Topic: Economics
Recovery Depends on Investment and Capital Accumulation This article gives the argument that the New deal didn't end the Great Depression some in depth clarification.by Darren Wolfe
(libertarian)
Tuesday, January 27, 2009
Some of the feedback I've received on the article "An Economy on Life Support Is Not Recovering" shows a fundamental misunderstanding my critics have about the arguments presented there. In retrospect I see that a more detailed explanation is needed.
In reply to the article there are those who state what the article acknowledges, that Gross Domestic Product (GDP) grew and unemployment dropped from 1933 until 1937. This is taken as proof of the success of the New Deal. Their mistake is thinking that all GDP numbers are equal. They are not, as I explain below.
GDP growth based on private investment in productive capital is the only basis for real growth. In other words companies must invest in factories and other productive facilities (capital accumulation). This investment must come from people's savings, i.e. it must be based on real production, real resources that have been produced. In this way the economy can grow in a realistic and sustainable manner.
When the government spends untold fortunes to stimulate the economy, GDP and unemployment numbers may temporarily improve, but this improvement is illusory. All one does under this scenario is put more money out chasing a stagnant or declining supply of goods and services. The resources used in such a process are not being invested in any kind of productive facilities. On the contrary, productive facilities are being run down to support the make work projects that the government is spending tax money on. (I know that governments also spend money by running deficits, but ultimately the debts must be paid out of tax revenues. Governments can also "print" money, that is paid for with inflation)
The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption.
For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.
The whole scheme wouldn't work even if the government could spend massively forever, but, anyway, the reality is that it can't. When the day of reckoning comes and the government's spending slows the economy slows with it. This is exactly what happened in 1937.
Of course, the government could ignore the "day of reckoning" and just keep on spending, but the result then is the disaster we see in Zimbabwe today.
Hopefully, this clarifies the argument put forward in the article "An Economy On Life Support Isn't Recovering".
In closing I'd like to anticipate the counter argument that spending on infrastructure such as roads, bridges, mass transit, and schools isn't make work but needed improvement. To a very small degree this is true, however, most of the money will be spent according to political pull rather than necessity. Politicians excel at making the usually false argument that project X in their district is of vital importance and most necessary. The reality is that they just want more pork to pass around to supporters to buy votes and campaign contributions. Remember, a bridge to nowhere is not an investment, it's a waste of resources.
I would like to thank Ralph Mullinger for reviewing this article and for his feedback.
The views expressed in this
article are those of Darren Wolfe only and do not represent
the views of Nolan Chart, LLC or its affiliates. Darren Wolfe is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
You should stick to your Libertarian writings and stay away from the ECONOMICS. I’m afraid the water is a little too deep for you at this end of the pool.
First, let me tell you that even building a PYRAMID is good for the economy. If the workers are PAID, of course this provides an income for them to spend on whatever they need. This is in addition to the materials that are needed, and the transportation that is needed, as well as all the overseers, water bearers, mud mixers, quarry masters, etc, and architects involved in the project. This allows them ALL to buy things. If things are in short supply, the increased demand will provide incentives to create them.
Even if SLAVES are used ~ as was done with large portions of the Great Wall of China ~ this produces jobs for MANY people. Let’s even say that the slaves are free, the materials are free (taken or stolen, or whatever), and there are no transportation costs or costs of illumination, fires, or other materials. Aren’t these slaves going to be fed? Where does the food come from? Is it just stolen or taken, too? Let’s say that it is. Food and water and clothes, shoes, doctors, swords, chains, cutting tools.
When the warriors go to war to take/possess all these slaves and materials, where do their weapons and horses and supplies come from? Do they just take them, too? Are the overseers paid, the soldiers who guard them when they’re working and not working? Are the kings and land owners not enriched by this process? Instead of paying all the workers, they accumulate the value that is put into their treasured pyramid. It is accumulated, rather than paid out. It increases WEALTH while it may not immediately increase INCOME. (Until the tomb raiders steal it and spend it!)
There was an early question in economics about whether just digging a hole then filling it in, and paying workers to do it would produce economic growth? Of course it does! The act of working creates payments which allow spending. It doesn’t matter what is built in the process. Shortages of capital goods just creates higher prices for them which creates incentives to build them or obtain them. (That's what makes "black markets". You don't find POT growing anywhere that the police can find it, but there's plenty available for the right price.)
Your analysis ~ and that of Frank Shostak ~ is just too SHORT TERM to see the ultimate impact of these procedures. In a LONG(ER) TERM, there will ALWAYS be growth.
