Mars Attacks!

Beyond Saving
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Mars Attacks!

If you pay close attention to politics you have probably heard this but for more casual observers I have included the video. Basically Paul Krugman says that a fake alien invasion would fix our economy. While the assertion is downright laughable, I want to address the fundamental keynesian theory that underlies the statement rather than make fun of the particulars. It is important because Krugman is not some fringe wacko making up shit in his basement. He is a very prominent keynesian economist and held in high regard by our president. It is keynesian theories that have been a main driving force of our economic policy for decades.

 

The point I would like to focus on is the belief that actual productivity does not matter. Keynes exact quote that was referenced in the above video

 

Keynes wrote:
 If--for whatever reason--the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. "To dig holes in the ground," paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.

 

Well, the rate of interest can't fall anymore because the keynesians have driven it to rock bottom. So now we dig holes... Keynes mistake is being completely fixated on money. Money is not true wealth, true wealth and a better standard of living are obtained through the production of desired goods and services. In other words, our government could simply decree that everyone in the country has a billion dollars. Yay, we are all billionaires, we don't need to work anymore because we can buy whatever we want. Everyone quits their jobs and retires because we are all rich. Are you hungry yet? The farmers all retired too, they are billionaires. Well the farmer isn't going to work for a few thousand a year. If you want to encourage him to work, you would have to pay a lot more. The result of simply declaring everyone a billionaire, would be rapid inflation and since you can't eat money and money in and of itself does not improve your standard of living, you have not actually improved anything.

 

Put another way, suppose you are on a deserted island with three other people. You decide to divvy up the duties and assign one person to collect water, one person to collect food and one person to build shelter. Being keynesian, you decide that the fourth person ought to dig holes and fill them up again because you can't think of anything else useful for them to do. Now if Zeus throws a lightening bolt, which person do you want it to hit? If it hits the person collecting water, food or the person building shelter, someone else in the party will have to work harder or you will live without an essential (ie your standard of living will go down). If it hits the person digging holes, no one has to work any harder and no one will experience a reduced standard of living. In fact, the remaining three will not have to work as hard because they won't need as much food, as much water or such a large shelter. Your micro economy is actually being slightly hindered by the person contributing nothing.

 

Whether you pay the person digging the holes in money which is then used to purchase shelter, water and food from the other three changes nothing. The three workers are not having their standard of living improved by the person digging holes. Nor does the size of the economy matter except for the number of unproductive workers it can support. The island economy might only support one non-productive worker before serious problems/shortages occur while our economy can easily support millions before the effects are even noticeable. 

 

That doesn't change the fact that any given person is either productive or non-productive. Either you are providing/creating/supplying/collecting a good or service that people need/desire or you are not. If a worker is the former, they are improving the standard of living, if they are the latter, they are not. From a personal level, it might be better for you to have a non-productive job than to have no job at all. But if you are essentially just "digging holes" you might as well sit at home doing nothing and at least you might consume fewer resources and be less of a drain than if you drove to work every day. Putting people to work digging holes would help the unemployment rate but if it isn't actually improving anyone's standard of living and may even detract from it, why would you? To get out of the recession we don't need people doing "make work", we need people doing things that actually improve the lives of people around them. The question we should be asking is not "how do we employ the most people?", We need to be asking "how do we increase the production of goods/services that improve peoples lives?"

 

Whether money is spent by government or a private individual, what it is spent on does matter and it does have an effect on our standard of living. On the macro level, no one decision has a big effect. If someone decides to freeload, their individual decision has such a small effect that it isn't noticeable. When you are dealing with billions and trillions of dollars being spent without regard to whether it is encouraging products that are beneficial the effects can be extremely harmful and lead to a long drawn out recession and a substantial drop in our real productivity.

 

Back to the alien invasion, suppose we actually believed one was coming so we borrow a shit ton more money and hire everyone who is unemployed to build huge missiles, rockets, guns etc. In the short term, a lot more people would be working and would have more income. Good for them. Our GDP would rise because more things were being created. Then what? We find out the aliens were fake, we pack all the missiles and guns away in an underground bunker and everyone who was employed building the things now need new jobs and in addition to that, we have a huge pile of debt that has to be paid back. Is your standard of living better? Do you have any more luxuries in your life because of those missiles and guns in a bunker somewhere? No. You probably have fewer luxuries overall because you now have to pay a larger percentage of your income to pay off the debt.

 

If all those workers who built the missiles were building something that improved your life, you could have purchased those goods instead of the missile you paid for. Maybe a better computer or new tv. A comfy sofa. Whatever it was, I am sure that you would agree almost any product is better than a missile that will never be used. The missile is only useful when you actually intend to use it or if it is effectively used as a deterrent. Even then, you are sacrificing some other luxury you could have purchased in exchange for the protection. So while an alien invasion might make the numbers look pretty for a time, in the long run it doesn't actually improve your standard of living.

    

It is scary that the people in our government think that it doesn't matter what money is spent on. That simply spending is going to somehow magically make everything wonderful for us. Government spending is inefficient enough as it is, when the people controlling where that spending goes believe that it doesn't matter and treat government spending so cavalierly, it is downright scary.

 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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Useful economic activity is useful. Two years later we find out that we were sold the proverbial bill of goods will not modify the fact.

 

The great state of Connecticut benefits well from building hardware needed to fight the Soviet Union.

