Down With Democracy

by Hans-Hermann Hoppe

Imagine a world government, democratically elected according to the principle of one-man-one-vote on a worldwide scale. What would the probable outcome of an election be? Most likely, we would get a Chinese-Indian coalition government. And what would this government most likely decide to do in order to satisfy its supporters and be reelected? The government would probably find that the so-called Western world had far too much wealth and the rest of the world, in particular China and India, had far too little, and hence, that a systematic wealth and income redistribution would be called for. Or imagine, for your own country, that the right to vote were expanded to seven-year-olds. While the government would not likely be made up of children, its policies would most definitely reflect the 'legitimate concerns' of children to have 'adequate' and 'equal' access to 'free' hamburgers, lemonade, and videos.

In light of these 'thought experiments', is there any doubt about the consequences which resulted from the process of democratization that began in Europe and the U.S. in the second half of the nineteenth century and has come to fruition since the end of World War I? The successive expansion of the franchise and finally the establishment of universal adult suffrage did within each country what a world democracy would do for the entire globe: it set in motion a seemingly permanent tendency toward wealth and income redistribution.

One-man-one-vote combined with 'free entry' into government – democracy – implies that every person and his personal property comes within reach of – and is up for grabs by – everyone else. A 'tragedy of the commons' is created. It can be expected that majorities of 'have-nots' will relentlessly try to enrich themselves at the expense of minorities of 'haves'. This is not to say that there will be only one class of have-nots and one class of haves, and that the redistribution will be uniformly one from the rich onto the poor. To the contrary. While the redistribution from rich to poor will always play a prominent role everywhere, it would be a sociological blunder to assume that it will be the sole or even the predominant form of redistribution. After all, the 'permanently' rich and the 'permanently' poor are usually rich or poor for a reason. The rich are characteristically bright and industrious, and the poor typically dull, lazy, or both. It is not very likely that dullards, even if they make up a majority, will systematically outsmart and enrich themselves at the expense of a minority of bright and energetic individuals. Rather, most redistribution will take place within the group of the 'non-poor', and frequently it will actually be the better-off who succeed in having themselves subsidized by the worse-off. Just think of the almost universal practice of offering a 'free' university education, whereby the working class, whose children rarely attend universities, is made to pay for the education of middle-class children! Moreover, it can be expected that there will be many competing groups and coalitions trying to gain at the expense of others. There will be various changing criteria defining what it is that makes one person a 'have' (deserving to be looted) and another a 'have-not' (deserving to receive the loot). At the same time, individuals will be members of a multitude of groups of 'haves' and/or 'have-nots', losing on account of one of their characteristic and gaining on account of another, with some individuals ending up net-losers and others net-winners of redistribution.

The recognition of democracy as a machinery of popular wealth and income redistribution, then, in conjunction with one of the most fundamental principles in all of economics – that one will end up getting more of whatever it is that is being subsidized – provides the key to an understanding of the present age.

All redistribution, regardless of the criterion on which it is based, involves 'taking' from the original owners and/or producers (the 'havers' of something) and 'giving' to non-owners and non-producers (the 'non-havers' of something). The incentive to be an original owner or producer of the thing in question is reduced, and the incentive to be a non-owner and non-producer is raised. Accordingly, as a result of subsidizing individuals because they are poor, there will be more poverty. In subsidizing people because they are unemployed, more unemployment will be created. Supporting single mothers out of tax funds will lead to an increase in single motherhood, 'illegitimacy', and divorce. In outlawing child labor, income is transferred from families with children to childless persons (as a result of the legal restriction on the supply of labor, wage rates will rise). Accordingly, the birthrate will fall. On the other hand, by subsidizing the education of children, the opposite effect is created. Income is transferred from the childless and those with few children to those with many children. As a result the birthrate will increase. Yet then the value of children will again fall, and birthrates will decline as a result of the so-called Social Security System, for in subsidizing retirees (the old) out of taxes imposed on current income earners (the young), the institution of a family – the intergenerational bond between parents, grandparents, and children – is systematically weakened. The old need no longer rely on the assistance of their children if they have made no provision for their own old age, and the young (with typically less accumulated wealth) must support the old (with typically more accumulated wealth) rather than the other way around, as is typical within families. Parents' wish for children, and children's wish for parents will decline, family breakups and dysfunctional families will increase, and provisionary action – saving and capital formation – will fall, while consumption rises.

