Fear and Economic Demand

It is generally understood that economic demand – the total purchases made, whether by consumers or by those who are intermediaries in the chain of individuals and companies that are involved in the production of a product or service – is very important in determining how productive a country is. Regardless of the productive capacity of a country’s economy, if there are few or no buyers for its products and services, then that country will remain mired in economic stagnation. This fact was very clearly illustrated during the Great Depression, when every industrialized country was capable of producing significantly more than it actually produced, but it was not able to do so because of a dramatic decline in overall economic demand.

Economists and those who pay attention to what they say often talk about something they call consumer or business confidence. They assume that this confidence influences the way consumers and the producers of products and services behave, such as how much they spend or invest, whether they hire new employees or dismiss some of their present employees, and so forth.

Instead of this vague concept of “consumer or business confidence,” I believe it is better – because it is more accurate – to speak of people’s fear. Fear is the opposite of confidence, and so these two determinants of economic variables like total output have opposite effects: whereas confidence is believed to result in an increase in spending, fear will produce a decrease in spending. Although they are related, these two concepts – fear and the absence of confidence or, to put it another way, confidence and the absence of fear – are not exactly the same thing. Whereas it is assumed by economists and their many imitators that higher levels of confidence will lead to more spending, the absence of fear will not necessarily lead to increased spending.

To illustrate what I mean, let us consider a miser. Like other people, the miser will reduce one’s spending if one becomes fearful that one’s income will diminish or disappear, or if one’s income has actually diminished, and one then becomes afraid of penury or economic ruin. Conversely, the alleviation of this fear will motivate one to return to the spending habits one had before its onset, just as in general the absence of fear will cause people to behave as they normally would when they are not afraid. But even in times of economic prosperity, when the miser, like many other people, feels confident that one will continue to earn a steady or increasing income in the foreseeable future, this confidence will not necessarily lead one to increase one’s spending, since, by definition, a miser is someone who prefers to hoard money rather than spend it.

So, whereas a person who is confident in the future may not spend money or not spend more than one usually does, a person who is fearful will almost certainly reduce the amount of money one spends. An obvious example is a person who loses one’s job and does not know when one will start working again. Most people who find themselves in this situation change their spending habits by spending less than they formerly did. Of course, there are other factors, such as how much savings one has and the total amount of financial obligations one must continue to pay, such as a car or home mortgage, or the presence of other persons like children who depend on one’s income for their well-being, which will influence the strength of one’s fear, and hence, how much one spends, as well as the kinds of things one buys. In contrast, there are some individuals – those denoted by the term “profligate” – who, not experiencing any fear in spite of their precarious economic situation, continue to spend money with not a care in the world. This is because their dire situation fails to produce any fear in them, just as some people experience no fear in the presence of certain kinds of physical danger to their life or well-being.

An example of fear on a large scale occurred during the Great Depression, when the sight of long lines of unemployed people looking for work, waiting in soup or bread lines, or just milling around for lack of anything better to do, made those who had jobs fearful that they would end up like them. This fear was augmented by the fact that many of these unemployed people were homeless, poorly clothed, appeared malnourished, and were generally unkempt in appearance.  When it is strong and widespread, as it was during the Great Depression, fear can have a crippling effect on economic demand.

Fear can have other harmful economic consequences, such as when a large number of a bank’s depositors, fearful that they will lose their money, cause a run on the bank’s deposits by attempting to withdraw all of their savings, a herd behaviour that can quickly lead to the bank’s insolvency. When this happens to many banks and other financial institutions, this fear can destroy or debilitate the system of financial credit that is vital to the operations of all modern economies.

Thus, we can establish it as a fact that increased fear, whether this fear acts on a single individual or on many of the inhabitants of a country or region, will result in a decrease in spending and, hence, a decrease in economic demand, which, in turn, will result in a decrease in total production, sales, and employment. In other words, there is an inverse relationship between the strength and prevalence of the fear of penury or economic ruin and how much money people spend.[1]

Economists have failed to realize that, in many cases, it is through the intervening emotion of fear that crises of various kinds can cause economic slumps, recessions, and even depressions. In contrast, it is only when this fear is alleviated that consumers start spending money again as they formerly did. The probable reason for this oversight is the economists’ desire to purge their field of study of messy and unmeasurable variables like human emotions. Moreover, it conflicts with their false picture of humans as being rational creatures who do not let such irrational forces like emotions, imitation, conformity, and contempt influence their decisions. In wanting to sanitize economics of such wayward, irrational, and disreputable emotions, they have ignored important determinants of our behaviour like fear, with the result that their theories often do a poor job of explaining and predicting human behaviour.

In past ages, a person with no money and no means of procuring employment could fall very low on the scale of economic prosperity and penury. Apart from the shame of not being employed, there was a real possibility that one would become homeless, starve, freeze in colder climates and seasons, become sick, or die. There are other important reasons why people spent much less in the past than many people do today, but for most of human history, the prevalence of the fear not just of economic ruin, but of hunger, disease, sickness, starvation, misery, exposure to the elements, and ultimately death was also a strong check on the sorts of non-essential purchases that make up a large part of consumer spending in wealthy countries today.