You're engaging in the money is wealth fallacy. It's not money that is wealth, it's what the money will buy:
3. The fallacy of “money is wealth.” The mercantilists of the 1600s raised this error to the pinnacle of national policy. Always bent upon heaping up hoards of gold and silver, they made war on their neighbors and looted their treasures. If England was richer than France, it was, according to the mercantilists, because England had more precious metals in its possession, which usually meant in the king’s coffers.
It was Adam Smith, in The Wealth of Nations, who exploded this silly notion. A people are prosperous to the extent they possess goods and services, not money, Smith declared. All the money in the world—paper or metallic—will still leave one starving if goods and services are not available.
The “money is wealth” error is the affliction of the currency crank. From John Law to John Maynard Keynes, great populations have hyperinflated themselves to ruin in pursuit of this illusion. Even today we hear cries of “we need more money” as the government’s monetary authorities crank it out at double digit rates.
The good economist will recognize that money creation is no short-cut to wealth. Only the production of valued goods and services in a market which reflects the consumer’s wishes can relieve poverty and promote prosperity.
Which leads us to the next fallacy you engage in:
4. The fallacy of production for its own sake. Although production is essential to consumption, let’s not put the proverbial cart before the horse. We produce in order that we may consume, not the other way around.
I enjoy writing and teaching but I enjoy sunning in Acapulco even more. I have labored to produce this piece and to teach its principles in my classes instead of going to Acapulco first because I know that’s the only way I’ll ever get out of Michigan. Writing and teaching are the means; sunning in Acapulco is the end.
A free economy is a dynamic economy. It is the site of what the economist Joseph Schumpeter called “creative destruction.” New ideas supplant old ideas, new products and methods replace old products and methods, and whole new industries render obsolete old industries.
This occurs because production must constantly change shape to conform with the changing shape of consumer demand. As Henry Hazlitt has written, “it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow.”
A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”
It seems that whenever an industry gets in trouble, some people cry that it must be preserved “at all costs.” They would pour millions or billions of dollars in subsidies on the industry to prevent the market’s verdict from being heard. The bad economist will join the chorus and ignore the deleterious impact that would befall the consumer.
The good economist, on the other hand, does not confuse ends with means. He understands that production is important only because consumption is even more so.
Want an example of this fallacy at work? How about the many proposals to prevent consumers from buying Japanese autos in order to “protect” the American auto industry from competition?
As I say in my article above, "All one does under this scenario is put more money out chasing a stagnant or declining supply of goods and services." You haven't refuted that.
The Darren fallacy #1 (or is it #3? Hard to tell, as is your reasoning.)
Assertion does not make anything true, and even the assertion of the almighty Adam Smith doesn't properly capture the answer to our question of whether growth and prosperity takes place when money is accumulated. Let me put it this way ~ if I have something that is used as MONEY, then it is something that you can use to buy things with. That's what MONEY is. And, if I have it, I can offer enough of it to YOU to do just about anything I want you to do if I have enough of it.
Let's say that you don't have ANYTHING. If I offer you enough money, will you go get it from someone who does? Yes, of course you will. That's what makes ALL of us do things. Someone offers us enough money to work for them.
MONEY is a MOTIVATOR!
Darren's fallacy #2 (or is it #4? Your numbering is as confusing as your reasoning.)
We produce to consume. Not really true, but I'll clarify it for you. We produce so that we have the ABILITY to consume. Otherwise you would have a barter system. A money system gives you the potential to consume. You can SAVE it if you like, or grow your own and not pay a thing. Some people ~ as on Nolan Chart ~ work/write for FREE because they like to do it. I have a neighbor who has his own garden of fresh vegetables. Never charges a thing for them. Just loves digging in the soil.
Your misunderstanding of the process of economics is mixed with your misunderstanding of motivation. How do you think the Great Wall of China was ever built (2400 miles!) if it wasn't earning wealth or income for a whole LOT of people?
You and Shostak and Mullinger need to do a little studying and thinking, not just rely on a few quotes to get you by. To use one of Walt's old references, what do you think they did BEFORE the machines? Ha! Ha! How do you think black markets work?
You're just a little too bogged down in wanting to criticize fiat money and President Obama to see the WEALTH in that PYRAMID.
Posted By: Ralph Mullinger
Date: 2009-01-28 14:24:17
MC, Bastiat back in the 1850's saw right through your mistake and wrote a wonderful debunking of it. The case was of the urchin that broke a shopowner's window. When townspeople started considering the additional work for the glasier to replace the window, and his spending on goods and services, and the providers' additional spending, the urchin turned from a little criminal to a public benefactor in the confused people's minds.
