Tuesday, September 13, 2011

An injection of your own blood

If Obama can re-use his first stimulus speech from a few years ago (although I think he just plagiarized Hoover's 1931 stimulus speech), I can re-use one of my old posts:

Government can't really stimulate economy.

Why not? Read here:
Any statement about the economy that contains a mechanical metaphor is more than likely wrong. We’re told government must “jump start” the economy. How can it? Think about what happens when a car is jump started. Cables connected to a charged battery convey juice to a dead battery. Energy is injected into the broken-down car from outside.

Politicians and court economists want us think this is analogous to government’s jump starting the economy. But it cannot be. Since the government has no money lying around waiting to be spent*, it will have to borrow close to a trillion dollars to carry out the program President-elect Obama and the congressional leadership are planning.

But borrowing money for their pet projects injects nothing into the economy. It merely moves money from where it currently is in the economy to where politicians want it to be. How is that a stimulus?

Moreover, the debt will be covered (monetized) by the Federal Reserve by creating money out of thin air. That money will then be spent and “invested,” but notice the problem. Creating money is not the same as creating wealth. Imagine you were stranded on a desert island. Overhead you see a plane. It drops a large box down to you. Excitedly you tear open the box expecting to find food and water. But instead you find a printing press and a large supply of green paper. An instruction sheet states: “Print all the money you need.”

Are you better off?

All resources are scarce. A quantity of steel, for instance, can be used to make a washing machine or a machine to produce more steel. It can’t make both at the same time. When the Fed creates money, it increases the demand for scarce resources — but no new resources. How can that be a path to prosperity? Rather, it’s a path to higher prices and lower real incomes.

But it’s more than that. Since the new money gets into some hands rather than others first, monetary expansion — that is, inflation — changes the pattern of prices and production that would have resulted from voluntary exchange under sound money. Among the prices distorted are interest rates. By doing so, inflation transfers resources from those who produce wealth to others.

Inflation, therefore, is one more government income-distribution program. The lucky early recipients of the fresh fiat money gain purchasing power — command over scarce resources — at the expense of everyone else. The market process is thereby corrupted. In the absence of inflation (and other government interference), it is a system in which entrepreneurs pursue profit by pleasing consumers.

What makes this work amazingly well is the price system, which communicates to producers and consumers the relative scarcities of products and factors of production, the relative demands for such things, and the degree to which people prefer goods in the present to goods in the future. This permits production to be guided by consumers’ preferences.

Inflation distorts those relative prices, garbling the signals and ill-serving consumers. In the end society is poorer than it would have been. When the inflation is finally stopped, the economy suffers depression and mass unemployment as it corrects for the malinvestment. Or, if the inflation accelerates to hyperinflation, as it did in Germany in the 1920s and in Zimbabwe today, society will be thrown into chaos.

This is where the Obama-congressional “stimulus” plans will lead. Nothing is more dangerous than a politician who thinks he must “do something now”.
The last statement points at the root of the problem. People think of government as some creative force — government creates things (products, services, initiatives) and directs civilization. This is a model of a slave society, where people belong to the society, which itself is a big beehive.

On the other hand, a model of a free society, where each person is an individual who belongs to himself but agreed with others to build a society together, involves only one function of the government — not creative, but restrictive. Such a government merely protects people’s rights allowing them to make decisions in building civilization, providing services, inventing new products, etc. — something people have been doing just fine by themselves (and better than when government got involved).

In a free model of a government, the latter has no mitzvos aseh (“thou shalt”)it only has mitzvos loi ta’aseh (“thou shalt not”).

* Now, it's not actually true that there is no way to inject money into an economy from "without", as one injects juice into a dead battery. There is. Hitler, y"sh, used it to "jump-start" German economy. What you do is invade another country, rob it of its resources, and the "inject" those resources in your economy.

The only question is: should we invade Mexico or Canada? The first is full of cheap labor, but we already have more of their cheap labor than we know what to do with. The second is full of liberals and hippy guitar players (yes, I am thinking of Tzvi Freeman), and we seem to have too many of those too. Perhaps we can invade an oil-rich country and... oh, wait...


Michael said...

