The coronavirus is having a profound impact on our economies. Faced with economic downturns, governments have traditionally attempted to spur employment and restore economic health by propping up aggregate demand. Scholars differ on the track record of these interventions, yet all agree that governments, by stimulating demand, aim to provoke productive activity. Today, though, rather than trying to stimulate activity in the wake of the pandemic, governments are aiming to stop it. And at this task, everyone must agree, governments are performing splendidly.
Once the coronavirus is under control, restarting the economy faces many obstacles—especially social distancing. If we continue to remain at arms’ length from one another, we will hamper our natural “propensity to truck, barter, and exchange,” identified by Adam Smith as a key source of economic growth.
An even bigger impediment to renewed economic vigor, however, is the theory and practice of mainstream macroeconomics. The brainchild of John Maynard Keynes, modern macroeconomics focuses exclusively on aggregates, especially aggregate demand, and GDP. The economy is modeled on what economist Arnold Kling calls “a GDP factory,” or perhaps a machine. This machine produces stuff (GDP) and does so at peak efficiency when properly fueled. The fuel is aggregate demand—total spending—and it’s the job of government to ensure that the supply of fuel into this machine remains adequate.
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