All the Dads in Bourneville make confectionery and, as a result, all the boys and girls in the village have the best sweet shop in the world in which to spend their pocket money.
Every day you can see them, their smiling faces pressed up against its panes, shrouding its wonders in the fog of their eager breath against the glass.
But, if you look closely, you will see — a little way back from his friends — the forlorn figure of a boy, his face glum, hands thrust deep in his pockets, kicking listlessly at the tin can lying at his feet.
If you were to ask him, he would tell you he is sad because he, alone of all the children in the village, cannot buy any sweets because he doesn’t have any money and that the reason he has no money is that his poor father does not make enough to spare on such trifles.
Enquire further and you will find that the reason his father is so indigent is that he makes sweets which very few are willing to buy (certainly not at the price at which his Dad tries to dispose of them), so he, in turn, has very little to spend — especially after buying his sugar and flavourings, his packaging, and the oil for his cooking stove, not to mention the sum he must find for the wages of Jake, his helper, or the rates he must pay to the Town Council for his little shop.
Being a kindly soul you seek to console the child. Now, now, you say to the boy, ruffling his hair with your hand. Don’t be so downhearted, I have an idea which will enable you to buy all the sweets you want in no time. Take me to your father at once.
There, you explain that you are an eminent economist. Indeed, you declare, with just a hint of pomposity, your pronouncements on the subject have been carried in the pages of the New York Times itself. Thus you can instantly diagnose the problem and almost as quickly effect a cure.
What is wrong, you say, what is preventing your son from being able to enjoy his sweets like all the other children, is the lack of something you term u2018final demand’.
But, no fear! you exclaim. Together, we shall soon rectify this harmful shortfall!
Firstly, we must persuade the other parents that they are giving their children too little pocket money and, then, you yourself might think to borrow some cash — pledging your shop as security perhaps — in order to allow your unfortunate son the rare pleasures of an exercise of u2018purchasing power’.
Don’t worry about the debt, you say, for all that extra spending money passing across the shopkeeper’s counter will mean your sweets will soon begin to sell and shortly you will not only have paid off the debt, but you will be making a steady living, into the bargain.
A week or so later, your business (actually, being a Times columnist, this is just as likely to be someone else’s business) takes you back to Bourneville and, as you stroll into the town’s precincts, you anticipate the welcome you will receive from your new friend, the boy, now that he can have his share of sweets, just like all the other children.
That being so, you are a little disconcerted when you hail the lad from across the road, only for him to frown at you in recognition, stick out his tongue and run away!
You are still pondering upon the inveterate bad manners of youth when there, in the very spot where the child used to mope, stands his father, in seemingly no better a frame of mind that that which used to afflict his son.
Here he comes, Mr. I’m-an-Economist, the fellow sneers and, choking back a remonstrance against this discourtesy, you notice he looks shaven and unkempt, as if he hasn’t seen soap or hot water for a while.
Asking him what ails him, you are surprised to hear that he has lost his business and his home. How? you press him uncomprehendingly. Did you not do as I bid you?
Oh, yes! We did that all right, the man replies. To loud cheers everywhere across the schoolyard, pocket money was doubled and, as you recommended, I borrowed several weeks’ worth against the value of my house — my workshop only being rented, you understand.
At first things looked fine, more money was indeed spent in the sweet shop and even my sales increased a little.
Unfortunately, though, since no-one actually liked my wares anymore than they did before all this rigmarole, nearly all the extra money went on others’ products instead.
Worse still, all the other confectioners started paying more for sugar and oil and the like, while the sweetshop owner offered my landlord more rent if he’d turn my workshop over to him so he could expand, and the landlord insisted upon a raise from me if I wanted to stay.
Before long I was worse off than I had ever been!
Finally, I had to ask my trusty assistant Jake if he’d accept a wage cut so I could afford to keep him on, but he refused point blank. In fact, he said, the old boy who ran the existing sweet shop was looking for a hard-working young man like him to run his new outlet and was willing to increase his salary to tempt him away, an offer he was minded very much to accept.
When my son asked me for pocket money that week, I had to tell him not only would there be no pocket money, but no bread either, most likely, and that I’d had to sell his toys and his books to try to delay the bailiffs from repossessing our home, since we now had no reliable source of income — only what little I could get from the errands I was running from the newly affluent sweet shop owner.
I told the boy we must be suffering another failure of u2018final demand’, like you’d explained before, but my son looked at me strangely and shook his head at that.
But, Dad, he said, I never did quite understand that idea.
I thought all that was messing us up was just that you were making the wrong sort of sweets to sell, but your economist friend seemed to think that the problem was that we children had somehow totally satisfied our appetite for all sweets and chocolates.
Dad, How could he say that? Hasn’t he ever been into Mr. Fernyhough’s Candy Wonderland?
Moral of the Story: Inflating your way out of a slump is, as Mises said, like trying to undo a traffic accident by reversing back over the victim.
(Read this and a debunking of several other economic fallacies, as well as a thorough analysis of world financial markets, in Capital Insight’s January 2003 edition of the u2018Monthly Insight and Strategy’ at www.capital-insight.com.)