In subsidizing the malingerers, the neurotics, the careless, the alcoholics, the drug addicts, the Aids-infected, and the physically and mentally 'challenged' through insurance regulation and compulsory health insurance, there will be more illness, malingering, neuroticism, carelessness, alcoholism, drug addiction, Aids infection, and physical and mental retardation. By forcing non-criminals, including the victims of crime, to pay for the imprisonment of criminals (rather than making criminals compensate their victims and pay the full cost of their own apprehension and incarceration), crime will increase. By forcing businessmen, through 'affirmative action' ('non-discrimination') programs, to employ more women, homosexuals, blacks, or other 'minorities' than they would like to, there will be more employed minorities, and fewer employers and fewer male, heterosexual, and white employment. By compelling private land owners to subsidize ('protect') 'endangered species' residing on their land through environmental legislation, there will be more and better-off animals, and fewer and worse-off humans.

Most importantly, by compelling private property owners and/or market income earners (producers) to subsidize 'politicians', 'political parties', and 'civil servants' (politicians and government employees do not pay taxes but are paid out of taxes), there will be less wealth formation, fewer producers and less productivity, and ever more waste, 'parasites' and parasitism.

Businessmen (capitalists) and their employees cannot earn an income unless they produce goods or services which are sold in markets. The buyers' purchases are voluntary. By buying a good or service, the buyers (consumers) demonstrate that they prefer this good or service over the sum of money that they must surrender in order to acquire it. In contrast, politicians, parties, and civil servants produce nothing which is sold in markets. No one buys government 'goods' or 'services'. They are produced, and costs are incurred to produce them, but they are not sold and bought. On the one hand, this implies that it is impossible to determine their value and find out whether or not this value justifies their costs. Because no one buys them, no one actually demonstrates that he considers government goods and services worth their costs, and indeed, whether or not anyone attaches any value to them at all. From the viewpoint of economic theory, it is thus entirely illegitimate to assume, as is always done in national income accounting, that government goods and services are worth what it costs to produce them, and then to simply add this value to that of the 'normal', privately produced (bought and sold) goods and services to arrive at gross domestic (or national) product, for instance. It might as well be assumed that government goods and services are worth nothing, or even that they are not "goods" at all but "bads"; hence, that the cost of politicians and the entire civil service should be subtracted from the total value of privately produced goods and services. Indeed, to assume this would be far more justified. For on the other hand, as to its practical implications, the subsidizing of politicians and civil servants amounts to a subsidy to 'produce' with little or no regard for the well-being of one's alleged consumers, and with much or sole regard instead for the well-being of the 'producers', i.e., the politicians and civil servants. Their salaries remain the same, whether their output satisfies consumers or not. Accordingly, as a result of the expansion of 'public' sector employment, there will be increasing laziness, carelessness, incompetence, disservice, maltreatment, waste, and even destruction – and at the same time ever more arrogance, demagoguery, and lies ('we work for the public good').

After less than one hundred years of democracy and redistribution, the predictable results are in. The 'reserve fund' that was inherited from the past is apparently exhausted. For several decades (since the late 1960s or the early 1970s), real standards of living have stagnated or even fallen in the West. The 'public' debt and the cost of the existing social security and health care system have brought on the prospect of an imminent economic meltdown. At the same time, almost every form of undesirable behavior – unemployment, welfare dependency, negligence, recklessness, uncivility, psychopathy, hedonism and crime – has increased, and social conflict and societal breakdown have risen to dangerous heights. If current trends continue, it is safe to say that the Western welfare state (social democracy) will collapse just as Eastern (Russian-style) socialism collapsed in the late 1980s.

However, economic collapse does not automatically lead to improvement. Matters can become worse rather than better. What is necessary besides a crisis are ideas – correct ideas – and men capable of understanding and implementing them once the opportunity arises. Ultimately, the course of history is determined by ideas, be they true or false, and by men acting upon and being inspired by true or false ideas. The current mess is also the result of ideas. It is the result of the overwhelming acceptance, by public opinion, of the idea of democracy. As long as this acceptance prevails, a catastrophe will be unavoidable, and there is no hope for improvement even after its arrival. On the other hand, once the idea of democracy is recognized as false and vicious – and ideas can, in principle, be changed almost instantaneously – a catastrophe can be avoided.

