London 2012: gold, but not growth

One estimate (from the Olympic Delivery Authority) for the overall ‘Public Sector Funding Package’ for the London 2012 Olympic Games, placed it in the region of £10 billion. Another estimate (from the Office for National Statistics) says that London 2012 boosted GDP growth by about 0.7%.

Rarely are such figures worth dwelling upon, but the opportunity to drive into their detail is meat and drink to Keynesian macroeconomic analysts. Such a pity we have no opportunity to consult the gods on Mount Olympus: chances are they would judge the first figure to be far too low; and the second figure to be utterly meaningless.

That London 2012 can give a permanent boost to economic growth is the social science equivalent of perpetual motion in physics. The best hope for state tax/borrow-and-spend is to break-even; but, given transactions costs and the greater likelihood of x-inefficiency in the public sector, even that limited hope is forlorn. Such judgement is based upon microeconomics. In respect of the macroeconomics, the message is just as dispiriting. It would be sensible to forget the income multiplier and to focus instead upon displacement.

Take, for example, state funding upon a new university and the flood of students that it brings into town. Traditional pubs serving real ale are typically displaced by wine bars serving an array of colourful high-octane beverages. Of course, the possibility of a reversion always exists helped, in this particular illustration, by new micro-brewing technologies. Such opportunities for change exist by allowing market processes to reflect consumers’ preferences whatever they might happen to be.

It is almost four years since Peer Steinbrück (then German Finance Minister, now chosen by the Social Democrats as their candidate to unseat Angela Merkel in next year’s elections) drew controversy when, in a Newsweek interview, he lambasted ‘crass Keynesianism’. The nub of the issue is that macroeconomic presentations of fiscal expenditure and interest rate cuts have relevance only to immediate job-creation. Their impact in overriding individuals’ choices and in corrupting decisions that determine the flow of inter-temporal production is entirely discounted. This myopia is present across Keynesian income-expenditure models at all levels of sophistication.

Although the notion of a Keynesian stimulus to boost aggregate demand is a hard one to shift, the very concept of aggregate demand is nonsense. Over sixty years ago, Joseph Schumpeter nicely coined the fundamental objection to Keynesianism: ‘Strictly speaking, there is no more sense in speaking of an economic system’s total or aggregate demand and supply … than there is in speaking of the exchange value of all vendible things taken together or of the weight of the solar system taken as a whole’.

Resources are finite and demands are always relative so, whether for real ale or alcopops, economic advance is achieved by allowing individuals to make their own expenditure decisions and by allowing entrepreneurs to chance their unique abilities in meeting consumers’ preferences.