21 Nov 2011

Kling for Kids

Economics, Shameless Self-Promotion 104 Comments

I am really hustling in my entrepreneurial capacities lately, so I haven’t had the luxury of commenting on the back-and-forth Arnold Kling is having with his critics on his view of economic “recalculation.” Specifically, the argument is whether we add anything to our discussion of recessions and recoveries if we talk about the need to reallocate workers (and other resources) to different sectors, versus framing everything in an Aggregate Demand / Aggregate Supply framework.

At some point I may chime in on the specific disagreements, but for now let me use Kling as a springboard for the present post. He wrote:

As you may know, I have been recording chalk-talks for my high school economics class. I did macro first, and now I am working on micro (I am now quite a few lectures ahead of where we are currently in the course). After I did the basic factor demand story (wage equals marginal revenue product), I thought it might be ok to introduce PSST [Patterns of Sustainable Specialization and Trade]. The result is here. Think of it as an introduction to PSST for students who have gone through the rituals of introductory macro and just barely learned basic supply and demand in micro.

Anyway, what occurred to me while trying to do my talk was that there may be some intellectual swindling going on with AS and AD analysis. More below.

I started with the textbook model. There, the only problem in the economy is that the wage rate is too high. Thus, you get an excess supply of labor. Given the too-high wage, there is no excess supply in the goods market (firms are producing where marginal revenue equals marginal cost). But I have two issues with the textbook model.

1. It is nearly an abuse of language to call the problem a shortfall of aggregate demand. That makes it sound as if the problem is a lack of demand for goods, when in fact the problem is an above-market-clearing wage.

2. My verdict is that the textbook model does not hold up empirically. There are too many recessions on record where you do not see the real wage rising as the model predicts. This has nothing to do with whether you like PSST or not. As an empirical matter, if you are trying to explain every change in unemployment on the basis of a reverse movement in real wages, you cannot do it.

In my talk, I addressed these issues by drawing a goods market with excess supply using the standard picture…

OK, for one thing, unless Kling’s got these kids as students, I think this is probably way too hard for high schoolers.

If I may, here’s how I tried to tell what is the Austrian story (without calling it that), in my textbook aimed at junior high kids:

========================================

The Causes of Mass Unemployment

The single most significant aspect of the business cycle—in both political and human terms—is the mass unemployment that occurs during the bust or recession phase. Yet ironically—and perversely—the very government policies that most people recommend to “help” the plight of the unemployed actually prolong the recession and sow the seeds for the next unsustainable boom.

The artificial prosperity of the boom period was fueled by the government’s interventions pushing down the interest rate. The “false” price of borrowing credit led entrepreneurs to borrow more than there was true savings available. Remember from Lesson 12 that the pure market interest rate serves to ration the available savings among all the competing borrowers, and that the process isn’t simply about money. There are real, physical resources involved as well. If workers and materials are devoted to building a new car factory that will take two years to complete, then those resources are “locked up” in the project for at least two years until they begin to “bear fruit” in the form of new cars.

During the artificial boom, too many of these long-term projects are started, because the false interest rate is too permissive. But the mere printing up of new money hasn’t actually created more workers or other resources to go around. It’s still the case that if work begins on a new car factory, it absorbs resources that could have been used elsewhere. If, during the early stages of the boom, too many projects are started, then it is physically impossible for them all to reach completion. The sooner the central bank chickens out and lets interest rates return to their appropriate level, the better, because then the entrepreneurs catch their mistakes sooner and stop digging themselves deeper into their mistaken projects.

When the boom collapses and turns into a bust, there is a period of confusion where everyone in the market needs to reevaluate his or her situation, in light of the shocking realization that the plans made during the boom were mistaken—and in some cases, very badly mistaken. If we step back and think about the adjustment process, during which the economy returns to a sustainable growth path, it must go something like this: Those resources that were drawn into unprofitable projects or sectors during the boom period, now need to be redirected elsewhere. And that requirement includes labor resources, meaning that people who happen to be working at extremely unprofitable businesses (but which seemed profitable during the boom) need to lose their jobs once the bust occurs.

For example, if six months’ work has been done on a new car factory that will take another 18 months to complete, but for which (in light of the new information) there won’t be enough car buyers to support its operations, then obviously the correct thing to do is to stop building it immediately. From the point of view of the whole economy, it’s not “compassionate” for the government to, say, use tax dollars to subsidize the company that owns the factory, in order to prevent the construction workers from being laid off, and to “create” jobs in the factory making cars that no one wants to buy No, the correct thing to do is allow those workers and other resources (which can be salvaged) to flow into other projects or sectors that are actually profitable.

The problem with this “tough love” recommendation, of course, is that it takes time for the economy to rebalance itself after an artificial boom, especially if the boom has lasted years. Consequently, there could be a period of months or even longer for some of the displaced workers, where they can’t find a productive niche in the streamlined economy, in the wake of the bust. Rather than waiting for the “laissez-faire medicine” to work, many people would far prefer the government to step in and provide immediate relief.

Yet even here, it’s important to realize the actual function that a prolonged spell of large-scale unemployment serves. Remember the critical flaw with outright central planning, i.e., pure socialism: Without market prices and the profit-and-loss test, the central planner wouldn’t know how to make efficient use of the resources at his disposal. In the modern United States, for example, a would-be central planner would have no idea how many people “should” be brain surgeons, or construction workers, or school teachers, and let alone how many people within each of these broad totals should live in each particular city in the United States.

By the very same token, then, no person or even group of experts could possibly know the “right” way for the economy to adjust, in light of a collapsing boom. For example, consider the construction workers who built houses in Las Vegas during the great housing boom from the early 2000s through 2006. Clearly there were too many workers (and other resources such as lumber and nails) going into the Las Vegas housing industry during these years, and the “correct” thing to do would be for them to do something else with their labor time.