The central task ahead of those wanting to turn the tide and prevent an outright breakdown is the 'delegitimation' of the idea of democracy as the root cause of the present state of progressive 'decivilization'. To this purpose, one should first point out that it is difficult to find many proponents of democracy in the history of political theory. Almost all major thinkers had nothing but contempt for democracy. Even the Founding Fathers of the U.S., nowadays considered the model of a democracy, were strictly opposed to it. Without a single exception, they thought of democracy as nothing but mob-rule. They considered themselves to be members of a 'natural aristocracy', and rather than a democracy they advocated an aristocratic republic. Furthermore, even among the few theoretical defenders of democracy such as Rousseau, for instance, it is almost impossible to find anyone advocating democracy for anything but extremely small communities (villages or towns). Indeed, in small communities where everyone knows everyone else personally most people cannot but acknowledge that the position of the 'haves' is typically based on their superior personal achievement just as the position of the 'have-nots' finds its typical explanation in their personal deficiencies and inferiority. Under these circumstances, it is far more difficult to get away with trying to loot other people and their personal property to one's advantage. In distinct contrast, in large territories encompassing millions or even hundreds of millions of people, where the potential looters do not know their victims, and vice versa, the human desire to enrich oneself at another's expense is subject to little or no restraints.

More importantly, it must be made clear again that the idea of democracy is immoral as well as uneconomical. As for the moral status of majority rule, it must be pointed out that it allows for A and B to band together to rip off C, C and A in turn joining to rip off B, and then B and C conspiring against A, etc. This is not justice but a moral outrage, and rather than treating democracy and democrats with respect, they should be treated with open contempt and ridiculed as moral frauds. On the other hand, as for the economic quality of democracy, it must be stressed relentlessly that it is not democracy but private property, production, and voluntary exchange that are the ultimate sources of human civilization and prosperity. In particular, contrary to widespread myths, it needs to be emphasized that the lack of democracy had essentially nothing to do with the bankruptcy of Russian-style socialism. It was not the selection principle for politicians that constituted socialism's problem. It was politics and political decision-making as such. Instead of each private producer deciding independently what to do with particular resources, as under a regime of private property and contractualism, with fully or partially socialized factors of production each decision requires someone else's permission. It is irrelevant to the producer how those giving permission are chosen. What matters to him is that permission must be sought at all. As long as this is the case, the incentive of producers to produce is reduced and impoverishment will result. Private property is as incompatible with democracy, then, as with any other form of political rule. Rather than democracy, justice as well as economic efficiency require a pure and unrestricted private property society – an 'anarchy of production' – in which no one rules anybody, and all producers' relations are voluntary, and thus mutually beneficial.

Lastly, as for strategic considerations, in order to approach the goal of a non-exploitative social order, i.e., a private property anarchy, the idea of majoritarianism should be turned against democratic rule itself. Under any form of governmental rule, including a democracy, the 'ruling class' (politicians and civil servants) makes up only a small proportion of the total population. While it is possible that one hundred parasites may lead a comfortable life on the products of one thousand hosts, one thousand parasites cannot live off of one hundred hosts. Based on the recognition of this fact, it would appear possible to persuade a majority of the voters that it is adding insult to injury to let those living off of other peoples' taxes have a say in how high these taxes are, and to thus decide, democratically, to take the right to vote away from all government employees and everyone who receives government benefits, whether they are welfare recipients or government contractors. In addition, in conjunction with this strategy it is necessary to recognize the overwhelming importance of secession and secessionist movements. If majority decisions are 'right', then the largest of all possible majorities, a world majority and a democratic world government, must be considered ultimately 'right' with the consequences predicted at the outset of this article. In contrast, secession always involves the breaking away of smaller from larger populations. It is thus a vote against the principle of democracy and majoritarianism. The further the process of secession proceeds – to the level of small regions, cities, city districts, towns, villages, and ultimately individual households and voluntary associations of private households and firms – the more difficult it will become to maintain the current level of redistributive policies. At the same time, the smaller the territorial units, the more likely it will be that a few individuals, based on the popular recognition of their economic independence, outstanding professional achievement, morally impeccable personal life, superior judgement, courage, and taste, will rise to the rank of natural, voluntarily acknowledged elites and lend legitimacy to the idea of a natural order of competing (non-monopolistic) and freely (voluntarily) financed peacekeepers, judges, and overlapping jurisdictions as exists even now in the arena of international trade and travel – a pure private law society – as the answer to democracy and any other form of political (coercive) rule.

