Viewpoint: Plumbing the Economy


If you look at most economics books published in the last 20 years, you will find "the economy" depicted as an interconnected set of pipes in which the "income stream" flows in circular fashion. It is remarkable that no one seems to have drawn attention to the implications of the hydraulic metaphor that is integral to so much Keynesian and post-Keynesian economic analysis.

We are all more or less familiar with the metaphor itself. Money is liquid, and it flows in an income stream. (All except savings, which are thought of as a counterproductive seepage from the pipes. That is why economic policy to this day actively discourages saving.) Sometimes there isn't enough money in the pipes to create "full employment," and at such times it is necessary to prime the pump. Fiscal policy, after all, is intended to "change the level of income and spending," as the Brookings Institution said in An Introduction to Economic Reasoning (1962). In many economics texts you will find references to the flow of spending, and so on. Other illustrations of the hydraulic analogy could be given.

There are several points worth discussing here. In the first place, an economy that is "explained" by reference to water flowing through a system of viaducts and pipes implies the existence of a kind of "central control panel" where important people called economists control the water flow. They sit in front of levers marked "fiscal policy" and "monetary policy" that can be eased forward when "stimulation" of the economy seems desirable. On the other hand, they can pull the levers back if things get "overheated." (I guess the aquatic analogy isn't entirely consistent.)

In any event, it is immensely pleasing to professional economists to believe that this degree of control is within their power and that they might one day be fortunate enough to sit at the control panel, reading the dials that record all the latest data coming in from the Commerce Department and the Bureau of Labor Statistics, and then whipping out their calculators for a quick check before arriving at a sound judgment as to the economy's need for pump priming or throttling back. (Notice, incidentally, how the very phrase the economy tends to encourage this vision of economic activity.)

Another point—so deeply embedded in the whole idea of pipes, levers, and control panels that one does not at first notice it—is that it reduces real people who perform real economic activity to the level of particles responding obediently to the decisions of economists in the same way that water molecules respond obediently to the laws of physics.

With people reduced to particles, the hopeful economist can then believe that economics is well on the way to certification as a science, awaiting only its Newton.

And there is another point about this reductionism by metaphor. The individual qualities of the human mind, which had been assumed in classical economics to animate economic life—such things as hope, fear, faith, and charity—are booted out of the calculation without even the courtesy of acknowledging that they had once been considered important. In short, people don't respond to incentives (which derive from private calculation and interior judgment); they respond to forces (outside the control of the essentially passive economic actors).

This was perhaps the greatest triumph of the Keynesian revolution. Keynes was too intelligent to deny outright that people behave self-interestedly—that is, rationally—in committing themselves to work and effort. Instead, he simply drew up a system of pipes in which such rationality was no longer a fit topic for discussion. (Did one bother to inquire whether drops of water wanted to go this way rather than that?)

Not surprisingly, economists of statist, socialist, or crypto-socialist inclination have been particularly pleased by these developments, because they have always been dismayed by the idea that people are motivated by self-interest. If their view of humanity was correct, people were supposed to be willing—indeed, eager—to toil away on behalf of the collective, or the state. So the new economic model that reduced people to particles and deprived them of their incentives was particularly welcome to a significant segment of the intelligentsia.

In this light, we can see what a revolution supply-side economics has been. More precisely, it has been a counterrevolution—a movement back, to overthrow the collective, particulate, "income stream" model and replace it with individuals making rational calculations. And to the extent that supply-side economics decentralizes decisionmaking by reducing tax rates to allow citizens more control over their lives, it also takes power away from the control panel.

Is it surprising, then, that professional economists have often proved to be so resistant to the new theory? They like it no more than archbishops would enjoy seeing cathedrals boarded up. And that is why the supply-side counterrevolution will be harder to carry out than the Keynesian revolution ever was. The academics and intellectuals and economists could see that Keynesianism had something in it for them.

But supply-side does have one important thing going for it: it corresponds to reality. People aren't drops of water.

Tom Bethell holds the DeWitt Wallace Chair in Communications at the American Enterprise Institute.