But what, specifically? Each construction worker in the Las Vegas area was a unique individual, with different skills, interests, and personal circumstances. The “correct” response of one worker may have been to get on a bus to Texas to take a job at an oil refinery. The correct response of another may have been to go back to graduate school and finish his Ph.D. in literature. And perhaps the correct response of a third worker would have been to take a huge pay cut flipping burgers in Vegas, waiting for the housing market to recover, because his wife held a great job as a personal assistant to a successful Vegas attorney.

Now that we have some idea of the scope of the problem, we see that the pure market economy is the best way to solve it. After the boom collapses, many workers realize that they can’t earn the same paychecks they had become accustomed to. That’s what it means to say the prosperity of the boom years was illusory—people really weren’t as rich as they thought. What happens then is that laid off workers begin looking for work, hoping to find a new job that offers a salary and other features comparable to their old job, and which doesn’t require them to move or (at least) to move to an area they detest.

It takes time for people to search for new positions. The longer an unemployed person searches, the better his new job is likely to be. However, the drawback of longer searches is that the unemployed person isn’t contributing anything directly to the economic system; he must live off of the output of others during his search.

Notice that all of these issues are given their due weight in the pure market economy. Each displaced worker is allowed the freedom to choose his or her new job, based on all the factors relevant to the individual; no government official decides where the worker “ought to go now.” At the same time, individuals bear the brunt of their delay in finding new work, because there are no government unemployment programs that (to put it bluntly) pay people not to find a new job.

As we have stressed throughout this book, economic analysis per se cannot decide which government policies are good and which are bad. But it can shed light on the results of particular policies, so that citizens and government officials can make informed decisions. In the case of mass unemployment, the issue is not simply a matter of cruelty versus compassion. By establishing a system of unemployment compensation, for example, the government reduces the earnings of employed workers, and makes it less attractive for profitable businesses to expand at the onset of the recession.

The government doesn’t create resources or wealth, it simply redistributes them. If there were no formal government scheme for unemployment insurance, individuals and businesses would still have the option of using their larger paychecks and profits (which would no longer be subject to contributions to the unemployment fund) to build up their savings in order to provide a cushion during times of economic hardship. Perhaps this free market cushion would in practice be smaller than the duration of unemployment checks established by the government, but again, what economics shows us is that there is a tradeoff involved. It is not a fact of engineering or chemistry to say how long unemployment relief should last; that is clearly an economic question.

For example, it would clearly be wasteful if the government established a rule saying that anyone laid off from his job could collect checks equal to 95% of his former salary, for up to 20 years, until he finds a new job. Even the most zealous advocates for the unemployed would admit that that hypothetical policy would be disastrous, and would in fact hurt workers (all things considered). But once we admit that there can be such a thing as unemployment benefits that are too “generous,” our knowledge of basic economics makes it hard to justify the government’s decision to provide benefits in excess of what would have occurred in a voluntary pure-market economy.

Finally, if the government were really interested in helping the unemployed, it would stop using the central bank to artificially suppress interest rates. If the government and public could resist the urge to meddle during a recession, and simply let the correct market prices redirect workers and resources to sustainable niches, there would be no need for further dislocations. Unfortunately, in practice the central bank often “cures” a recession simply by fueling the upswing of another unsustainable boom.

104 Responses to “Kling for Kids”

  1. Gene Callahan says:

    “The government doesn’t create resources or wealth, it simply redistributes them.”

    Come, come. Government has a redistributive function, but when a government project created the Internet, I do think it created a bit of wealth. You may think the same funds in private hands would have created even more wealth, or that taxation is morally unjustified anyway, or that this was a chance event that rarely happens, but this continuing contention amongst libertarians that the government *cannot* create wealth is absurd.

    • Bob Murphy says:

      Gene wrote:

      You may think the same funds in private hands would have created even more wealth…

      But that would give the game away, Gene. Let’s say the government taxes a billion dollars and then builds a TV with it. Yep, that’s wealth all right–the government could even sell the TV into the open market. But surely it hasn’t “created wealth” in the process.

      If you want to challenge my claim about the government not being able to create wealth, OK, but not with the above caveat.

      • Gene Callahan says:

        But, Bob, any wealth created by private entrepreneurs *also* might have created even more wealth in someone else’s hands. Either you hold the very non-Austrian view that markets are perfect optimizers all the time, or, by this stringent criterion, you can’t ever say anyone creates wealth!

        I propose the simple formula: $[project is worth at the end] – $[spent] = $[wealth created]. Then, obviously, we will say, “Yes, some government projects create wealth.” If we take our formula as: $[most wealth that could have been created with resources] – $[wealth actually created with resources], then I’m afraid we’d have to say, “Gee, we don’t know if anyone ever creates wealth, since we never, ever know the first term in our equation.”

      • Gene Callahan says:

        And Bob, you carefully chose your TV example so that it is an obvious losing proposition. I agree, to, that that is not wealth creation — see my formula above. But how about the case where the government taxes $10 million and creates the $10 billion Internet?

        • JFF says:

          But the government didn’t “create the internet.”

          • skylien says:

            JFF, I think this is not the actual question.

          • MamMoTh says:

            Wasn’t Al Gore in government when he invented it?

        • Bob Murphy says:

          Gene, we’re getting mixed up because of an issue of opportunity costs. Clearly if the government taxes $x and creates something with a market value less than $x, we’re on the same page. That’s what I thought you originally meant with your clause about “you might say the private sector could’ve done more.”

          Now I realize that you’re saying, the gov’t taxes $x, creates $y where y is bigger than x, but the private sector would’ve created $z where z is bigger than y.

          Is that what you’re saying? (Warning: Don’t type in greater than or less than signs; it messes up the html. I learned the hard way.)

          • Gene Callahan says:

            Yes, that’s right, Bob.

          • Gene Callahan says:

            “Gene, we’re getting mixed up because of an issue of opportunity costs. ”

            Well, one of us was. :-)

            And my point is, we don’t know the opportunity cost of any private investment, either, so unless we just do accounting profit to gauge wealth created, we will never know if anything creates wealth!

            • Anonymous says:

              And my point is, we don’t know the opportunity cost of any private investment, either,

              That’s false. We know that the alternatives were lower on the individual’s value scale.

