Acton Commentary

Overspending, Incentives and Freedom

It is becoming clear that many Western countries are plunging into economic recession. Instead of lamenting the situation, we should ask: What can we learn from this? What does the experience of the past 20 years teach us?

The title of the lesson might be, "The dangers of reckless spending."

It is true that the current crisis was ushered in by events in financial markets. But root causes go deeper, and they touch practically all of us: our ways of living and attitudes towards life--towards acting, owning, and being.

There are two fundamental issues. One concerns ideas, the other ethics. John Maynard Keynes once wrote: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else."

Paradoxically, Keynes' ideas were among the most influential of the 20th century. And he deserves much of the blame for the economic problems of today. One of the ideas central to his macroeconomic theory is the "paradox of thrift," which implies that savings are an economic evil. Following the ideas of Keynes, it is now commonly believed that our economies are driven by spending, and that a reduction in spending would cause a halt in economic growth.

As is the case with most popular ideas, there is a grain of truth in Keynes. In the very short run, a reduction in spending will cause difficulties. As consumers cut back their purchases, businesses are left between a rock and a hard place. However, the problem is not lack of spending as such, but the fact that earlier rates of overspending encouraged businesses to invest in equipment and inventories that are now turning out to be unprofitable. What creates costs and human suffering is the slow process of liquidating projects and laying off employees.

But in the longer run, unsustainable rates of spending will always prove destructive. We do not live in a dream world. That takes us to the other problem: the ethics of consumerism.

Consumerism is not about economics alone, for it is also destructive to man's spiritual soul. The spirit and the material world are linked. As we are by nature embodied souls, material incentives matter.

Among the external causes of consumerism, advertising is a major issue. People often say that advertising does not affect their behavior, but strangely enough, it seems to affect that of many others. Advertising is not inherently evil--it serves the useful purpose of disseminating information--but there is a dangerous tendency. By appealing to man's sensitive instincts, excessive and abusive advertising distorts rational behavior patterns and makes man more vulnerable to the slavery of his passions.

Another external factor is monetary policy. As central banks generate artifically low interest rates, they encourage living on debt and discourage saving. Over longer periods of time, this may have a deep-seated effect on personal and social attitudes. The virtuous habit of "saving for the rainy day" is increasingly rare.

Man remains a free being, and therefore the internal factors count the most: this is why personal virtues and ethics exist. As Viktor Frankl explained in his classic Man in Search of Meaning, we never lose the power of choice even in the midst of the greatest external difficulties. Choosing freely can be difficult, but failing to choose is itself a result of a choice, as we willingly succumb to external influences.

To use our freedom responsibly, we need virtues, which are stable habits of the intellect and the will to do the good. Virtues are not innate to man; they grow through practice, day in and day out. A good education and moral formation, beginning in the family, are also important. As we mature and reach adulthood, we must gradually assume responsibility for our personal development.

Marx taught that history is determined by material forces. They are not irrelevant, but he was wrong nevertheless. The human spirit is the driving force of history. It is the spirit that determines our use of material goods and the way we shape the incentives and institutions around us.

As to the problem of the long run, Keynes famously mused: "In the long run, we're all dead." Well, we are living the long run, right here, right now. Let us use it wisely.