To simplify, imagine a community with a bunch of factories. That community has a certain amount of wealth in the form of physical capital and in the form of human capital - workers that have the skills to operate the machines in the factories.
The community undergoes and economic downturn - for the sake of argument say that it was caused by easy credit putting money into people's hands to buy goods that they couldn't really afford, and when a certain resource that people simply could not do without skyrocketed in price, there was simply not enough money left to float all that debt, causing a withdrawal of credit, which left much of the factories' production capacity unsold, causing the factory owners to cut back on production, causing workers to lose jobs, suppliers to lose income, etc. leaving them with even less money, causing sales to go even further down, and the entire economy of the community descends into a vicious circle of contraction.
Now, the important thing to remember about this imaginary picture is that the community has wealth, it is just deployed in a less useful way right now. Because, all those machines, and all those skilled workers represent years of invested wealth. It's like a chessboard where white has lots of pieces left, they are just on the wrong side of the board, and his king is getting checkmated on the other side.
So, the libertarian economist would say "Let the market do its job." Let those factories declare bankruptcy, sell off the machines for spare parts and scrap, let the workers find new skills that are employable, etc. even though this results in a greater loss of wealth, the libertarian economist does not think that wealth the market will not pay for should be considered wealth. A cleansing collapse, the libertarian believes, is in the long term best interests of the community, even if it will mean short term pain for a lot of people.
The Keynesian, however, says that government can have a role. Government cannot create wealth, but government can temporarily abrogate the rules of chess to get the pieces into a position where they can do some good. By printing money, government can ACTIVATE the already existing wealth of the community, because government can take on debts that individuals cannot take on. So, the factories can go back to full capacity, and the workers go back to work, and a virtuous cycle of increased profits, more hiring, more revenue is set into motion.

Michael said...

that's the theory, anyway

Certified Ashkenazi said...

1. According to the libertarian perspective, the problem with the depression is misinvestment of resources. I.e., the capital is in the wrong place.

This happens because, one way or another, the government misrepresents the interest that society has in a certain product. (The government does this by messing with interest rates or by, for example, forcing housing credit to be too easy.)

So, the problem is not that I have a lot of chess pieces, and they are on a wrong side of the board, but that I have a lot of black knights and bishops, but I really needs white ones (this analogy would be much easier with Go, but whatever).

By printing more money to keep afloat the companies that produce the goods that the society does not really need in such amounts (or is not ready to pay for them), the government is basically just feeding the tumor.

All the manipulations that the government does, all the "resources that are available to keep the economy afloat", as NPR puts it oftentimes, are just keeping the tumor growing bigger and bigger. So, first, when it explodes, it will be even more painful. Second, by keeping it alive, the government pulls resources from the rest of economy, which consists of actually healthy businesses that would benefit if the capital flowed from the tumor to them.

So, that's why the collapse is necessary: What needs to happen is for the capital to flow to those business that ARE needed by the society at the moment.

It's a bit like the situation when a certain profession becomes a fad. Let's say, programmers. Let's say, the government somehow misrepresents how much programmers are really needed. So, 100k people go into programming. But the society really only needs 50k people in programming.

Should the government say that all the unemployed programmers are "chess pieces on the wrong side of the board" that need to be supported until they find a job? (And this way, it drives the salaries of the employed programmers lower, plus, because it printed a bunch of money to pay for the unemployed programmers' welfare, it makes the employed programmers' salaries worth less.)

Or should the government encourage the unemployed programmers to look for a different kind of jobs?

So, that's the first problem: malinvestment of capital that needs to be corrected.

2. The second problem is that printing money and using it to pay for creation of jobs is not the same as investing already existing capital. My wife needs to use the computer, so I don't have time to explain now. :-P

Certified Ashkenazi said...

2. The problems with treating government taxing the populace and then supporting certain projects/businesses as "investment" has several layers. First layer is quantitative: the government is taking money away from everyone else. So, this may result in a net loss.

The second layer, as I understand it, is actually the precursor of the first problem listed above (the malinvestment). The government is not an entrepreneur. It lacks necessary wisdom or experience. Therefore, even if the government had its own source of money (e.g., if the government officials were willing to invest their own money, starting with Obama's Noble prize million dollars), it would probably malinvest it.