              • scineram says:

                And alternatives to high speed rails in California were lower on Obama’s value scale. So?

        • Silas Barta says:

          I agree that creation of the internet produced a lot of wealth on net, but you can’t credit the whole benefit to the government — much (most?) of the value of the internet comes from the content non-governmental agencies put on it. Had they not done that, the internet would have ended up like any other public infrastructure boondoggle.

          • Gene Callahan says:

            No, I don’t. But I bet if you looked at what they DID invest and cut them a percentage, it would be a pretty good investment!

    • Anonymous says:

      Someone hasn’t learned Bastiat’s lesson of understanding the diifferent between what is seen versus what is not seen.

      You’re wrong. One can say that government cannot CREATE wealth, because government is based on violence.

      The same reason why a petty thief cannot create wealth, is the same reason thieves calling themselves government cannot create wealth.

      This continuous contention amongst anti-libertarians that the government *can* create wealth is what is absurd.

      Wealth can only be created by voluntary production and exchange. Violence can only redistribute wealth.

      • Gene Callahan says:

        Anonymous, I’m going to continue discussing this with Bob, with whom rational discussion is possible.

        • Anonymous says:

          In other words, you are unable to have a rational discussion unless the interlocutor agrees with your flawed assertions?

          Goodie.

          • Richie says:

            A rational discussion to Gene, Anon, is calling someone with whom he disagrees mentally retarded.

            • Gene Callahan says:

              You’re lying, Richie, and that’s an ugly thing. I’ve been disagreeing with bob on this blog for a long time, and I’ve never called him mentally retarded. I call Major Freedom that because he continually acts like a moron, not because I disagree with him.

      • Watoosh says:

        Head, meet wall.

        You do realize that Gene Callahan is a (former?) adjunct scholar with the Mises Institute who has written tons of articles for LewRockwell.com, The Freeman, Reason and other libertarian publications, who has a Master’s degree in economics, and who just happens to not be a libertarian anymore? And here you are, anonymously explaining Bastiat’s wickle economics lesson* to him like he’s a child, because apparently all one needs to know about economics is that violence is always, always baaad, unless used to defend property.

        *Actually, you didn’t even do that. You gave a bunch of definitions to prove your case – violence cannot create wealth (why not? Because it can’t!), gov’t is violence, ergo gov’t cannot create wealth. That is not what Bastiat was saying at all, but who cares as long as it makes for a good name to drop for your wall of libertarian arguments.

        • Watoosh says:

          I meant assertions, not definitions.

        • Gene Callahan says:

          And Watoosh, even when I *was* a libertarian, I knew this assertion was false. I was interviewed on radio once by someone who asked me, “So, can we say that government spending is ALWAYS wasteful compared to private spending?”

          I answered, “No, of course not. That would imply a framework in which entrepreneurs never miss any opportunities and government officials never got lucky and hit upon one. What we can say is the odds are heavily in favor of private investment.”

          Which is still pretty much what I think now!

          • Anonymous says:

            And Watoosh, even when I *was* a libertarian, I knew this assertion was false. I was interviewed on radio once by someone who asked me, “So, can we say that government spending is ALWAYS wasteful compared to private spending?”

            You could not have known that argument to be false. That argument is true. And yes, government spending is ALWAYS sub-optimal compared to private spending. Peaceful exchange is always supra-optimal to violent confiscation!

            I answered, “No, of course not. That would imply a framework in which entrepreneurs never miss any opportunities and government officials never got lucky and hit upon one.

            It’s not about “opportunities” or “luck.” It is about being forcefully deprived of property and only focusing on what the looter did with the property.

            What we can say is the odds are heavily in favor of private investment.”

            It’s not about odds. Violence against the individual through taxation reduces their wealth to whatever degree the government gains wealth. It’s a direct wealth transfer.

            Just because you subjectively value what the government does with that money has higher than what you suspected might have happened in some counter-factual world by the private individual, that doesn’t mean you can say that net wealth was created. All you can say is that net wealth creation is no greater than zero, since theft does not create net wealth, and probably net negative, since whatever the government does is necessarily lower valued by the individual because they were forcefully as opposed to voluntarily deprived of their property.

            • Gene Callahan says:

              Ha ha, anonymous. Bob was agreeing with my assertions? No, rational discussion isn’t possible with someone who strings together a bunch of propaganda slogans and presents them as an argument.

              • Anonymous says:

                Ha ha, anonymous. Bob was agreeing with my assertions?

                Where did I say that?

                Haha, rational discussion isn’t possible with someone who strings together a bunch of propaganda slogans like taxation is voluntary, and that governments can create wealth, and presents them as an argument.

              • Gene Callahan says:

                You said I could only have discussion with people who agree with my assertions.

            • Gene Callahan says:

              Naked assertion. Naked assertion. Naked assertion.

              There, was that a good comeback, anonymous?

              • Anonymous says:

                Naked assertion. Naked assertion. Naked assertion.

                There, was that a good comeback, Mr. Callahan?

          • skylien says:

            Gene, may I ask you a question?

            Might it be possible, that you didn’t really change many of the core believes that you had while you *were* a libertarian? And you mainly started to speak out against libertarianism because you saw it going in a direction you think is wrong (You saw oversimplifications, too extreme in certain points, dogmatism etc..)?

            Or did you really change a lot?

            • Gene Callahan says:

              No, I don’t think I changed much at all. I just realized one or two arguments that had previously seemed sound to me were wrong.

              • skylien says:

                Thanks. Do you care to say what are those, or do you have a post or something about them on your blog?

              • Gene Callahan says:

                You must have read them, skylien. Probably when I saw the flaw in my “taxation is theft” position, that was the final straw. But I’ve been blogging this for two years.

              • skylien says:

                Gene,

                Yes I have an idea of what annoys you, but the point if every Dollar taxed is theft or if a Government can or cannot create wealth at all are no knock out questions for libertarianism. At least any Minarchist has to agree on these points with you. Yet still most people would call them libertarian, and so would they call themselves.