The fault was that the analysis did not look at the fact that part of the shopkeeper's wealth was thus diverted from those things on which he would have spent the money. Thus an investment in his business was lost, or his own consumption spending and the additional spending by those providing him with goods and services. At best, the urchin only redistributed wealth away from the shopowner, he did not help the community. And presuming it was an investment that the shopowner was stopped from making, the community was left clearly worse off.
This is exactly the same as happens to the national economy from building pyramids or digging and filling in holes. Yes, people get employed, but funds get diverted away from people that would have spent or invested the money more productively. Thus, society loses from your pyramid, it does not gain.
Posted By: Ralph Mullinger
Date: 2009-01-28 14:30:18
There is, of course, a special case, and we may be in it now, although it is very rare. Usually, even going into a recession, people are not insane enough to be giving huge amounts of their money to the government at near zero interest rates. They are now, a sign of just how bad the panic is, and other borrowers besides the government aren't getting anywhere near the benefit, because the interest rates they have to pay are much higher since they are viewed as more risky. This is the kind of situation that Keynes referred to as a liquidity trap. The Federal Reserve can push the interest rates shockingly low, and it won't matter, since demand to borrow and spend and invest is just not there.
It cannot be sufficiently stressed just how rare this is, and if it is handled correctly it is also very transitory. In this situation, very uniquely, it does make sense for the government to borrow all it can at the idiotically low interest rates on government paper, and spend quickly in the most worthwhile way it can figure - in this case I would think unemployment benefits and ready-to-go infrastructure projects the states have, but can't afford. (I would love to nominate tax cuts first, but temporary tax cuts don't seem to do much good for economic stimulus.) And the government would have to be very nimble, quickly winding that spending down as interest rates and economic activity began recovering.
That won't happen, of course. "Stimulus" spending will actually be for the political purposes of the group in power and its favored special interests, and will tend to become part of the baseload of government weighing down upon us and sapping our wealth long after it serves any useful purpose in pulling us out of the emergency. Witness how much of the obscene "stimulus" package that is now being crafted will go to spending in 2010 and beyond. That is why I wouldn't waste time arguing for an intelligent stimulus response to the current crisis. We'll get one anyway - and it will be far from intelligent.
At the very least, your retelling of this story about the shopowner and the "urchin" is muddled and seems to lack enough specifics to put the various pieces that you've broken it into, into some coherence.
You say that a shopowner's window was broken, yet the townspeople and the "glasier" and "the provider's additional spending" were all involved in the project. Why are the townspeople involved? Who is the "provider"? It seems to me that you've got COSTS going everywhere, then you turn them back on the shopowner. Either you're greatly confusing this situation or you're trying to make it appear that there's something here that there isn't.
If a shopowner gets his window broken, either he pays for it or his insurance coverage pays for it. How much does it cost? Well, the cost of the glass, and the cost of the labor to put it in. That's it.
If the shopowner has insurance, it doesn't cost him anything additional. If he doesn't, then it will only cost him for the glass and the labor. How this involves a loss or gain to the community is beyond me.
In any event, this example neither transfers to PYRAMID building that I can see, nor shows any loss of wealth that impacts anyone in a significant way.
Your writing is some of the most obscure rambling I think I've ever read since trying to plod my way through some of R3volt's. If you have a clear point to make, make it. I think my explanations more than clearly identify the mistakes that you and Darren and Shostak made. You and the "urchin" and the "glasier" and the "provider" may have had just a little too much to drink the day you went through that horrible experience! Ha! Ha!
What country are you from, by the way? If you're an Aussie or a Brit, you might have to explain your references a little better. But, if you're an American, you need to get out a little more often because you're swingin' in the dark!
It's called "The Broken Window Fallacy" and how could you not have ever heard of it, MC ? And as for pyramid building being good for society in a wealth creating sort of way, yes if you get the fat government contract but no if you pay for the fat government contract. Getting people to pay for something they didn't need doesn't sound like wealth creation but wealth distribution. Of course I'm not a highly trained professional economist like you so my opinion is suspect.
I'm afraid that to say that there is a parable or a story about something or other that in NO WAY addresses the point at issue is not really to say anything at all.
So, there's a parable about the early bird gets the worm? So, there's a parable about the fox and the hens? So, there's a parable about Jonah and the whale?
My point is that this "broken window" story in no way translates into a refutation of PYRAMID BUILDING as a way to create and distribute wealth. By building a PYRAMID or digging a hole, real wealth is created.