In other words, even if it is true that in a certain business, the "pieces are on the wrong side of the board", it's not within the government's expertise to judge whether this business is solvent. The business owner should go to a bank and borrow money. If the bank manager (who has years of experience and success in investment of money) deems the business insolvent, but Obama thinks we should "give the business owner a break", whose judgement should we trust?

(Of course, the government doesn't have its own money. It takes your money. This would be similar from me stealing some of your money and then investing it into building a perpetuum mobile.)

But then, for the society overall, the capital would not be completely lost, because it would just be directed to the businesses that really needed it (with some money lost to "entropy", such as the resources needed to re-distribute the capital).

But when the government just printed a lot of money, there is nothing to redistribute. It just counterfeited a lot of money out of thin air and invested it into garbage.

I feel like there is another practical reason why we can't treat taxation/printing money as investment, but I can't put my finger on it right now.

But besides the practical reason, there is the moral argument. The government is stealing one person's money to give to another person.

And speaking of Dina D'Malchusa Dina, I don't know if there is a justification for the government to do that. I understand taxing money to keep the government running and to pay for the law and order (so that people don't eat each other alive, or so that the Canadians don't invade us), but where does it say that the government can tax in order to pay for someone's failing business? (I guess some poskim say that there is a power of din to redistribute property, like in the case of pruzbul, which extends even to a secular government.)

But even if it was halachically allowed, I don't know if we could call it yashar.

Certified Ashkenazi said...

Another thing I wanted to say is that it is a little misleading to say that we believe that the "economy will right itself". I mean, a lot of libertarians say it, and I agree with what they mean, but it sounds like "problems will go away by themselves".

But, if you think about it: the "economy" is really thousands of entrepreneurs who have experience in doing business (as evidenced by the fact that they have been successful so far; otherwise, they would be forced to return into the workforce). So, saying "we don't need the government to meddle, the economy will right itself" is really saying: "we trust private entrepreneurs in business decisions more than a law professor from Harvard whose main skill is oratory".

Also, by allowing thousands of business people to right the economy we are not putting all eggs in one basket. If six fail, their capital will flow to the four that succeed. And this way the "economy" will figure out the best way to improve the situation: by business people branching out and competing with each other, and the most successful ones getting the capital of the less successful ones to build the economy.

When the monopoly is in charge of fixing the economy, a) if it fails, it fails big time, b) it must have a gift of omniscience in order to know where exactly to invest.

Certified Ashkenazi said...

I guess the simplest way to put it is: when the government taxes/prints money and "invests" it into failing businesses, it reshuffles the capital from the successful business towards the unsuccessful ones. In reality, the opposite must happen.

(And by the way, the "capital" means human resources that are left working in the failing businesses. Lav davka would the workers have to learn a new trade. Perhaps they could go from working on a failing car factory of GM to working at local branch of Toyota.)

Michael said...

A lot of long paragraphs that avoid the key point:
The libertarian criticism in your post is that the government cannot create wealth.
The Keynsian response is that the government is not creating wealth, it is ACTIVATING the wealth that already exists.
Say there are $100 billion worth of auto manufacturing equipment, and $100 billion of worker training invested in auto workers.
Given that the auto companies are poorly invested, the US economy may only be getting a $150 billion yield from that $200 billion in wealth.
But, if the auto companies go bankrupt, and their machines are sold for scrap, and their workers get jobs in other sectors, then you will only be getting say a $50 billion yield from that $200 billion in wealth.
The government can print say $20 billion, use that money to prop up the economy and get people buying American cars, and voila, a $20 billion money printing nets an $80 billion boost to the economy.
How did that happen? How do you "inject yourself with your own blood?"
Because the wealth was already there, its just that the slumping economy renders that wealth inactive, and Keynsian borrowing activates it.

This point is the refuation of the libertarian whine that "Government cannot create wealth."

There are many caveats to this rule.
1) It only works when there is inactive wealth lying around.
2) It is very hard for government to properly target spending to have the desired effect.
3) this may be "feeding the tumor"

Which is why this tool should be used very, very carefully. But, the extremist position that government stimulus is like draining a pint of blood from a patient in order to give that patient a transfusion is definitely refuted by the above argument.