It was precisely to alleviate such widespread misery that the inhabitants of many industrialized countries, as they became more wealthy and prosperous, and thus, for the first time in human history, were able to do so, decided collectively to implement programs that were intended expressly to free all the citizens of their country from the fear of starvation, homelessness, ignorance, pain, disease, sickness, and premature death.

An unintended consequence of these concerted efforts to free people from physical suffering and misery has been to alleviate people’s fear of these things, which, in turn, has led to an increase in consumer spending and demand. In other words, welfare programs like universal health care, old-age pensions, family allowances for young children, unemployment insurance, public education, and the like, by alleviating people’s fear of the dire consequences of penury and economic ruin, are an important reason for robust consumer spending, which is the lubricant that allows the motor of economic activity to continue running smoothly.

In most countries, the modern welfare state was largely created after World War Two. During that period, in industrialized countries at least, there has been a more or less steady rise in people’s income and standard of living. Thus, it is not a coincidence that the unprecedented economic expansion that took place during the second half of the twentieth century in the industrialized countries of the world took place roughly at the same time as the development of the welfare state. The invention and diffusion of television also played an important role, by providing viewers with the opportunity to observe many more models of behaviour than people did in the past, which observation created or strengthened their desire to do certain things or purchase certain products.

In contrast, the dismantlement by free-market economists of the socialist welfare state that existed in many communist countries, as well as the elimination or reduction of key welfare programs in many countries that have received loans from the IMF or the World Bank, variously called “shock therapy” or “structural adjustment programs,” has sown fear on a wide scale among the populace. This fear has had the predictable effect of significantly reducing consumer spending, which in turn has crippled these countries’ economies, so that they are not able to pay back the loan, or their governments must borrow even more to pay the interest on the loan, resulting in greater and greater indebtedness.

It should not be assumed from my favourable discussion of welfare programs that I am in favour of all welfare measures. An example of a frequently-proposed government program to which I am opposed is a guaranteed or minimum income, because it is a foolish proposal that would bankrupt any government that adopted it, in no small part because it would reduce people’s motivation to work. What I am in favour of are basic welfare programs like old-age pensions, universal health care, limited unemployment payments, welfare programs for the poor and disabled, public education, job retraining, and so on – in short, the kinds of programs that already exist in many countries.

As this and other discussions of basic economic concepts contained in this book show, the plain fact is that economists don’t really understand some of the fundamental determinants of economic behaviour and productivity. They speak of confidence when they should really speak of its opposite, fear; they don’t understand the causes of consumer demand and the reasons why people buy the things they buy – why, for example, people buy more things today than they did in the past and hence, why the savings rate in many countries is significantly lower now than it was in the past; or why some people refuse to perform certain kinds of jobs, which leads to the economic conundrum that there are some positions that go unfilled even when there are many people looking for work; they make nice-sounding, tidy assertions like savings equals investment which, when they are examined more closely, turn out to be false; they do not realize that much of what is called investment today is not investment in the sense of capital formation, but is rather financial speculation that should be discouraged; they fail to make the important distinction between actual and speculative demand for a product; they have overlooked the use of a different pricing model in the financial sector – collective pricing – which often yields wildly inaccurate results and expectations; and the classical economists’ belief that, in the long run, the economy will reach an equilibrium of full employment without any government interference or intervention is completely false, since a country’s economy can reach an equilibrium at pretty nearly any level of employment, including very high levels of unemployment, such as more than fifty percent, as exists in many African and other poor countries today.

When it is strong, contempt can lead people to behave irrationally by doing things that are contrary to their interests and objectives. This is encapsulated by the proverb, “Cutting off one’s nose to spite one’s face.” In wanting to eliminate most or all welfare programs, whether for ideological reasons or because they believe the free market can provide them better than the government can, the advocates of laissez-fare capitalism fail to understand the vital role that these programs play in maintaining the system which they vaunt as the greatest social and economic system of organization ever devised by human ingenuity. For, as was painfully evident during the Great Depression, the great machine of capitalism cannot function without a very large number of buyers for the products it produces in ever-increasing quantities. If capitalism is compared to a multi-storey building that rises higher and higher into the air, by their supercilious but foolhardy contempt, these individuals, thinking that they are not necessary, would unwittingly weaken or eliminate some of the supports of the building on whose upper floors they and many others are standing, thereby increasing the chance that the building will collapse.

[1] My claim that fear and economic demand are inversely related may not hold when comparing different countries due to traditional or prevailing models of behaviour that determine how much of their income a particular country’s inhabitants save and how much they spend. Rather, the claim is that, within a particular country or society, all other things being equal, an increase in fear will lead to a decrease in consumer spending, and this will be true even if the federal bank increases the money supply. In times of crisis, increasing the money supply is successful only when it is able to reduce people’s fears about economic matters or the course of future events. If this does not happen, that is, if increasing the money supply fails to alleviate people’s fears, then it will not produce an increase in spending, or maintain current spending on the part of consumers. In accomplishing this objective, the federal bank has a powerful ally in modern methods of communication, which, by providing viewers with images of people consuming or possessing many things, such as driving a new car, eating in restaurants, wearing fashionable clothes, living in luxurious dwellings, going on trips, or visiting foreign countries, evokes or reinforces in them the desire to own or do these things themselves.