                An example of a knock out question would be (at least for me): What is your first best monetary system?
                1: Should it be a government controlled cartelized banking system with a central bank as monopoly issuer of a fiat currency, in which a small panel of “independent” technocrats steers interest and employment rates?

                Or

                2: Should the interest rate as well as the medium(s) of exchange be decided solely by the private market, with equal rules for all banks and firms, and a clear constitutional restraint on government that they cannot set up institutions and laws nationalizing this again?

                3: Or something else..

                If you really didn’t change that much, then I guess your answer should be the same on this question today as it was 5 years ago. Although I’ve read quite a few of your statements already I have absolutely no idea how you would answer the question above. Or would you vote for Ron Paul or Obama etc.. I have no idea.

              • skylien says:

                Just for clarification: “Nationalizeing” is not the right word. I merely mean taking control of it like nowadays, not that they nationalize every bank…

        • Anonymous says:

          You do realize that Gene Callahan is a (former?) adjunct scholar with the Mises Institute who has written tons of articles for LewRockwell.com, The Freeman, Reason and other libertarian publications, who has a Master’s degree in economics, and who just happens to not be a libertarian anymore? And here you are, anonymously explaining Bastiat’s wickle economics lesson* to him like he’s a child, because apparently all one needs to know about economics is that violence is always, always baaad, unless used to defend property.

          That’s one giant appeal to authority fallacy.

          *Actually, you didn’t even do that. You gave a bunch of definitions to prove your case – violence cannot create wealth (why not? Because it can’t!), gov’t is violence, ergo gov’t cannot create wealth. That is not what Bastiat was saying at all, but who cares as long as it makes for a good name to drop for your wall of libertarian arguments.

          When the individual is deprived of his property by force, as he is through government, that means whatever is gained by government, or those people the government gives the stolen wealth to, is exactly matched by an equal and opposite reduction in wealth from the victim. There is no net gain in wealth.

          As for what Bastiat was saying, clearly I made the point that he spoke of the importance of identifying what is not seen no less than what is seen. Prof. Murphy pointed this out when he emphasized to Mr. Callahan the concept of opportunity costs. Mr. Callahan was completely ignoring it. He just said “Look people, the government had a hand in creating the internet, so let’s ignore what is not seen (the property that was taken, i.e. REDUCED, from the people who were taxed, and only focus on the immediate moment and only those directly involved.”

          • Gene Callahan says:

            “That’s one giant appeal to authority fallacy.”

            Anonymous, you don’t even know what the appeal to authority fallacy means, as evident by this response.

            • Anonymous says:

              Anonymous, you don’t even know what the appeal to authority fallacy means, as evident by this response.

              Mr. Callahan, you don’t know what appeal to authority means, as is evident by YOUR response.

              Watoosh just appealed to authority when he spoke about your qualifications as if they serve as a premise for the veracity of your incorrect assertions.

              • Gene Callahan says:

                Yes, he appealed to authority. That was a *valid* appeal to authority. You’re not even aware that not every appeal to authority is a fallacy, are you? You’ve just taken it on authority that it is!
                http://www.fallacyfiles.org/authorit.html

              • Gene Callahan says:

                I love the way trolls like anonymous just disappear from a line of discussion whenever they are conclusively proven wrong.

              • Dan says:

                I’m not trying to antagonize you but how would you classify a valid appeal to authority? I’m just curious what your position would be on that.

              • Gene Callahan says:

                Well, if we want to know something about quantum physics, we ask a quantum physicist.

                In any case, watoosh wasn’t even really doing *any* sort of appeal to authority: he was just saying “This guy has been around; give him credit for knowing these basic points.”

              • Dan says:

                Ok, then I would agree with all of that.

      • Rob says:

        Applying Gene’s formulae : $[project is worth at the end] – $[spent] = $[wealth created] to a govt project then even assuming “wealth created” can be measured then it has to be compared with the utility lost of $[spent], which is likely forced taxation.

        Assuming people do not voluntarily pay this tax then no matter how great the project is deemed to be worth it will never exceed the value of the taxation given up – otherwise the project would have been funded privately.

        • MamMoTh says:

          Assuming people do not voluntarily pay this tax

          wrong assumption

          otherwise the project would have been funded privately.

          wrong conclusion

        • Gene Callahan says:

          “Assuming people do not voluntarily pay this tax then no matter how great the project is deemed to be worth it will never exceed the value of the taxation given up – otherwise the project would have been funded privately.”

          Say what?! So entrepreneurs NEVER miss any opportunities and people NEVER think they got value for their tax dollars.

          • Rob says:

            So entrepreneurs NEVER miss any opportunities: That is a hard to measure but even assuming they do I do not believe the government will be able to identify and deliver uponthese opportunities.

            people NEVER think they got value for their tax dollars: They do – but surely if they thought about it they would realize that anything they get via taxes they could also get better via the market – except perhaps the ability to coerce their fellow consumers to pay for things that they would not voluntarily pay for.

            .

            • Gene Callahan says:

              “That is a hard to measure but even assuming they do I do not believe the government will be able to identify and deliver uponthese opportunities.”

              Not usually, I grant you. But NEVER?

              “but surely if they thought about it they would realize that anything they get via taxes they could also get better via the market ”

              This is called “begging the question,” Rob: your conclusion (“governments can’t create wealth”) is here being pumped into one of your premises. The whole thing we are doing here *IS* thinking about it, and wondering if, on occasion, people might get something better through taxes. You can’t settle that debate by saying “If you think about it, they can’t!”

              • Rob says:

                Given the choice between having a sum of money taken as taxes by the government or keeping the money to spend himself an individual is surely better with the latter.

                It the government takes the money anyway it is theoretically possible that this individual may conclude that he got more value out of the way the government spent the money than he would have done had he been able to carry out his own spending plans.

                So if that is all you are saying then I agree with you. If you are proposing this as a justification of taxation however then I disagree.