Certified Ashkenazi said...

I think the argument is that the wealth is inactive because it has been invested into wrong area. By investing more money into the GM, US government won't make Americans buy GM cars, since it won't alleviate the reason why Americans weren't buying GM cars to begin with: 1) GM sucks, 2) Americans don't want to (or cannot) buy cars at the moment.

So, GM equipment must be 1) sold to a company that knows how to make good cars), or 2) sold for scrap to build the equipment that will produce what Americans want at the moment.

The government can print say $20 billion, use that money to prop up the economy and get people buying American cars, and voila, a $20 billion money printing nets an $80 billion boost to the economy.
How does that happen? How does the government "boost the economy" by printing $20 billion dollars. So, far, all I see is the government creating inflation. Where does the boost come from?

Michael said...

Because instead of getting $50 billion of yield from $200 billion of wealth through the process of the factory machines being sold for scrap and trained workers being retrained or employed in fields that don't use their training, you get $150 billion of yield from the $200 billion of wealth, a gross increase of $100 billion, less the $20 billion that you borrowed to get that effect, nets you $80 billion.
OF course, if a) Americans don't want cars anymore, or b) they want cars but they don't want this company's cars, they want another company's cars, this doesn't work.
But, in the limited case where Americans want cars, they just can't buy them because of the economic slump, government spending CAN ACTIVATE wealth that is already latent in the economy.

Certified Ashkenazi said...

2) It is very hard for government to properly target spending to have the desired effect.
3) this may be "feeding the tumor"

Which is why this tool should be used very, very carefully

"Joe is not very good at doing brain surgeries. Furthermore, Joe is not very good at distinguishing a brain tumor from a cerebellum. Which is why one should use Joe as a brain surgeon sparingly."

To me that sounds like a good idea not to use Joe as a brain surgeon at all.

Certified Ashkenazi said...

Slumping economy is the same phenomenon as Americans not wanting to buy cars, because they want to save rather then spend. But the government, by messing with interest rates, makes it look that Americans want to spend, which attracts malinvestment.

Judging whether Americans want to spend or not is the job of entrepreneurs. And usually (when the government doesn't meddle), they do a good job at it.

I mean, how do you know whether Americans want GM cars or not? Are you going to ask them: "If I gave you $20K, would you buy a new Ford?" I think most would rather buy a used Toyota. Which is what was happening before that led Ford to go down.

If you give them a $20K gift card that they can spend at Ford, maybe they'll buy the car, and Ford will get a short-term boost, but then what? Ford still sucks as a company, and the same problems that led to it going close to bankruptcy will persist. This is what libertarians mean when they say that when the government helps out slumping business by "spending its way out of depression", it actually keeps the economy in depression.

This is why the Great Depression was great. FDR kept expanding the bubble with his policies.

Certified Ashkenazi said...

The central point about not being able to create wealth is that you have to take the wealth from somewhere else. In order to activate existing machinery/workforce, you need to do the same.

So, you're taking money from Bill Gates (or devaluing his money), who was managing his money well, and giving it to GM (through a gift card to a consumer), who were not managing their money well, to keep them afloat.

How is that a good idea? If investing in GM was a good idea, a bank would recognize this before Paul Krugman or Ben Bernanke and do it. As I said, it comes down to the same question: whom do we trust more regarding where to invest the money — a successful bank owner or a bureaucrat in Washington?

Certified Ashkenazi said...

As my wife points out, printing $20 billion will result in more money in circulation, which will result in higher prices. So, Joe and his wife, who had $30K in their savings account, which they were hoping to use for a down-payment, not cannot use it, because the downpayment is now $40K. And while Chayim was buying Lubavitch shechita cornbeef for Shabbos and cholov Yisroel butter for weekdays, now he can't afford it.

But thank G-d we did not sell all that equipment at GM factory for scrap.

Or, the way someone put it on mises.org: "If you have $100 you're saving for something important, and someone steals it and buys you something else, are you any richer?"

