Ethic”) that made economic reform possible in the first place. As he put it, “religious forces have taken part in the qualitative formation and the quantitative expansion [of capitalism]” (Weber, 1930, p.91). Weber saw the cultural ethos of Calvinism – with its emphasis on “giving oneself” to one’s work – as essential to the rise of the market. Under a system still dominated by the morals of Catholic Church – which set itself in unequivocal opposition to usury and gain – the emergence of a market system based on trade and free-enterprise could not have occurred.

Whatever the reasons, these cultural and economic shifts unquestionably paved the way for the rise of modern capitalism.

Conclusion: The Culture of Capitalism?

Many different economic systems today fall under the banner of capitalism and these systems both shape and are shaped by the cultures in which they operate. For Weber, the early capitalism of Western Europe was shaped by the “Protestant Ethic”, for Tocqueville the laissez-faire market system of the US was shaped by a less tangible “spirit of capitalism” (Tocqueville, 1835). In today’s world, many argue from the opposite direction: that the “culture” of global capitalism is shaping the nature of “traditional cultures” around the world. For some, the spread of technology and ideas – and the inevitable impact that this has on once isolated cultures – is something to celebrate; for others, something to bemoan.

Rajani Kanth suggested that “economics has always been a material, practical science of social engineering, not an abstract science inquiring dispassionately into the eternal verities of the economic order” (Kanth, 1992, p.89) and many point to the decline (real or imagined) of local cultures (in the capacity of food, dress, language, etc.) as evidence that ideological imposition of economic liberalisation is having a deleterious effect on cultures around the world. However, in doing this we must recognise that in a capitalistic system cultural production is essentially democratic: at the risk of committing what Marx called “commodity fetishism”, if people wish to continue consuming “traditional” cultural artefacts then market-based capitalism is surely no hindrance to that. Theoretically at least, consumer sovereignty puts economic production – including cultural production - squarely in the hands of the people.

So while global capitalism is having an ostensible effect on the nature of traditional cultures all around the world, there is also strong evidence to suggest that culture is shaping the nature of capitalism as well. We need only look at the variety of capitalistic market systems as evidence that national culture still plays a pre-eminent role in determing the nature of economic production. We might, for instance, contrast the laissez-faire capitalism of the United States with the more socialised capitalist economies of France and Japan and recognise, again, how difficult it is to disentangle culture from economic production both in today’s world and in the ancient past.

As one paper put it, “economic life is deeply embedded in social life, and it cannot be understood apart from the customs, morals, and habits of the society. In short, it cannot be divorced from culture.” (Ryterman, 1997)


Cicero 1913, De Officiis (trans. Walter Miller), Harvard University Press, Cambridge

Cipolla, Carlo M.1991 - Between History and Economics, T.J. Press Ltd., Oxford.

Collins, Roger 1991, Early Medieval Europe 300-1000, Palgrave, London.

Dover, Kenneth 1980, The Greeks, Butler & Tanner Ltd., London.

Febvre, L. & Martin, J 1976., The Coming of the Book: The Impact of Printing 1450-1800, New Left Books, London.

Heilbronner, Robert L. 1968 - The Making of Economic Society, Prentice-Hall Inc., New Jersey.

Kanith, Rajani 1992 - An introduction to the philosophy of education, M.E. Sharpe Inc., London.

Marx, Karl 1970, Capital: A Critique of Political Economy (Vol. 1), Lawrence and Wishart, London.

Plutarch 75, Pericles, Available:

Ryterman, Randi.1997 The Cultural Foundations of Economic Reform, World Bank, Ref. no. 681-18C.

Swedberg, Richard & Nee, Victor 2005, The Economic Sociology of Capitalism, Available: .

Tawney, R.H. 1937 - Religion and the Rise of Capitalism, Penguin, New York.

Weber, Max 1930, The Protestant Ethic and the Spirit of Capitalism, Unwin, London.

Williams, Raymond 1976, Keywords: A Vocabulary of Culture and Society, Fontana, Glasgow.

Williams, Raymond 1977, Marxism and Literature, Oxford University Press, Oxford.

Williams, Raymond 1980, Problems in Materialism and Culture: Selected Essays, New Left Books, London.

Sunday, February 7, 2010

The Debt Fallacy

One fear that seems to be constantly iterated about Obama's stimulus package (or, for that matter, any equivalent package anywhere else in the world) is the fear that running large budget deficits will saddle the nation with levels of debt that will take generations to pay-off. These fears are sensible in their way, but they also fail to appreciate the function of stimulus spending and why deficit spending - under certain conditions - represents a perfectly acceptable economic strategy.