          • Bharat says:

            I think libertarians have a point, but it should be clarified. The government cannot create wealth ex ante. If the government coercively taxes money from someone to create something, ex ante the government gains wealth and the taxpayer loses wealth. Ex post we can all postulate as we wish, but nothing is conclusive. So if you’re speaking ex post about the subject, sure, perhaps there’s a possibility of the government being able to create wealth, but it is certainly unverifiable

            • Rob says:

              Nicely put !

            • Anonymous says:

              You are half right, Bharat.

              The very fact that with taxation people are forcefully deprived of their money, it means that whatever the government does, is subjectively valued as less than what the individual would have done themselves with their money.

              Suppose I stole $100 from you, and with that money, I used it in such a way that, incredibly, is something you would have done yourself, for example suppose I bought a list of food from the grocery store that exactly matches what you would have bought, and exactly matches what store you would have bought it at, and exactly matches the time that you would have bought it at.

              The only way that this could happen would be if I exactly mimicked your every action, which means, and this is the kicker, only if I am actually you will my theft of your money result in an at least a non-negative outcome for you.

              For if I slip up in just the tiniest degree, say I bought food at the store you wouldn’t have went to, or suppose that I get one brand wrong, or suppose that I bought the food one minute later or earlier, heck, even one second later or earlier, then that one single detail that I get wrong, will necessarily generate a net loss to you compared to what you would have done yourself voluntarily, which is by the nature of human action your highest valued goal(s) at the time.

              Even the reality of me getting everything exactly right, but you not having the $100 on your person by virtue of me doing everything “for you”, that will be suboptimal to you because you would have kept that money yourself if you had the choice.

              So contrary to Mr. Callahan, it is actually impossible for any thief to generate net wealth for the individual taxpayer, let alone 200,000,000 million of them or however many taxpayers there are.

              • MamMoTh says:

                Bollocks.

                Comparing taxes to theft is only a proof of your mental problems, nothing else.

                Comparing government spending to the spending of a thief misses the most important aspect of government spending: coordination in a large scale.

              • Anonymous says:

                Bollocks.

                Denying taxes are theft is only a proof of your mental problems, nothing else.

                Denying comparing government spending to the spending of a thief misses the most important aspect of government spending: coordination in a large scale on the basis of individual choice.

                Large scale coordination does not require a single conscious entity overseeing the whole thing. You’re ignoring economic calculation and the market process.

              • MamMoTh says:

                Bollocks.

                Your schizophrenia is another proof of your psychological problems MF.

                And your stupid comparison of government spending with a thief spending misses the whole point of coordination in a large scale.

                I thought you would get at least that.

              • Anonymous says:

                Bollocks.

                And your stupid denial of government spending with a thief spending misses the whole point of coordination in a large scale.

                Coordination on a large scale is possible through the price system, which is based on peace, not violence, and certainly not a monopoly counterfeiter and spender of fiat money.

                It’s a myth to say that coordination somehow goes from no state needed, to state needed, without saying exactly when small turns into large. You’re missing the middle step because you know it’s full of crap.

            • Gene Callahan says:

              “If the government coercively taxes money from someone to create something, ex ante the government gains wealth and the taxpayer loses wealth.”

              Bharat, I don’t think there are many people who believe the *transfer* creates wealth. It’s a matter of what is done with the money after the transfer that might, at times, create wealth.

              • Bharat says:

                If I referred to it as an exchange would you agree that it does create wealth?

                When two people peacefully exchange, ex ante both are better off than before, hence we can say they are wealthier.

                When one person violently forces another to exchange with him, ex ante one is better off and one is worse off.

                I am not disagreeing with you that government can create wealth ex post; I’m saying it’s pointless to talk about because it’s not provable. When libertarians say government does not create wealth, they are correct if they are referring to it ex ante. Some may not be, so you are correct in that sense of your criticism, but nothing is conclusive ex post. That is all I am saying.

              • Gene Callahan says:

                “I’m saying it’s pointless to talk about because it’s not provable.”

                Well, as I note above, either you can use simple accounting profit, or you can not talk about the market creating wealth ex post either!

                If libertarians are simply arguing that taxes, *by themselves*, never create wealth, then they are arguing with no one, because no one says they do. Anyone who contends it does is always talking *ex post*.

                But it is nice, Bharat, that, while you disagree with me, you at least understand what is being discussed!

              • Bharat says:

                That is a good point, an ex ante argument would be an argument with no one (at least generally).

            • Gene Callahan says:

              “The very fact that with taxation people are forcefully deprived of their money, it means that whatever the government does, is subjectively valued as less than what the individual would have done themselves with their money.”

              No, it certainly does not. All it means is that ex ante the person with the money preferred some other use.

              That doesn’t mean someone else doesn’t value what the government does with the money even more, nor does it even mean that the person himself might not realize after the fact that he really *did* prefer the new highway to the new blender.

              And, anyway, most people pay their taxes voluntarily.

              • Anonymous says:

                No, it certainly does not. All it means is that ex ante the person with the money preferred some other use.

                Which means there is at least a net zero gain.

                That doesn’t mean someone else doesn’t value what the government does with the money even more

                Unbelievable. You just puked on one of the most basic precepts in all of economics, namely, the fact that comparing intersubjective utility is a fallacy.

                No wonder you believe wealth CAN be created by government. One of your premises is believing the silly notion that Mr. Callahan values $100 “by more than” Mr. Anonymous values that $100!

                And, anyway, most people pay their taxes voluntarily.

                No, taxation is involuntary, or else it would not be collected on the threat of violence. That some people have convinced themselves that they are paying them willingly, does not mean they are voluntary. I mean, if taxes were voluntary, then why is there 100% correlation between required taxes and paid taxes, rather than paid taxes being above required taxes?

                Now, before you embarrass yourself and say that market prices people pay are not more than the market price, and that since people don’t pay a higher price than is asked, it means it is allegedly silly to expect that voluntarism requires paying more than what is asked, then you’d again be puking on one of the most basic of economic precepts, namely, that market prices are not always directly set by the sellers. In many cases, the sellers accept the highest price that is offered, even though they are willing to accept a lower price.