Another key point:

Wealth is not money. Wealth is resources. The government cannot create resources. When the economy is in a slump, it's not because it doesn't have enough money. It's because, as you said, the chess pieces are on the wrong side of the board — but that means that the real resources (machinery and people) belong to a wrong business. When the government prints money, it keeps that business afloat. What it should really do is allow other businesses buy out the failing business's resources in order to use them in a more productive way.

Certified Ashkenazi said...

>in the limited case where Americans want cars, they just can't buy them because of the economic slump

If American cars were buyable, people from all over the world would buy them, and Americans would not buy Japanese cars. The fact that the company is having problems shows that it is using its resources (raw resources, machinery, and workers) unwisely. That's a good reason to hand over those resources to someone else, not give it more money to keep doing the same thing.

Michael said...

you just ignored the central point that I made, and went on and on talking about the imaginary cases that you want to talk about - where government is just redistributing - instead of the imaginary case I was talking, where government stimulus "unlocks" or "activates" the wealth latent in the economy.
First, let me give you another imaginary case: Let's say there is a society where people only need to buy two things - widgets and apples - and everything else, they get for free.
Let's imagine now that there are two types of the widget - one costs $10, and the other costs $20. The $20 widget is better in every way than the $10 widget. The capitalists of the society invest money in building factories that can make the $20 widget and they train workers to make the $20 widget. (The machinery and skills to make the $20 widget are completely different from the machinery and skills that make the $10 widget.)
Then the price of apples skyrockets, so fewer and fewer people are able to buy the $20 widget. As orders drop, the factory owners lay off workers, so now even less people can buy $20 widgets.
The machines that were designed to build $20 widgets become valueless, and the capitalists declare bankruptcy. They sell their machines for scrap, and the society loses all the money that it investedin human and physical capital for the purpose of building $20 widgets.
even though everybody in the society realizes that failing to buy $20 widgets is going to cause their society to collapse, they simply cannot do it, because they can't spend money they don't have.
However, the nature of government is that they CAN spend money they don't have. (That's why Joe does brain surgery, because even though he's really bad at brain surgery, he is the only one capable of doing it.) So, if the government offers a widget rebate of $2 per $20 widget purchased, there might be just enough people capable of buying $20 widgets that the factories can stay open, and the society doesn't collapse.
In this case, the goverment is not creating wealth - the wealth is already there in the form of human capital and physical capital that can produce $20 widgets. It's just activating and unlocking the wealth.
Now, before we get to the libertarian responses, the libertarian must at least acknowledge the FACT that in this imaginary case, the objection of "the governement can't create wealth" doesn't apply.
So, now come the libertarian responses, with the reasonable person's counter.
1) If the government didn't intervene, some innovator would come up with a way to convert the $20 machines to $10 machines, or to manufacture the $20 widget for cheaper.
Reasonable response: Maybe, maybe not, the only way to know would be to let the pain continue and see what happens. It is also possible that its just too hard to convert $20 widget makers into $10 widget makers, and the society would have to suffer tremendously before such a conversion takes place.
2) This is an imaginary case. In the real world, companies fail because they are inefficient and are outcompeted by nimbler companies. Government intervention just drags out the process by which the weak die off and the strong take their resources.
Reasonable response: That may be true, but, the libertarians also describe imaginary cases where resources are redistributed painlessly. In the game of Monopoly, you can put a hotel on Boardwalk and Park Place for $2000, then just take it off and get your $2000 back if you need the cash for something else. In the real world, you have to tear down the hotel, brick by brick, wasting lots of labor and materials in the process. The process that libertarians describe so airily as "take the resources from them and give them to people who use them better" is not nearly so simple as that.
Unhappily for libertarians, sometimes it is better for a society to prop up a struggling company than to let it go under and let a strong company replace it.

Certified Ashkenazi said...

It's very difficult to respond to such limited scenarios, but sure:

In your example, the reason why the people can't afford to buy the $20 gadgets is because they have to spend so much money on the (more expensive) apples that they have no money left for the gadgets.

So, when the government prints money to subsidize the gadgets, a lot of people buy gadgets, and this keeps the gadget business afloat. But then, within next couple months, the wave of inflation spreads through the economy and... guess what?.. people cannot afford to buy apples anymore.

People starve and most of the population dies.