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Useful economic activity is useful. Two years later we find out that we were sold the proverbial bill of goods will not modify the fact.

 

The great state of Connecticut benefits well from building hardware needed to fight the Soviet Union.

 

 

And if that economic activity was never really useful, it is never useful. Now even if it isn't useful, certain people can benefit. In the case of the cold war a strong argument can be made that it was useful because it prevented the Soviets from taking us over or nuking us. That doesn't change the fact that the labor and money spent on weaponry could have been spent on something else.

 

For example, suppose everyone involved in making weapons for the military built yachts instead. The price of yachts would go way down because of the high supply, so more people would be able to purchase a yacht. So you basically have a choice of purchasing a yacht (or any other luxury but lets stick with yacht to keep things simple) Or having a nuclear missile. Now if the threat is real and the Soviets are going to kill you the choice is clear, go for the missile because a yacht doesn't do you much good if you are dead. Even after the threat has passed, the decision to build the missile is still a net positive because it kept you alive and it is better to be alive with no yacht than dead with a yacht.

 

But what if the Soviets didn't actually exist? Or had no intention of actually attacking us or doing anything else we consider bad? Then would it make sense to build nukes to deter them? Of course not. If there is no real threat, passing up on the yacht in order to buy protection is senseless. Sometimes it might make sense to sacrifice your potential standard of living in favor of security, but that doesn't mean you aren't making a sacrifice and if you spend a significant portion of your wealth on things that are protecting you from threats that don't exist you will be poorer in the very real sense that you will have fewer luxuries than you might otherwise have had. Whenever we spend money on these types of things, whether it is military, infrastructure etc. we have to decide whether the potential gain is worth the cost both in dollars and opportunity cost. The keynesians believe that real wealth is created regardless of what type of work is done even if it is recognizable as not being useful from the beginning. 

 

 

If, if a white man puts his arm around me voluntarily, that's brotherhood. But if you - if you hold a gun on him and make him embrace me and pretend to be friendly or brotherly toward me, then that's not brotherhood, that's hypocrisy.- Malcolm X


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Right.

 

I am not a huge fan of the idea that wealth derives from one specific economic theory or another but on some level, we do need something.

 

Still, when work is being done and products are getting to customers, there is a certain benefit to everyone. Sure, you can make the point that your taxes would be lower if we did not build submarines but if you want to go to the grocery store you kind of depend on there being grocery stores. Grocery stores depend on employed people who get hungry once in a while.

 

Had we tanked the defense industry at the end of the cold war, it would not have been a just CT thing. It would have been an every state with a defense contractor thing.

 

What I dislike about the Keynesians though is the view that the economy is some sort of gigantic machine with millions of knobs which may be usefully twiddled with. That may provide some short term gain for the knob fiddlers but it is not like the real work that drives the economy in general.

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What happened during WWII

What happened during WWII was because of the fear of losing the war, people were willing to work their ass off for very little money. Also the rich were willing to lend and have their taxes raised to pay for the war, have their businesses taken over as well. If you look at Vietnam and the 'war on terror', they've dragged on too long and became a drain on the economy.

In the world of today, people expect a handout from the government. The government doesn't get anything back in return for all the spending. The rich move their money out of the country if we try to raise taxes on them.

People's basic nature is too be lazy and greedy. Only fear can get people to change, so maybe an alien invitation would work if the war didn't last too long.

 

Also, isn't that kind of what Bush/Chenney did with the threats of WMDs, like a mysterious alien invasion? And the later we find out there were none? The spending initially helped the economy, but now we're paying the piper.

 

“Religion is regarded by the common people as true, by the wise as false, and by the rulers as useful.” Seneca


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Beyond Saving wrote: In

Beyond Saving wrote:
In other words, our government could simply decree that everyone in the country has a billion dollars. Yay, we are all billionaires, we don't need to work anymore because we can buy whatever we want. Everyone quits their jobs and retires because we are all rich. Are you hungry yet? The farmers all retired too, they are billionaires. Well the farmer isn't going to work for a few thousand a year. If you want to encourage him to work, you would have to pay a lot more. The result of simply declaring everyone a billionaire, would be rapid inflation and since you can't eat money and money in and of itself does not improve your standard of living, you have not actually improved anything.

Correction: government gives a $billion to every person in the country, inflation promptly snaps the neck of the world's economy. Strange consequences emerge which even I can not explain. One consequence I can explain is that much of the world converts to an even less ideal system of bartering because the American dollar is worthless, and currency is likely broken beyond repair for a few decades. Confidence in legal tender will take even longer to repair. Gold skyrockets as demand for it as a semicurrency/bartering tool goes into the stratosphere, and deflates temporarily when everyone realizes their metallic jewelry is the only means to support themselves. Indeed, nothing is improved, but at least farmers end up with lots of gold jewelry and ingots they don't really need.

 

I sense I've gone towards the pedantic, and my response is beyond the scope of your post, but anyways...

 

“A meritocratic society is one in which inequalities of wealth and social position solely reflect the unequal distribution of merit or skills amongst human beings, or are based upon factors beyond human control, for example luck or chance. Such a society is socially just because individuals are judged not by their gender, the colour of their skin or their religion, but according to their talents and willingness to work, or on what Martin Luther King called 'the content of their character'. By extension, social equality is unjust because it treats unequal individuals equally.” "Political Ideologies" by Andrew Heywood (2003)