Sunday, January 6, 2013


An acquaintance of mine on Facebook asked me to comment on his proposed social policy based on MMT (an economic theory). The proposal, the way I understand it, basically comes down to: let's print money and spend it on the “infrastructure", which will be a good long-term investment for businesses able to take advantage of the improvements and a good short-term “boost" to the economy, since it will increase spending and stimulate businesses.

Well, where to begin?

Let's break the problem up into two parts: first, figure out the problem with the government spending resources and then the problem with printing money.

1. Imagine that a bunch of space aliens came over and offered to help rebuild some city's infrastructure or just some businesses. They are providing building materials and manpower. We are providing the management. Who should manage the improvements: the government or the private sector?

Misesian calculation problem theory explains that centralized monopoly will always perform worse than many decentralized competing companies. First, no single entrepreneur can predict what the public will want and how to distribute the resources as well as many entrepreneurs trying out things together. Just look at the modern smartphone market. Apple products may be good, but they are not the only good thing out there (and they are partially good because they were able to take advantage of the success of other companies in some aspects of those companies' products). The only way that Apple knows that its products are good is by comparing them to other companies' products and by seeing in which way other companies succeeded.

Second, if a company is isolated from profit and loss mechanisms, not only will it not have incentive to improve and cut losses, but it will not have any way of knowing whether it's doing well or badly, since there is nothing to measure its success (in providing the public with  the desired services) in. Plus, isolated from the competition, again, it will not know whether it could have done something better in a particular area.

This is why, as I said, a bunch of competing companies will always do anything better than any monopoly, including the government. Plus, as the story with Obama's spendulus showed, government's spending always has a lot of internal inefficiency and corruption (something also possible for any individual company out there, but controlled for through competition with the other companies).

So, clearly, allowing the government to manage the aliens' limited resources would be a worse choice then letting the private sector bid for the pieces of the offer, using its entrepreneurial insight to seek out what improvements in the society the public truly wants.

This is an important point: a government building a highway may be of benefit to some people. But is this truly the best use of the taxpayers' money? Why not let the taxpayers decide themselves on spending their money on what the private sector has to offer? And, if an entrepreneur predicts that what the public will really want is a bridge, he can borrow money from a bank (not one guaranteed success by the FDIC, but one also competing with its brethren on a free market), buy the land, build the bridge, and collect tolls. He will compete for people's money not only with the owners of other bridges, but also with the owners of other local businesses. This way, the public truly decides where its money goes, and without any coercion.

When we let the government make this decision, not only are we letting it force people regarding what to spend their own money on, but we are (foolishly) assuming that a bunch of bureaucrats are better than private entrepreneurs and bankers at the latters' job.

But, what my friend proposes is even worse. His proposal does not take offered help from the space aliens and give it to the government. It takes resources from the private sector and gives it to the government (to misuse). If you read nothing else, read this:

There is no difference, in terms of distribution of resources, between a) the government coming in and taking human labor and building materials by force, or b) taxing the businesses and using the taxed money to hire humans and buy building material, or c) printing money and doing the latter. The total amount of resources in the society at any given moment is fixed. By printing money, the government still "sucks in" some of the resources that would have otherwise been used by businesses to do something else (better): not only because it hires some workers away and increases price on supplies, but also because it devalues everyone's savings by debasing the coin.

And this brings me to my second point:

2. Why is printing money itself a very damaging act? Well, a few reasons:

a) as mentioned above, it devalues everyone's savings;
b) it motivates people to spend, rather than save, thus shifting the distribution of resources without any good reason for it (again, the government is acting as a central planner, and it is a priori bad at it);
c) increasing the amount of money in circulation alone (without any additional efforts by the government) without any "natural" increased demand for money from the markets creates malinvestment bubbles.

I won't reiterate the last point and explain Austrian Business Cycle Theory for the Nth time. I will just link you to the previous post, where I have done so or linked to works by Bob Murphy, Murray Rothbard, and others who have explained the theory:

Why Did Solyndra Fail?
Why Stimulus Failed
Activating Trash

Inflation and Roman Empire

Or you can just read this brilliant work by Doug French:

Early Speculative Bubbles

Also, here is an interesting excerpt from Ludwig von Mises's Human Action that demonstrates the above point (that increasing money in circulation causes artificial booms):
The main deficiency of all attempts to explain the boom — viz., the general tendency to expand production and of all prices to rise — without reference to changes in the supply of money or fiduciary media, is to be seen in the fact that they disregard this circumstance. A general rise in prices can only occur if there is either a drop in the supply of all commodities or an increase in the supply of money (in the broader sense).
Let us, for the sake of argument, admit for the moment that the statements of these nonmonetary explanations of the boom and the trade cycle are correct. Prices advance and business activities expand although no increase in the supply of money has occurred. Then very soon a tendency toward a drop in prices must arise, the demand for loans must increase, the gross market rates of interest must rise, and the short-lived boom comes to an end.
In fact, every nonmonetary trade-cycle doctrine tacitly assumes — or ought logically to assume — that credit expansion is an attendant phenomenon of the boom. It cannot help admitting that in the absence of such a credit expansion no boom could emerge and that the increase in the supply of money (in the broader sense) is a necessary condition of the general upward movement of prices. Thus on close inspection the statements of the nonmonetary explanations of cyclical fluctuations shrink to the assertion that credit expansion, while an indispensable requisite of the boom, is in itself alone not sufficient to bring it about and that some further conditions are required for its appearance. 
Yet, even in this restricted sense, the teachings of the nonmonetary doctrines are vain. It is evident that every expansion of credit must bring about the boom as described above. The boom-creating tendency of credit expansion can fail to come only if another factor simultaneously counterbalances its growth. 
If, for instance, while the banks expand credit, it is expected that the government will completely tax away the businessmen's "excess" profits or that it will stop the further progress of credit expansion as soon as "pump-priming" will have resulted in rising prices, no boom can develop. The entrepreneurs will abstain from expanding their ventures with the aid of the cheap credits offered by the banks because they cannot expect to increase their gains. It is necessary to mention this fact because it explains the failure of the New Deal's pump-priming measures and other events of the 1930's. 
The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

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