Or, people have to spend even more money to buy apples, which means they cannot afford to buy gadgets anyway... and now the money they had in savings/salary is devalued. So, the government has to subsidize the gadgets again... which means that the mayor of the village gives a speech in which he proposes "Gadget relief bill" which is identical to the one he proposed three months ago. (And the village's council has to pass the bill right away.)

Responding to your last point: who said that transfer of capital is painless? It's not. But cutting out the tumor, though painful, is less painful than living for a decade in depressed economy.

Certified Ashkenazi said...

Reasonable response: Maybe, maybe not, the only way to know would be to let the pain continue and see what happens. It is also possible that its just too hard to convert $20 widget makers into $10 widget makers, and the society would have to suffer tremendously before such a conversion takes place.

Well, we can look at the history of government interventions vs. the history of private initiatives and see which kind worked out the best for humanity.

We can also look at the societies where the government runs the economy and prints money in times of economic crisis vs. the societies where it doesn't. And see which way the immigration goes.

I remember the times when I was living in Ukraine when a piece of bread cost 1000 karbovantzev (a unit of money). Then, in a few months, it now cost 10,000 karbovantzev. Then, in about a year, the government said that the old currency is worthless, and now everyone should use grivnas, the new currency. And if you didn't exchange your money by the end of the week, you now have a lot of colorful toilet paper (in fact, the toilet paper in the stores had more intrinsic value than the old money).

Certified Ashkenazi said...

I think the deeper point is that money itself is not wealth. Money is a way of assigning abstract value to wealth, such that labor and products can be exchanged easily.

When the society gives me money it says that it is willing to provide X units of service for the service that I provided. And then I choose whether the units of service will be taxi rides or a bunch of people mining metal and putting it together in a bike for me.

So, instead of saying: "I will sell you one gadget for 100 apples", I say: "I will sell you one gadget for $20, and you will sell me 100 apples, $0.20 an apple".

So, if "the price of apples went up", this means that the availability of the apples per gadget has decreased (really, number of apples per dollar decreased, but since number of gadgets per dollar stayed constant...). There is no way to change that short of producing more apples.

You can trick the people into thinking that apples actually are actually worth more gadgets by printing money and giving it to someone as a rebate for the gadget.

So, you made the ratio of money to gadgets higher, but the ratio of apples to gadgets did not change, and eventually, the economy will catch up to the trick, when gadget producers will spend the money on apples.

What will happen is they will buy out a lot more apples with their available money, making the apples more scarce for the rest of the population, driving the price of the apples up. And they won't necessarily do this out of malice; just in their judgement how scarce the apples are by comparing the price of an apple to their bank account, they will think the apples are as plentiful as before. But in reality, the apples are more scarce, as the rest of the population will find out when it goes to the market next day.

Certified Ashkenazi said...

Now, let's push this fantasy further.

You may say: well, both the apples and the gadgets are a luxury. People were getting their wheat for free; the apples were just a desert. It sucks a little that some folks will have to go without an apple, but at least we saved the gadgets' machinery.

So, what you did, as a mayor of the island, is you decided that gadgets are more important for the people than the apples. But surely the people should make that decision, not you. If the people were buying apples rather than gadgets with their limited resources, they made a call that the apples are more important for them.

Not that you saved the gadget industry, mind. As I said, people will catch up and stop spending money on the gadgets, because they will want to save up money on the apples (maybe it will take them twice as much now; meaning, they will be able to afford half as many apples per month).

So, the gadget industry will be back to square one. And the vicious cycle will repeat itself.

Michael said...

Here is what I don't get:
I said that the premise of your post - that government cannot create wealth - was wrongheaded. Not that it is wrong, but it is wrongheaded, because it misses the point of what government can do - which is, in certain, very limited cases, unlock wealth that is there in the economy.
I said that this was the point of Keynseian spending, in theory.
I said that all the libertarians who whine about the governement not being able to create wealth are missing the point of stimulus spending.
I did not say that there were no problems and/or unintended consequences of stimulus spending, that might outweigh the benefit.
I did not say that I advocated a specific stimulus expenditure like Obama giving money to his buddies that run a solar panel plant.
I just said that your core point is wrongheaded, because it ignores the possibility that government spending triggers a process that ACTIVATES the wealth latent in the economy.
So, don't respond by arguing against all of the points that I did not say. Respond to the point that I did say!!