                With taxation, people don’t pay anything more than what is asked by government. You don’t see people jumping over each other paying more taxes than others.

                nor does it even mean that the person himself might not realize after the fact that he really *did* prefer the new highway to the new blender.

                Absurdity number three. You’re on a roll!

                EVEN IF someone changes their mind, and end up wanting the blender more than the road, or the road more than the blender, you’re still ignoring the fact that they were deprived of their money and the opportunity to voluntarily pay for the blender rather than the road, or the road rather than the blender. That in itself is a loss in utility.

                If I stole $100 from you, and you could have spent the money on medicine, but I spend your money on bullets, then it doesn’t matter if you changed your mind and conclude that you value the bullets over the medicine. You’re still out $100, and the opportunity to spend $100 on bullets yourself.

                If your nonsense were true, then you would be denying one of the most fundamental needs and desires of humans to have, which is control over their own lives.

                By your crap worldview, every individual would value having zero financial control more than financial control, and would be willing to have someone exactly match their desires in what to spend their money on, where, and when.

                In other words, you’re seeking to be a child, who has everything spent for him and every decision made for him, by some authority figure, that results in him getting what he wants, without having to make the conscious decision and action.

                You’re not talking about adults, you’re talking about babies. You’re a mental baby. Now it makes sense.

              • Gene Callahan says:

                “You just puked on one of the most basic precepts in all of economics, namely, the fact that comparing intersubjective utility is a fallacy.”

                a) It is not a fallacy. Some economists claim it cannot be done, but because, say, swimming to the moon can’t be done does not mean it is a fallacy. I now understand your confusion about the “appeal to authority fallacy” — you don’t even know what fallacy means.

                b) The whole issue of “wealth creation” is one of welfare. If you want to claim we can’t gauge overall welfare, fine, but then you can’t say, out of the other side of your mouth, “But all government actions necessarily reduce it!”

                I very explicitly pointed out the difficulty presented to us here by the problem of intersubjective utility comparisons in my very first comment. Now, why don’t you let those five or six of us here who are rationally discussing this in a friendly fashion get on with it, while you go wank off in some other web discussion?

              • Anonymous says:

                It is not a fallacy. Some economists claim it cannot be done, but because, say, swimming to the moon can’t be done does not mean it is a fallacy. I now understand your confusion about the “appeal to authority fallacy” — you don’t even know what fallacy means.

                False. Inter-subjective utility comparisons is a fallacy, because there is no common denominator that can allow you to say that this person values $100 by more than the other. It’s a figment of your imagination. That’s why economists had to invent things called “utils” when reality couldn’t suffice.

                The whole issue of “wealth creation” is one of welfare. If you want to claim we can’t gauge overall welfare, fine, but then you can’t say, out of the other side of your mouth, “But all government actions necessarily reduce it!”

                I can say that, because when I say all government actions necessarily reduce welfare, I am referring to INDIVIDUAL welfare, not “general” welfare. The attacks against individuals is what is important here.

                I very explicitly pointed out the difficulty presented to us here by the problem of intersubjective utility comparisons in my very first comment. Now, why don’t you let those five or six of us here who are rationally discussing this in a friendly fashion get on with it, while you go wank off in some other web discussion?

                You are immature and you are an idiot.

            • MamMoTh says:

              there’s a possibility of the government being able to create wealth, but it is certainly unverifiable

              Then so if Murphy’s assertion that the government is not able to create wealth.

              Poor kids. Do they need to be brainwashed with this?

              • Bharat says:

                I am speaking of ex post at certain points and ex ante at others. If you read my post again, you may understand.

                Also, comparing taxes with theft is certainly justifiable. Are you trying to say taxes are voluntary?

              • MamMoTh says:

                ex ante does not matter.

                and taxes are not theft.

              • Bharat says:

                I was hoping to actually discuss this with you, but apparently that is futile. Go ahead and make another “smart” comeback devoid of any substance.

              • Gene Callahan says:

                Just so, Mammoth. One can either take a simple accounting view of profit, that ignores opportunity cost — in which case some government activities will certainly be seen to create wealth — or one can remain silent. What is dishonest is to play the “all values are subjective” card when it suits you, but hold it back when it doesn’t.

              • MamMoTh says:

                Discuss what?

                I am willing to agree that there’s a possibility of the government being able to create wealth, but it is certainly unverifiable.

                But this implies that saying the government is not able to create wealth is not true.

              • Gene Callahan says:

                Comparing taxes with theft is nonsense propaganda, Bharat. But let us grant you that: The statement “Theft never creates wealth” is NOT the same as “Thieves never create wealth.”

                Because thieves do things besides steal, and governments do things besides tax. Nobody but nobody that I’m aware of says, “Ah, just tax people a lot (in kind) and then burn their shit — that’ll create wealth.”

                No, anyway who argues that governments *can* do so means by what they do with the money after they get it by taxing, like providing courts and laws and things like that. So either you permit ex post comparisons, or throw your hands up and say “We can’t tell.” But equivocating between ex ante and ex post won’t do at all.

              • Bharat says:

                MMT, I actually misunderstood this part of your post:

                “Then so if Murphy’s assertion that the government is not able to create wealth.”

                And then you went on to talk about brainwashing, so I assumed you were speaking to me and stating something in my argument was wrong.

                Mr. Callahan, I have conceded to your point further above. I am reading up on your posts about the illegitimacy of stating that taxes are theft, and it seems like you are only finding errors in the libertarian argument (e.g. the circular reasoning). Is there any reasoning you have against actually adopting a libertarian frame of property ownership?

              • MamMoTh says:

                Bharat, ok, my mistake for writing quickly.

              • Anonymous says:

                Comparing taxes with theft is nonsense propaganda, Bharat.

                Denying taxes is theft is nonsense propaganda, Mr. Callahan.

            • Gene Callahan says:

              “Ex post we can all postulate as we wish, but nothing is conclusive. So if you’re speaking ex post about the subject, sure, perhaps there’s a possibility of the government being able to create wealth, but it is certainly unverifiable”

              Right. Mammoth has gotten this right: since *everyone else* (besides libertarians) is talking ex post when discussing this topic, then given what you have just written, you have conceded my point: it is *wrong* to say government actions can never create wealth, since, as you just wrote, the right thing to say is “We don’t know.”