The Problem with Socialism

By Bill Jenkins

03/18/09 Pylesville, MD As I read the headlines, I can’t help but see the tendrils of socialism grasping more and more very day. And it always brings to mind my uncle, Wm. R. Duvall.

When I was a boy, my uncle was the richest man I knew. He was fond of saying, “”There are three things you need to get rich: time, leverage and other people’s money.” I didn’t know what it meant at the time, but when I got older, I wanted to hear how he made it big

“I always knew I would be rich,” he said. “Even when I didn’t have two nickels to rub together.”

He started out as a barber, renting a chair in another man’s shop for $20 a week. “10 heads,” he said, “that’s all I needed. After that, every dollar was mine.”

“At that point,” he remarked, “all I had was time. I was making money, but I wasn’t getting rich.” It finally occurred to him that a real way to get ahead in barbering was to have his own shop and rent out his own chairs to other guys who were getting started in the barbering business.

So he looked high and low until he found a dumpy old place where he could afford the rent, then spent his nights and weekends fixing it up. In a couple months, he had it ready and went to work. He rented out the five chairs in the shop while he still worked at the same chair he had rented for several years. “It seemed like a risky idea to leave the spot where my customers were used to coming,” he told me.

Unfortunately, after a year, his landlord realized how good the business was and forced my uncle out. “What a setback,” he said. “All these customers and nowhere to go.”

His first thought was to look for a new place to rent. But then he was hit with a stroke of genius: “Own my own place, and I can’t get kicked out again!” It only took him a handful of days to locate what would become his goldmine: 3 acres of land with a corner shop and two houses.

He set out his shingle in the shop, bought a trailer for $150 and moved it onto the back of the property, then rented the two little houses. He had talked the owners into selling him the whole ball of wax with 100% financing over 10 years. After he got his extra chairs rented out and moved another trailer onto the property, he was flush with cash. In the end, the property was paid off in eight years. But in the meantime he dabbled in other real estate, left the country and bought a house in Cancun where he lived as a tour guide. Years later he came back and bought a beachfront house on a local river, where he lived until just recently.

“Everybody gets the same amount of time, Billy,” he would often say. “But that’s not enough to get you to the top of the heap.” His experience with collecting the rent from four other barbers showed him the power of leverage. His no-money-down real estate deal taught him about other people’s money. And I imagine he probably watched a boatload of late-night infomercials that helped formulate his “Wealth Outline.”

I have come to find that what he said (even though it was completely borrowed and not original) held a great deal of truth.

But up to this point, you’re probably wondering what in the world this has to do with socialism. Seems like a pretty entrepreneurial story. Right? You are correct.

Seeing the proper working of a man and his wealth, well, that makes a counterfeit all the more easily spotted. But we could add to that story our own little adventure in currency options. The same three principles are at work. Time, leverage and other peoples’ money.

But the path to wealth through socialism is not so clearly seen. As a matter of fact, it is more like a path to nowhere. Because socialism denies the capitalistic importance of these four pillars: wealth, time, leverage and other people’s money. Instead, they corrupt them to their own destructive ends.

Any socialist will tell you wealth is important. As a matter of fact, that is the big carrot held out to entice people to follow such a muddleheaded plan. They will also tell you that time is important. Not because you need it to build wealth, but because you need it to spend wealth. In other words, the here-and-now is what is of the utmost importance. And you must be rich now, in order to enjoy what time you have here!

Leverage is also important to the socialist. As poor men manage their wealth very poorly (but seem to know instinctively how to manage their ballot), it is imperative to leverage out the efforts of the poor man into large voting blocks. One poor man cannot get a candidate into office. But 100,000 of them, that’s a horse of a different color.

Finally, we have the socialist’s take on other people’s money. They love it. They covet it. And they’ll do anything to get it. Obviously it is impossible to enrich the poor men who voted for them with the candidate’s own money. This is why other people’s money is so critically important. Unfortunately for them, they have forgotten the words of U.K. Prime Minister Margaret Thatcher, who said, “The problem with socialism is that you eventually run out of other people’s money.”