I have many times pointed out that HURRICANE damage is GOOD for the economy. All those INSURANCE COMPANIES are then going to have to cough up a lot of that MONEY they've been collecting in PREMIUMS for so long. Creates jobs, buys materials, replaces old buildings with new ones, etc.
But, I suppose there are a lot of BROKEN WINDOWS in that situation, too. Duh! Must be it isn't really true, huh, Ralph?
I can't believe you don't get it. You talk about people getting paid to build useless pyramids. Suppliers, transporters, etc get paid too. The point is where did this money come from? If it was from taxes then all you did was take money from one pocket & put it in another. There's no creation of additional wealth.
For example, Tut is the guy building the pyramid. He got paid $20 to do so. The govt got that $20 by taxing Ramses. So Tut has $20 more & Ramses $20 less. How is this helping the economy?
There's an old story about a guy who went swimming in LAKE CONFUSION. He put a lifejacket on, he had water wings on his arms, he had helium-filled balloons holding him up from overhead, and he even breathed helium into his lungs for as long as he could to make him more buoyant.
Do you know what happened to him? HE STILL SANK AND DROWNED! Do you know why? Because his head was full of ideas that wouldn't float!
I guess, not all stories have a HAPPY ENDING! Ha! Ha! Ha!
Well Master C, this last comment of yours ends all further attempts at serious discusion with you. Thanks for the comment though, it really shows that you have no sensible arguments to back up your govt worship. As Mises said:
"The enemy is not refuted: enough to unmask him as a bourgeois.[7] Marxism criticizes the achievements of all those who think otherwise by representing them as the venal servants of the bourgeoisie. Marx and Engels never tried to refute their opponents with argument. They insulted, ridiculed, derided, slandered, and traduced them, and in the use of these methods their followers are not less expert. Their polemic is directed never against the argument of the opponent, but always against his person. Few have been able to withstand such tactics. Few indeed have been courageous enough to oppose Socialism with that remorseless criticism which it is the duty of the scientific thinker to apply to every subject of inquiry."
You know, it's using quotes that you don't understand that got you in trouble in the first place. Maybe you should try to actually LEARN from the comments I made for you instead of trying to REFUTE them.
Sometimes the rocky, bumpy, unpaved road is that way because no one drives on it anymore. There's a new freeway right around the corner. You ought to try it. It makes more sense than Mises and Bastiat. Mises never knew what a personal computer is, and Bastiat never even knew about the telephone! Welcome to the PRESENT, Darren.
I have refuted you, you just don't get it. Now that you give me something else to reute here goes.
Free trade is actually the more modern idea. Keynesianism/interventionism is just a regression to mercantilism as made clear by Lawrence W. Reed in point #3 above.
Anyway, your attitude makes clear that you don't understand that the important thing isn't changing technology, but unchanging human nature. Free trade works just as well today as it did in Adam Smith's time & govt intervention is still just as bad as it's always been. After all, it was the govt's intervention in the economy that got us in the present mess.
Posted By: Ralph Mullinger
Date: 2009-01-29 21:33:17
MC, You clearly have a lot of time on your hands, to make up nonsense like you've written above. Yet despite that, you never even addressed:
"The fault was that the analysis did not look at the fact that part of the shopkeeper's wealth was thus diverted from those things on which he would have spent the money. Thus an investment in his business was lost, or his own consumption spending and the additional spending by those providing him with goods and services. At best, the urchin only redistributed wealth away from the shopowner, he did not help the community. And presuming it was an investment that the shopowner was stopped from making, the community was left clearly worse off.
This is exactly the same as happens to the national economy from building pyramids or digging and filling in holes. Yes, people get employed, but funds get diverted away from people that would have spent or invested the money more productively. Thus, society loses from your pyramid, it does not gain."
Further, I can't believe you held up damage from hurricanes as something that creates wealth! Just follow that one a bit. A town is battered by a hurricane. So it spends lots of money and time and effort fixing the damage. Then the next one strikes, almost immediately. More money, time and effort. Oh, lots of work. But the town is not producing anything to sell, it is just fixing damage. Then the next one strikes almost immediately after. Clearly, the town is left very much poorer. And all it got was repeated doses of your prescription for prosperity!
The hurricanes did just what, economically, the Pyramid does. Everyone loses lots of their resources to the pyramid builder, resources that could have been used on their own production, investment, and enjoyment of life. All destroyed for them because of wealth redistribution to provide some creep exactly like Mao or Lenin an elaborate tomb for his carcass.
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