              • Anonymous says:

                Right. Mammoth has gotten this right: since *everyone else* (besides libertarians) is talking ex post when discussing this topic, then given what you have just written, you have conceded my point: it is *wrong* to say government actions can never create wealth, since, as you just wrote, the right thing to say is “We don’t know.”

                False. We can say we know, on the basis that taxation is violent and necessarily substitutes goods of lower value in place of goods of higher value. Value is destroyed through violence. Just because the government might end up with something that is greater than non-existence, like missiles and tanks and spy equipment, that doesn’t mean they are CREATING wealth.

                It is no more creating of wealth here than it would be in me stealing your money and building a pyramid made of moldy cheese.

                The right thing to do in this case is not say I don’t know. It’s to say I know, and here’s why.

              • MamMoTh says:

                Take your pills MF

  2. Evan says:

    Blind squirrels *can* find nuts

  3. John G. says:

    Doc, thank you for writing your textbook. I bought it and read it and loved it. I am a 49 year old U. of Chicago MBA who has ‘Gone Galt’ back in early ’09 (after making money in precious metals over ’04-’06 and shorting the S&P 500 over ’07-’08; I am now solely long precious metals). I am trying to backfill the empty and incorrect spaces in my understanding of economics, and your textbook was a real help.

    The next step will be to get my high school son to read your textbook, so that he can unlearn what he is being taught in his A.P. economics class (Krugman textbook; ugh!).

    And, thanks for this blog, sir!

  4. John G. says:

    Gene, to me, the clearest example that government spending is wasteful (in aggregate) compared to private spending is the post-WWII experience.

    In 1946, government spending fell by 63% (from 39% of GNP to 15% of GNP). Yet, GNP only fell 1%, as personal consumption expenditures (PCEs) moved up 15% and gross private domestic investment (GPDI) moved up 175%.

    In 1947, government spending fell by 7%. Yet, GNP grew 11%, as PCEs moved up 13% and GPDI moved up 6%.

    Over the two year period (’45 to ’47), annual government spending fell from $83B to $29B, yet GNP increased from $215B to $236B. Thus, PCEs and GDI moved up by much more than the cuts in government spending. The spending on PCEs and GDI was much more ‘stimulative’/additive than the government outlays (negative multiplier).

    Government spending is often large-scale carpool/bus lanes with no demand (here in San Diego), TSA and DHS agents adding transaction friction and dampening demand (for air travel), and bombs and missiles on the heads of innocent Muslims. Sure, private investors have failures, too. But, they are typically of much smaller scale, less costly, and much more quickly liquidated, seems to me.

    I feel very comfortable that the Ron Paul approach — slash departments, regulations, and defense spending — would do wonders for our economy today, as it did in the post-war period.

    • Gene Callahan says:

      “Gene, to me, the clearest example that government spending is wasteful (in aggregate) compared to private spending is the post-WWII experience.”

      That current government spending is wasteful on aggregate (something I don’t doubt!) says nothing about whether or not the government can EVER create wealth.

    • Gene Callahan says:

      “government spending is wasteful (in aggregate) ”

      John, I don’t doubt that (today) it is. But that is not the question on the table here!

    • Gene Callahan says:

      Sorry for the double post! I got an error on the first one, and I assumed it didn’t go through.

      • John G. says:

        (1) If you agree that in aggregate, government ‘investment’ is less efficient than private investment and
        (2) A priori, you cannot tell whether a particular government ‘investment’ will prove fruitful or not –>
        then, from an efficiency perspective, you should not make any investments via government, seems to me, Gene, and should instead fund all potential projects via the private sector.

        My company periodically went to Lawrence Livermore labs to get briefed on potentially lucrative investment ideas/research projects that LLL could not fund. We need more of that and less of Solyndra and the like, seems to me.

        • Gene Callahan says:

          “then, from an efficiency perspective, you should not make any investments via government, seems to me, Gene, and should instead fund all potential projects via the private sector.”

          John, all I am arguing here is that Bob’s statement (the government never creates wealth) is false. I am not *advocating* anything (not with my argument here).

  5. Bharat says:

    Good job filing this under Shameless Self-Promotion this time :D

  6. Gee says:

    Gene, will you please explain your choice of the Internet as an example for the government creating wealth? Here’s what I don’t get: at what point did government create wealth?

    “when a government project created the Internet, I do think it created a bit of wealth.”

    The wealth created via the Internet happened almost entirely in the free market, after the government supposedly “created” it. Do you dispute this? If not, are you saying that all wealth created by the Internet after the government’s initial contribution is considered government-created wealth?

    Or… Are you really saying that possibly the Internet wouldn’t exist absent the government’s tiny role in creating it? Surely, this is one of those things that is impossible to prove or disprove. However, we know by looking at the history of the Internet that it’s not as if the idea of creating networks was a totally new idea at the time. What specific quality about the government do you think makes it more capable of creating the Internet vs if those same resources were under private control? Or do just think it was a happy coincidence?

    • Gene Callahan says:

      Come on, I’m just guessing that the small initial investment — which, by the way, funded the Internet for its first 20 years or so! — DARPA not only strung together the initial network, but developed TCP/IP, and the web was developed at CERN, and much of the rest of the development took place inside universities, so that your statement that it happened “almost entirely in the free market” is very inacccurate! — has been more than justified by the wealth it created.

      But maybe I’m wrong. There are plenty of other examples: say, the creation of the common law in England. We only need a single example to falsify a “never” statement.

      • Gee says:

        “We only need a single example to falsify a “never” statement.”

        Well, that’s what I’m wondering: have we actually found even a single example?

        I’m still confused, because you quoted me out of context and then failed to answer my question:

        “The wealth created via the Internet happened almost entirely in the free market”

        I was referring to wealth specifically, not the “development” of the network.