Whether she actually believed that or not is a question for another day. But it still has the ring of an eternal truth.

My uncle’s understanding of other people’s money was that it could be used to make money for himself. And he was right. But here is a key difference. The “other people” in my uncle’s life lent him that money VOLUNTARILY, not because they were coerced. And they expected a real cash return on their funds, not just the “warm feeling” that comes from being forced to help an indolent person by way of government-run charity!

Because socialists reward those who treat money poorly and penalize those who treat money well, the system will never work. True, advocates of wealth redistribution can point to circumstances where it did “work,” and where it does “work” from time to time (if only for a limited time). But I can also point to circumstances where the laws of gravity are temporarily suspended, such as when I get on a plane.

But even God will not help me if I just assume because I can fly for a few hours from here to there that I can fly forever. At some point my plane has to come back to the ground. At some point the laws of gravity will resume their authority, and I will realize that my flight and my violation of gravity’s laws are coming to an end.

Capitalism is a law established by God, just like gravity. Its foundation is in the 9th Commandment, “Thou shalt not covet.” I am never free to desire to take what is my neighbor’s. Not his wife. Not his house. Not his lands. Not his possessions. I can trade him for them if I have something he wants more than what he has. (Except his wife, of course…) I can buy them from him if my offer is right. But I cannot steal (or vote) away his property into my account. That is not wealth creation; it is merely re-distribution. God condemns it, and He will not be mocked by those who think that they can make socialism “fly” forever.

Eventually, they will run out of other people’s money. And when they do, their plane will come crashing to the ground.

One more thing. All around us, we see the widespread push toward more socialism, even when it hasn’t yet worked. How could that be? To explain what we are seeing currently, we must acknowledge that if the socialists manage to escape complete annihilation in the plane that they wreck, they will begin a campaign of propaganda, reminding the people that if only the free market force of gravity hadn’t gotten involved, they would have been successful. And that all they need is more fuel (other people’s money) to get the thing going again.

And, of course, the people will see the wisdom of their case, and will vote for more fuel or parts or anything, just so long as we don’t let those stupid Gravitarians have control of the cockpit.

More groundbreaking efforts will be tried, such as debasing the fuel, so that we have more of it. Sure, if you add five gallons of water to five gallons of gasoline you get 10 gallons… Certainly we can go further on twice as much fuel, right? Yeah, Right. Whatever you say, Comrade. Meanwhile, anybody who knows better had better be preparing a parachute.

As the major nations of the world move deeper and deeper into the “Pit of Despair” (to borrow a good term from “The Princess Bride”), their solutions will work less and less. Each effort will become more and more futile. Perhaps then we will learn our lessons. If not we will be doomed to repeat them.

All that being said, we did have a big news item from last week. Chinese Premier Wen Jiabao fired a shot across the bow of the Good Ship USS Treasury.

It was not just a request, and it was not couched in the tactfulness of political diplomats.

China warned the United States to “Keep its word.” Seems that the Moral Empire of America has a hard time with the bad habits of lying and stealing.

And now the rest of the world knows it.

And now we know that the Chinese know it.

And we know that we need their lending to keep up our little charade.

And they know we need their lending.

Now they are telling us, do not fool with our investments. China has options of where to put their money. What options do we have? How many nations can lend us the amounts we are consuming? China has options. We don’t. “The borrower is servant to the lender.”

The world is changing… and we will keep looking for opportunities to profit from it.

The Problem With 'Nationalization'

by Gerald P. O'Driscoll Jr.

The chorus for nationalizing America's struggling banks is growing louder, and support for the idea comes from strange sources.

Alan Greenspan has said that he understands that "once in a hundred years" the government needs to take over the banks, and now is the time. Sen. Lindsey Graham, a Republican from South Carolina, has called for doing what works and "if nationalization is what works, then we should do it." That is the kind of pragmatism that leads to socialism.