What triggered this post was a piece I just saw on BBC news, which suggested that Obama's stimulus package would cost around $9 trillion, or - as the reporter rather sensationally pointed out - around $30,000 for every man, woman and child in the US. A scary figure, to be sure, and for that reason I can understand the reaction of the man they then interviewed on the street: "What I want to know is where they're getting the money from... well, I mean apart from the taxpayers!". These two factors - the stupefying amount of money involved and the pernicious belief (happily peddled by Republicans) that public spending requires saddling individual tax-payers with commensurate levels of debt - have conspired to create an opposition to stimulus spending based more on a visceral fear of large numbers than on sound economic reasoning.

Let's use an analogy to make the issues a bit easier to grasp. Say the father - in a family of four - decides to take out a loan of $100,000, paying interest at a rate of 5% per annum, to invest in some company. According to the logic of the anti-stimulus fear-mongers, this man has just saddled every man woman and child in his household with $25,000 of debt, effectively appropriating earnings or future earnings from his wife and children ("the taxpayers" and the "future taxpayers") without their permission. This is the picture that the fear-mongers want to paint on a much broader economic scale, but the analogy raises 2 important points:

1) The father isn't taking money from the other members of his family, it's coming from an external bank.


2) The family may now be $100,000 in debt, but it is not $100,000 poorer - note the difference! In fact, at the moment the loan is taken out, the assets ($100,000 cash) equal the liabilities ($100,000 repayments owed), so in undertaking the debt the family is - to begin with, at least - absolutely no worse off financially than it was before undertaking the debt. If the man invests in a company and sees returns on that investment that exceed the interest payments, then in the long-run he will actually profit by going into debt!

Now the analogy isn't perfect (as I'll explain) but it does have some important corollaries for the economy at large:

1) Governments don't fund deficit spending by taking from taxpayers, they fund it by borrowing from banks (both domestic and foreign). Now the distinction between public government and private citizen in a democracy is admittedly somewhat blurred, but not so blurred as to render sensible the arguments raised by the fear-mongers about the government "thieving" from the taxpayers to fund deficit spending.


2) The government is not simply taking out debts and throwing away the money (in which case, every man, woman and child would be out of pocket by $30,000) it's taking the money and investing it in domestic production. If the return on this investment is consistently greater than the interest owed, then the short-term debts may pay for themselves in long-run economic growth. Just as the current generation of Americans can profit from the economic investments made during the New Deal without owing the government a cent, far from being saddled with debt, today's children may actually be in a position to profit tomorrow from the investments that the government makes today.

In other words, the two main fears about stimulus spending - that the money is coming from the tax-payers and that the levels of debt owed are fixed - are actually untrue. These fears fail to take into account that investments made with these deficits will be generating economic growth (no-one can seriously deny that) that will, over time, be used to pay the debt off. If the revenue generated by these investments exceeds the debt undertaken plus interest (admittedly this is a big "if" and something very hard to accurately measure: how much economic growth can be pinned on the stimulus, how much can be pinned on other factors?) then the deficit pays for itself in the long-run. Unless the stimulus package fails to stimulate any growth at all, then the idea that children are walking around today with a $30,000 debt that they'll have to pay-off when they start earning is just blatantly false.

The other factor that the fear-mongers fail to take into account concern the economic costs of doing nothing (or, at least, doing substantially less). An economic retraction which causes business closure, unemployment and depressed spending and investment will itself cost countless billions in growth forgone, only - in contrast to a debt that can be repaid over time - this is a loss than can never be recouped. Even if we presume that the stimulus package is somewhat unsuccessful, and is unable to generate returns on investment large enough to avoid saddling future generations with debt, it's far too simple to say that these future generations are therefore necessarily worse off. For instance, is it better for these children to mature into an economy that is able to provide opportunities at the cost of public debt, or is it better for them to mature into an economy gutted by a long, deep recession without the burden of public debt? Even in the more pessimistic scenarios, the moral dangers of running large deficits are not quite so clear cut.

Now this is an idealised portrait and I hope I haven't given the impression that it's all quite so easy. It's a complex issue and one that exists far beyond my purview as an economic undergrad. But it is precisely this complexity which requires us to identify the facile nature of anti-stimulus movement for what it is, namely a movement propagated more out of ignorance (largely excusable - as I said, superficially the numbers are scary) and personal ideology (less excusable) than out of concern for the tenets of economic policy.