Stimulating demand is no more valid

Stimulating demand is no more valid

Stimulating demand is the standard prescription for the economy worldwide. This idea is the core of Keynesian economics. But each idea has its scope of applicability. Is today’s environment similar to the time of Keynes?

John Maynard Keynes was prescribing for an economy in a youthful growing stage. After listing many sound economic indicators despite the persistent high unemployment figures, he declared:

We are suffering from the growing pains of youth, not from the rheumatics of old age. We are failing to make full use of our opportunities, failing to find an outlet for the great increase in our productive powers and our productive energy. Therefore we must not draw in our horns; we must push them out. Activity and boldness and enterprise, both individually and nationally, must be the cure. (Keynes 1932, 156)

Keynes was right in his time. The 1930s saw the largest discovery of oil reserves in world history. The transformation from a coal-based economy, centered on railways, to an oil-based economy, centered on cars, was partly responsible for the Great Depression, as the railroad economy fell apart before the car economy grew enough to take its place. Yet the abundance of oil also set the stage of economic boom in the 1950s and beyond, and by the 1960s the country was embedding the auto industry into a fixed-cost infrastructure (interstate highways) that dominates our transportation infrastructure to this day.

Today, fertility rates have dropped below the replacement rate and the average ages have been rising steadily for several decades in most wealthy countries. It is difficult to argue that we are suffering from the growing pains of youth. We are certainly not at a time of rapidly falling energy costs; quite the contrary. Therefore we have to take a different approach.

Specifically, we need to reduce the fixed cost of the society. Lower fixed cost systems have higher fertilities. Debts are fixed income for creditors. Debts are fixed cost for borrowers. In an already heavily indebted society, stimulating demand will further increase debt burdens and further depress fertility rates. Instead, we should cease to push relentlessly for monetary economy, to give room for biological economy. But monetary economy serves the interest of the moneyed. Hence, standard economic theory will always push the expansion of economic activities, until the collapse of the society.