There is a great deal of imprecision in all the talk of nationalizing banks. The government, through the Federal Deposit Insurance Corp. (FDIC), temporarily takes over insolvent banks when it closes them. When it can, the FDIC sells a failed bank to another institution. Sometimes the purchaser does not want some or any of the failed bank's assets. The FDIC must either then pay the buyer to take the assets (subsidize expected losses) or take over those assets. In a limited number of cases, there is no buyer for a failed bank. IndyMac Bank is a notable recent example. It has been operated since last year as an FDIC-owned institution (IndyMac Federal Bank) with the goal of finding a private buyer.

There are no good options and certainly nothing resembling a free-market solution.

Certainly, in the latter case, a government agency has taken ownership of a bank. The federal government, under the auspices of the FDIC, can be said to routinely nationalize failed banks. There is nothing new about that policy and it certainly occurs more than once every 100 years.

There are some commentators, pursuing an ideological agenda, who want to use the current crisis to nationalize the entire financial system. That is nationalization in the style of a Latin American despot. It is presumably not what most advocates of bank nationalization have in mind, and certainly not what Mr. Greenspan or Mr. Graham are advocating. Those two advocate temporary nationalization of a limited number of institutions, until they can be restructured and put back into private hands.

The real issue is what to do with a subset of the largest financial institutions, the financial behemoths headquartered in New York City and other money centers, which are feared to be headed toward insolvency. (Some think they are already insolvent.) Treasury Secretary Timothy Geithner's promise to "stress test" the major banks has fed the chorus of Cassandras. What if a major bank fails the test?

There are no good options and certainly nothing resembling a free-market solution. The government has put the taxpayer on the hook in a myriad of ways. First, there is deposit insurance. Second, there have been guarantees issued to certain creditors. Third, and most notoriously, the Treasury has invested taxpayer funds in preferred shares of certain institutions. Fourth, the Fed has lent funds on many of the dodgy assets of these banks. The Fed's balance sheet should be consolidated with the Treasury's in any cost-benefit calculation of alternative resolution strategies.

Ideally, the administration would adopt the least-cost method for the taxpayer of resolving the failure of a large bank. In principle, temporary nationalization in some instances could be the least-cost approach. The example of the Swedish banking crisis of the early 1990s is most often cited by nationalization advocates.

The conservative government of Prime Minister Carl Bildt took an aggressive approach to the banking crisis and is generally credited with having done a good job of resolving it. He acted quickly to guarantee all depositors and bank creditors. Asset values were aggressively written down. Public funds were used to recapitalize banks, for which the government received common shares to give any upside to the taxpayer. Two banks were nationalized entirely.

Gerald O'Driscoll is a senior fellow at the Cato Insitute.

More by Gerald P. O'Driscoll Jr.

The rest of the story is an important element of Mr. Bildt's success. His political opposition backed his government, at least in public. The bad assets, mostly real estate, were sold relatively quickly. The needed workouts brought cries that borrowers were being squeezed. In short, the resolution was handled professionally rather than politically.

The contrast with the current U.S. crisis could not be sharper. From the beginning, the handling of the U.S. crisis has been politicized. The partisanship is as toxic as the bad assets on bank balance sheets. Both parties are coming up with schemes to impede the process of foreclosing on homeowners who can't afford their homes, which would get those homes into the hands of new owners who can afford them. Does anyone believe that a government bad bank will squeeze homeowners? To ask the question is to answer it.

Moreover, we know how the government runs financial institutions -- consider Fannie Mae and Freddie Mac. Or IndyMac, whose management by the FDIC has been criticized for inflating the rescue costs through its liberal loan-modification program. A money-center bank in government hands would become a conduit for politicized lending and grants disguised as loans. That's what's happened at Fannie and Freddie. The government would never let go of its political ATM. You might as well consolidate such an institution with the Fed from the outset.

Mr. Geithner wants a public-private partnership to buy toxic assets from banks. All that government has done thus far has only scared private money off. As bankers now realize, when you turn to the government for financial assistance you take on an untrustworthy partner. Outside money will not come in only to see its investment diluted later on when the government injects additional funds.

Rather than focusing on ways in which we can further involve the government in the financial system, we need to find ways to extricate banks from government's deadly embrace. Banks, at least the behemoths, were public-private partnerships before the crisis. Deposit insurance, access to the Fed's lending, and the implicit (now explicit) government guarantee for banks "too big to fail" all constituted a system of financial corporatism. It must be ended not extended.