Michael said...

As a good libertarian, you surely know about the "Broken Window Fallacy". And, of course, Bastiat is right that the six francs the shopkeeper spends on the new window are six francs that he won't spend on something else. So,there is no stimulus.
But, what if the glazier has large debts and his creditors told him that if he doesn't pay his debts today, they are closing him down, and that means all of his employees lose their jobs, so they won't be able to shop at Goodfellow's store, and his inventory will pile up and he will lose a ton of money. In that case, the fact that he spent six francs on a window actually is a huge benefit for him.
The point is that not all "six francs" are the same.
Think of it as a phase transition. Imagine that you have a freezing sytem that is keeping a block of ice frozen. The block of ice is holding up a heavy sculpture. You take a tiny amount of energy away from the freezing system so that instead of cooling the water to 0C, it cools the water to only 4C. And, the sculpture collapses.
The libertarian says "This is impossible. Freezers cannot create energy, and the tiny amount of energy I took out of the system was not enough to hold up the heavy sculpture, so there is no way that the sculpture could collapse without that energy, but stay up with that energy."
The reasonable person knows that what happened was that there is a large amount of potential supportive capacity in water cooled to 4C, but until you cool the water to 0C, and it crystalyzes into ice, you get no benefit from that support potential. Once you cool the water to 0C, you unlock all the potential that was in the water to begin with. So, that tiny amount of energy that it took to cool the water to 0C from 4C yields a much larger "bang-for-buck".

Certified Ashkenazi said...

But saying that stimulus cannot create wealth is still true. You are right, it can activate wealth, just like any private loan/investment can. Of course. But it is always a bad idea for the government to do so for a large number of reasons. (See my last post for the very pragmatic reasons.)

And the practical point of the statement is that in a global sense, government spending cannot lead to more wealth, since it always results in a net wealth loss.

Certified Ashkenazi said...

As a good libertarian, you surely know about the "Broken Window Fallacy". And, of course, Bastiat is right that the six francs the shopkeeper spends on the new window are six francs that he won't spend on something else. So,there is no stimulus.
But, what if the glazier has large debts and his creditors told him that if he doesn't pay his debts today, they are closing him down, and that means all of his employees lose their jobs, so they won't be able to shop at Goodfellow's store, and his inventory will pile up and he will lose a ton of money. In that case, the fact that he spent six francs on a window actually is a huge benefit for him.

Even if you are right, this is a decision not for the government, but for a bank to make. The banker who wants to close down the glazier's business is more competent than the glazier.

Maybe the fact that the shopkeeper did not spend six franks at the bookstore next door means that the bookstore owner will close down, and his employees will not shop at the shopkeeper's place?

Certified Ashkenazi said...


Certified Ashkenazi said...

Actually, even better, here: http://mises.org/daily/5626/The-Gnome-Thought-Experiment

Certified Ashkenazi said...

But, what if the glazier has large debts and his creditors told him that if he doesn't pay his debts today, they are closing him down, and that means all of his employees lose their jobs, so they won't be able to shop at Goodfellow's store, and his inventory will pile up and he will lose a ton of money. In that case, the fact that he spent six francs on a window actually is a huge benefit for him.

To me that sounds like: "Maybe you should stop going to work and start randomly digging in your backyard. It's true that the time you spend digging is the time you're not earning money, but what if you dig out a treasure? Not every patch of dirt is just a patch of dirt."

I.e., I agree that if you invest money into a business, you may return it from a brink of collapse, and this may be a worthwhile investment. But the problem is: the government doesn't know how to do that well (how to find a business worth investing in)!

Furthermore — and this is the first point of saying "government cannot create wealth" — in order to activate wealth, it needs to take it from somewhere else, i.e., from healthy businesses. So, you have the situation of the government forcibly sucking out blood of a healthy limb to inject into a tumor.

The second point of saying "government cannot create wealth" is that if the government prints out a lot of money to invest into a business, it has not created new resources. It has still taken resources from other people (without their permission).