Rockin' Robbins

Every little swallow, every chickadee
Every little bird in the tall oak tree
The wise old owl, the big black crow
Flappin' their wings singing go bird go
--Jackson Five

Lionel Robbins discusses the 'poverty in plenty' notion and its relationship to government intervention and economic hardship. Robbins was a top British economist in the early 20th century, and his thought processes mirrored those of the Austrian school. Curiously, later in his career he 'jumped ship' from his long held views and joined the Keynesian movement for reasons that appear less than intellectually honest.

The piece appearing here was written prior to his 'defection.'

First, he dismisses claims that modern methods of production have eliminated the scarcity condition. He observes that if you took the productive capacity of the industrialized world, increased it by 20%, and then distributed it evenly throughout the entire planet, then it is likely that nearly everyone in industrialized countries would be worse off. This is because poverty in industrialized countries is a relative condition. Compared to standards of living of third world countries, even those at the lowest wrungs of the social pyramid in industrialized societies enjoy higher living standards.

His point is that even at maximum utilization of the world's productive equipment, we would be, on average, very badly off.

Then, he proceeds to ask why we cannot achieve even this low standard. Why is it that when needs of consumption are so great, there are periods that productive capacity sits idle (during such as times of economic recessions or depressions)?

Robbins notes that there are many who feel this phenonenon is due to an absence of centralized control of production. Absent central planning, the problem of production and distribution rests with private enterprise who generates economic resources guided by anticipations of consumers. Opponents argue that the market system is bound to lead to dislocation. The problem of economic downturns, they say, is due to the breakdown of private enterprise. If resources were generated and distributed by central planners, they claim, then there would be no dislocation.

Robbins argues that this thesis breaks down when viewed through the lens of reason. Production in free markets is oriented toward satisfying consumer demand. When (not if) mistakes are made, those who make the mistakes suffer and are motivated to correct them. The market mechanism, if left to itself, compels the necessary adjustment. Market arrangements are not conducive to dislocation, because market participants are motivated to correct their mistakes as soon as possible.

If free markets aren't to blame, then how are we to explain the periodic episodes of downturn and depression? During downturns, persistent maladjustments between supply and deman are visible, suggesting that producers miscalculated yet did not move to correct their errors. Morever, these maladjustments are apparent in more than one market, suggesting structural factors at work across much of the economy.

Robbins divides the explanation for these broad, persistent maladjustments into two pieces. When business outlook appears favorable, if more money than usual is available for investment, then it should be easy to see that investors will be led to make mistakes, launching new undertakings that will persistently bear fruit only if the easy money conditions last. A speculative mania may follow that requires ever increasing amounts of easy money for good times to persist. When conditions inevitably turn, then demand falls off and the mistakes are revealed as the boom sinks under its own weight. The observable outcomes are economic stagnation, unemployement, and unused capacity.

The first piece of the explanation, therefore, is that the slump is brought about by mistakes made in the boom that preceded it. At the root of the problem are conditions of easy money, which motivate speculation and error that ultimately lead to economic dislocation. Robbins points to the central banks as the sources of easy money supply.

The second piece of the explanation, Robbins argues, relates to actions that governments take once the dislocation occurs. Instead of realizing that it is at such time that governments should secure the maximum freedom of markets (so that mistakes can be quickly corrected), governments 'block up' channels of trade with restrictions and limitations. Additional credit supply, trade sanctions, subsidies and other interventions prevent markets from clearing. Investors are likely not to take risk under such situations. The slump therefore persists. 

Robbins then applies his explanations to the various booms and busts the occured in the early part of the 20th century.

When such interventionary actions of government are multiplied indefinitely, then Robbins submits that there should be little question why the phenomenon of poverty in the midst of plenty exists--or why it is likely to continue to persist.

It is not free markets, but rather the suspension of free markets, that is responsible for this phenomenon. It is not capitalism but interventionism and monetary uncertainty that are responsible for the persistence of the slump.