        Even if the government laid the foundation, did it generate the wealth? Or did Google, Twitter, Facebook, Amazon, etc. generate most of the wealth? Is this one of those questions that’s impossible to answer?

        • Gene Callahan says:

          “I was referring to wealth specifically, not the “development” of the network.”

          So, you think that the network had nothing to do with the wealth created by using the network? That’s really, really silly.

          • Gee says:

            So, now I see that there is nothing particularly special about your choice of the Internet as proof that government creates wealth. By the same logic that you chose the internet, for any industry in which the government has a significant role in the economy (via fiat) you would say, “you think the [insert infrastructure project here] had nothing to do with the wealth created by [insert business here]? That’s really, really silly.”

            Of course, you are right, but in a way that is wholly uninteresting.

            • Gene Callahan says:

              Well, it’s interesting in the kind of way that makes Bob’s statement false!

        • Gene Callahan says:

          And I gave you another example: English Common Law. There are, I’m sure, hundreds we can easily come up with.

        • MamMoTh says:

          Maybe we should define wealth to start with.

          Did Google, Twitter, Facebook, Amazon, generate wealth?

          How much wealth was destroyed with the dotcom bust?

          In any case none of it would have happened when it happened if the government hadn’t created the foundations for the internet as we now know it.

          Which is wealth in my book.

          • Dan says:

            Twitter and Facebook were created after the dotcom bust and google didn’t go public until 2004. Also all four of those companies have created an enormous amount of wealth. I’m not sure how you could define wealth in a way that would exclude these companies from being considered to have created wealth without the word completely losing its common meaning.

  7. Bob Roddis says:

    Of course, if the government hadn’t started the Fed in 1913 which funded the First World Bloodfest which led to the depression followed by the Second World Bloodfest and the takeover of 1/3 of the planet by the bloodthirsty commies, the internet probably would have been invented by private enterprise in 1937.

    Further, we can thank the government for subsidizing the vast armies of Marxist commie “sociology” professors who add so much “wealth” to our society.

    http://english.ucdavis.edu/people/directory/natbrown

    • MamMoTh says:

      That’s impossible. Al Gore was born in 1948.

      • Joseph Fetz says:

        The protégé.

    • Gene Callahan says:

      Bob, if someone was saying “every single thing the government does creates wealth,” you’d have a good point.

      • Bob Roddis says:

        For the record, I would never claim that government cannnot create wealth. For all I know, we wouldn’t have satellite radio if the Nazis hadn’t created the first rockets in order to bomb England. Unlikely but possible.

  8. Peter Marwood says:

    Certainly an interesting discussion to read, plenty of points to considered and read up on.

    I’m a bit suspect of the government internet value though. Yes, out of DARPA, TCIP/IP was developed and you could assume that lead to wealth creation, but TCP/IP also destroyed wealth when the DOD declared it THE standard. That government decision forced the other protocols developed privately to be abandoned and we don’t know if they may have been a better solution (the market never got the chance to decide).

    Not really convienced either on the coordinated large scale spending (which reads like central planning) arguement. Sure, if a company invests billions on wafer fab and to me I get the benefit of only needing to pay a couple of bucks to reap the benefit of those wafers, but I’m not required to make the purchase up front. Whereas government spending works the other way (and I have no choice in purchasing or not).

  9. DL says:

    Let me add something to this very interesting discussion on whether the Government can creat wealth or not.

    1) The Bloomberg company developed a system of communication to provide financial information in real time in the 80′s. It’s still the standard in the financial industry. What the famous “Bloomberg terminal” does is to connect a network of computers which send data back and forth (this includes private messages, just like email).

    Maybe I am wrong on this, and if so I would appreciate someone with specific technical knowledge on thiese issues to correct me. But as far as I know, that is a kind of Internet which was developed privately in the 80′s, isn’t it?

    I believe other similar projects were researched in the 60′s and 70′s but were never started because of regulation constrains. So the Internet would have been created privately, but Government stopped it (another nice example of ce qu’on voit et ce qu’on ne voit pas). There is an Austrian doctoral dissertation on this, if I’m not mistaken.

    2) I think there are two perspectives to consider here: the small scale one and the big scale one.

    In the small scale I think Mr. Callahan is absolutely right: if you claim Government does not create wealth because a private entrepreneur would have made better use of the same resources, then no entrepreneur ever creates wealth, since there is potentially always another better use for the same resources. And then you either measure the wealth created by pure accounting (in which case Government will sometimes create wealth, even if by mere chance), or you admit you cannot ever say whether anybody ever creates wealth or not.

    Then in the big scale, I would say Mr. Callahan is wrong because I believe (but this is a conjecture) that if we analyzed every single case of Government action, we would find that, as in the case of the Internet, the overall effect of Government action is negative in terms of wealth creation (as in the example of the Internet having been created by the Government, but the private enteprise actually having been able to do it earlier were it not for Government constrains).

    I am not 100% sure of everything I just wrote, so if anybody has better information I would appreciate his sharing it.

  10. DL says:

    How do I subscribe to the replies to my comment? I would like to see what people reply, but I am the most absent-minded person ever and I would forget about this in 5 minutes if no one reminds me…

  11. Gene Callahan says:

    “So the Internet would have been created privately, but Government stopped it…”

    A) Bloomberg was not a “sort of Internet” — it was a closed, proprietary network.

    B) The government stopped what? How? With what actions? I think you’re just making this up as you go along.

  12. DL says:

    No, I am not making it up, You should read better: there is a Ph.D thesis on that: http://mises.org/journals/scholar/neri.pdf

    (that is just a working paper from 2007, the final dissertation must have been completed by now)

    From the conclusions in that paper: “At the time of the birth of the Internet, many institutional restrictions were in place. At the same time science and society were ready to explore the concept of a computing network. Only the US Federal Government, allowing itself a freedom not permitted to actors of the private sector, was able to set the first milestone: ARPANET”

    Bloomberg is a closed network… which could have easily been expanded into an open one. What is the difference? If you put a Bloomberg terminal on every house, as you have a pc, how is that different from the Internet?