David McWilliams Explains Why Austerity Is Doomed In Europe

A very interesting video by an Irish economist explaining how the current reduce government spending (“austerity”) approach to the Eurozone debt and currency crisis is doomed to fail. It is doomed because cutting government spending in a recession only makes the recession worse, which in turn, reduces tax collections which then makes the government deficits worse not better.  But not only is the austerity approach all wrong to solving the debt crisis, it carries very significant risk of social upheaval.  (hat tip to Philip Pilkington and New Economic Perspectives).

Now I’ll offer one pre-emptive comment.  Critics of the arguments McWilliams makes often claim that either government spending isn’t really effective, that somehow only private investment spending will stimulate an economy.  Or, the critics claim that any resources the government puts into use through spending actually detract from the economy by denying those resources to some supposedly better, privately chosen use. Both of these criticism fail.  We are clearly discussing a situation in which there are excess, unused economic resources in the economy.  In plain language:  there’s high unemployment and people are out of work.  The criticisms are all based on an idea called “crowding out”.  For crowding out to occur, the economy must be at full employment – the opposite of being in a recession.

Do Copyrights Slow Growth?

Institutions and laws matter for economic development.  It is very clear from economic history that protection for property rights is necessary for industrialization and growth.  But that was always about property rights in land and physical stuff.  In the 1960’s the phrase “intellectual property rights” was created, and many people have just assumed that protecting so-called “intellectual property rights” is necessary to growth.  Of course that assumption has been made without reference to the historical record.  Now a German economic historian Eckhard Höffner, disputes this.  Instead, he observes that the absence of copyright accompanied Germany’s fantastic growth and industrialization in the 19th century, leaving England and France in the dust.  Frank Thadeusz, writing in Der Spiegel, says:

The entire country seemed to be obsessed with reading. The sudden passion for books struck even booksellers as strange and in 1836 led literary critic Wolfgang Menzel to declare Germans “a people of poets and thinkers.”

“That famous phrase is completely misconstrued,” declares economic historian Eckhard Höffner, 44. “It refers not to literary greats such as Goethe and Schiller,” he explains, “but to the fact that an incomparable mass of reading material was being produced in Germany.”Höffner has researched that early heyday of printed material in Germany and reached a surprising conclusion — unlike neighboring England and France, Germany experienced an unparalleled explosion of knowledge in the 19th century.

German authors during this period wrote ceaselessly. Around 14,000 new publications appeared in a single year in 1843. Measured against population numbers at the time, this reaches nearly today’s level. And although novels were published as well, the majority of the works were academic papers.

The situation in England was very different. “For the period of the Enlightenment and bourgeois emancipation, we see deplorable progress in Great Britain,” Höffner states.

Equally Developed Industrial Nation

Indeed, only 1,000 new works appeared annually in England at that time — 10 times fewer than in Germany — and this was not without consequences. Höffner believes it was the chronically weak book market that caused England, the colonial power, to fritter away its head start within the span of a century, while the underdeveloped agrarian state of Germany caught up rapidly, becoming an equally developed industrial nation by 1900.

Even more startling is the factor Höffner believes caused this development — in his view, it was none other than copyright law, which was established early in Great Britain, in 1710, that crippled the world of knowledge in the United Kingdom.

Germany, on the other hand, didn’t bother with the concept of copyright for a long time. Prussia, then by far Germany’s biggest state, introduced a copyright law in 1837, but Germany’s continued division into small states meant that it was hardly possible to enforce the law throughout the empire.

It is increasingly appearing that copyright is only economically good for publishers and those few authors/writers/performers who are fortunate enough to become superstars.  Overall, for us the paying public we pay twice: once when we overpay for monopolistically produced books/songs, and twice when our economy and technologies fail to advance as fast  as possible because we won’t/don’t/can’t share information.  Let’s hope the World Wide Web can change that.