Only someone completely ignorant of economics and American economic history could come out with such claptrap. Allow me to once again repeat myself: savings fuel an economy and entrepreneurship drives it. American entrepreneurs — not meddling politicians or arrogant leftwing academics — made Americans wealthy. Through their foresight and endeavours a process of capital accumulation accompanied by waves of innovation made America the wealthiest and most powerful country the world has ever seen.

The fantasy that Obama confuses with reality is what created crime-ridden ghettos and hordes of fatherless children to whom crime has become a way of life. And the likes of Obama perversely call themselves the "reality-based community". (If I didn't know better I would say that leftists have a sense of humour).

This economic ignoramus really does believe he can successfully substitute the destructive hand of the state for the "invisible hand" of the market. He has announced that he intends to spend $750 billion to $1 trillion to create 2.5 million jobs, most of which are meant to be 'green'. Given the current situation I presume that this spending will be funded by the fed. In plain English, the fed will print the money. Bernanke's massive increase in the monetary base strongly suggest that the fed is ready and waiting to do his bidding. If this comes to pass then Americans can expect to experience a very painful bout of inflation.

(Bernanke considers unemployment more evil than inflation. He obviously is unable to make the connection between monetary expansion, booms, busts and rising unemployment. Moreover, he has given no indication that he understands how inflation actually works to temporarily low unemployment. It looks like Americans will pay a heavy price for his ignorance).

As part of his stimulus plan Obama intends to send increased welfare payments — deliberately misnamed rebates — to millions of Americans. (Only the existence of a thoroughly corrupt media allowed him to get away with this brazen act of dishonesty). Combine this with jobs policy and you have a recipe for a significant increase in consumption. When he was asked how he would measure his economic success he replied: "My answer is simple: jobs and wages". (Remarks of President-Elect Barack Obama). Entrepreneurship and savings do not figure in this man's economic perceptions. In his view:

Standing up for our workers means putting them back to work and fueling economic growth. Our economy boomed in the 20th Century when President Eisenhower remade the American landscape by building the interstate highway system. (Ibid.)

Putting people to work is easy. (Ancient Egypt was noted for not having an unemployment problem, not with all those pyramids to build). The trick is to have more and more higher paying jobs for more and more workers. And the market has been the only institution to have pulled that off, which of course brings us back to entrepreneurs and the fact that only savings — and certainly not labour — can fuel economic growth.

There is no doubt in my mind that when Obama says that the interstate highway system created the boom of the fifties and sixties he really means it, which is even more bad news. The American economy was already booming before Eisenhower's proposed highway system got underway. And it was American entrepreneurship and economic growth that made it possible, just as British entrepreneurship and savings created Great Britain's marvellous canal system and then its railway system.

By completely misunderstanding economic history Obama has come to believe that state spending is the road to prosperity — never mind the lessons of history, especially the embarrassing fact that this policy failed Roosevelt and also recently failed in Japan. I honestly cannot think of a single country in which it has ever worked. And yet this "brilliant man" and a leader of the "reality-based community" firmly believes otherwise.

When publicly confronted with the fact that past cuts in capital gains taxes had resulted in higher tax revenues and increased economic growth Obama objected on the grounds that no matter what they still weren't fair. To his mind it is better to stop living standards from rising than allowing capital gains taxes to be cut. That these cuts benefit every one by raising the demand for labour and hence real wages is too difficult for him to grasp.

Let's try to see where Obama's economic illiteracy will lead. His policy of creating masses of so-called green jobs will cause the dissipation of billions of dollars of capital. Now I am not talking about the green stuff but real capital, the material means of production. These will consist of enormously wasteful projects that cannot — and never will — pay their own way. And all of those resources will have to be taken from genuinely productive investments — the only kind that can generate high-paying jobs.

Even a cursory look at Obama's spending binge shows that it will direct spending to consumption. But by doing so it will aggravate the situation regarding the very malinvestments that need to be liquidated. Given his misbegotten views on government spending and jobs it is not a stretch to imagine him pouring billions of dollars into these business in order to keep them afloat.

(This is now the case with Detroit, though its basic problem is one of a ruthless union viciously exploiting captured capital until there was basically nothing left).

Top this off, David Axelrod — another of Obama's brilliant economic thinkers — recently stated that the Bush tax cuts must go because the country cannot afford them. Let me get this straight, the country can afford a massive increase in government spending but it cannot afford tax cuts. Axelrod also believes that the colossal hike in taxes that would follow once the bush cuts expired would have no detrimental effect on the economy. And why not? Because his mate Obama would be spending it all for the common good. Then there is Bernanke who looks to be ready and willing to flood the country with dollars which could result in Americans finding themselves facing both inflation and stagnant output. After all, if Roosevelt could pull this one off I don't see why Obama cannot do one better.

I think a huge problem is that most if not all of Obama's economic advisors adhere to the fallacy invented by John Bates Clark and successfully promoted by Frank Knight that capital is a permanent and self-maintaining fund. It follows, therefore, that if there is a mysterious force that maintains capital independent of human action then Obama's massive spending and taxing proposals would have no detrimental consequences for America's capital stock.

The Clark-Knight fallacy also leads to the conclusion that production and consumption are synchronized simultaneously (John Bates Clark, Essentials of Economic Theory, The Macmillan Company, 1924, pp. 18-19 and p. 29), time plays no role in production and capital has no structure. No wonder Hayek called called it "pure mysticism". (Friedrich von Hayek, The Pure Theory of Capital, The University of Chicago Press, 1975, 2007, p. 106). Treating capital as a self-perpetuating fund also means that capital consumption is not possible. More than 70 years ago Fritz Machlup responded to this view with the common sense observation:

There was and is always the choice between maintaining, increasing, or consuming capital. (Fritz Machlup, Professor Knight and the "Period of Production", The Journal of Political Economy, October 1935, Vol. 43, No. 5, pp. 577-624).

Machlup's point should have been devastating because his rejoinder in part was based on the dreadful economic and political experiences of his native Austria when the kind of 'progressive policies' that Obama and his fellow Democrats support were implemented. He calculated that from 1918 to 1930 Austria lost something like 79 per cent to 87 per cent of its capital. This caused him to caustically comment that

Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin. (Fritz Machlup, The Consumption of Capital in Austria, Review of Economic Statistics, II, 1935, p. 19).

No country can ever be so rich as to be able to waste masses of capital. And that includes America.

Gerard Jackson is Brookesnews' economics editor

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