If a bank is too big to fail, then it is simply too big. Those institutions need to be downsized until their failure would no longer constitute a systemic risk. Then we can discuss how to untangle the government and the major banks, and create a banking system of genuinely private institutions.

The problem with all this economic doom and gloom

The problem with all this economic doom and gloom

During the long period of the cold war, which lasted for more than four decades after the end of the second world war, nothing infuriated me more than the question often put to me: "Is there going to be another world war?"

It was obviously even more unpleasant to contemplate than any kind of economic setback. But it seemed to me a pointless and unproductive kind of discussion. I could have answered "a 10 per cent chance", "a 50 per cent chance", or "an 80 per cent chance" with equal plausibility. I did not and could not know. Nor could anyone else. This kind of pointless crystal ball-gazing only deflected attention from a much more important question. This was: "Are we doing enough to reduce the probability of such a catastrophe?" By "we" I did not mean mankind in general but the government of the country in which I happened to live and was a citizen, namely the UK.

There are indeed parallels with the present economic outlook. I cannot claim to have foreseen the financial blow-out. But I did warn in my column of February 1 2008 of the danger of talking ourselves into a depression, and I wrote of the need to "buck up". President Franklin Roosevelt put it more elegantly when he said: "We have nothing to fear but fear itself."

The most alarming feature at present is the fatalistic public mood. The slump is being discussed as if it were a natural catastrophe like the arrival of the comet that destroyed the dinosaurs. All the popular talk is of retrenchment, cutting down and spartan savings of all kinds. It should not take a genius to appreciate that such activities can only make the situation worse and aggravate a downward vicious spiral. I would be the last to argue that people should spend recklessly for patriotic reasons, but nor should they stint themselves.

A slump is a tragedy for those who lose their jobs and also for those who fear to lose them. But it is also a logical absurdity that there should exist unsatisfied wants side by side with idle workers willing to supply them. The natural condition of mankind is one of scarcity, and conflicts are often about the allocation of scarce resources. You cannot usually have endless amounts of both guns and butter. Kashmir cannot belong to both India and Pakistan. The political and economic art is to find a way of living with such tensions.

But in a slump the rule of these copybook maxims is temporarily suspended. You can have more of A without sacrificing B. You can have environmental investment without sacrificing consumer satisfaction. Indeed the slump arises because not enough is being spent. We are in a kind of parallel universe familiar to cosmologists, when the normal rules are turned upside down and the traditional prudential warnings no longer apply. They will do so at some time in the future, but why not make the most of it while we can?

For what it is worth, policymaking is essentially more straightforward than it was a little while ago. Of course there are problems about the exact means by which purchasing power should be stimulated and about the relationship between fiscal and monetary weapons. But these are second-order compared with the dilemma that previously existed between fighting recession, which called for expansionary measures, and rising inflation, triggered off by explosive increases in oil and commodity prices, which called for restrictive measures. Inflation has now turned down with a vengeance and if we could free ourselves from the bondage of 12-monthly comparisons we would see that it no longer exists.

One of the main objections to what I am saying is the size of debts governments accumulate in anti-depression spending. How much better it would have been if they had tried to educate their electorates in the difference between private- and public-sector debt. It is an exaggeration to say in a single country, as the early Keynesians did, "we owe it to ourselves", but it is still true of the industrial world as a whole. Thus Gordon Brown, the UK prime minister, is right to argue for a multilateral approach.

A different kind of objection is that recessions are said to have a purpose. They accelerate the destruction of misplaced activities and overspeculative investment. It is what the Austrian economist Joseph Schumpeter called "creative destruction". Yes, up to a point. But this does not justify the secondary and tertiary destruction of perfectly viable activities because purchasing power has fallen throughout the economy. Indeed Schumpeter himself, who as a professor at Harvard had distanced himself from macroeconomic arguments, suddenly panicked in the 1930s depression and urged a very large fiscal stimulus. Friedrich Hayek, who was a different kind of Austrian, distinguished in his remarks in the 1970s between inevitable recessions and a "secondary depression" caused by a cumulative loss of purchasing power throughout the economy. But there is no evidence that he made this distinction in the 1930s when he taught at the London School of Economics and was one of Keynes’s principal opponents.

There will be a time to return to the copybook virtues. But it is not yet. As the writer of Ecclesiastes put it:

"To every thing there is a season and a time to every purpose under the heavens."