31 Oct 2012

## One More Attempt to Understand Aliens vs. Hurricanes

I am completely unsatisfied with the responses in the comments of my previous post. Let’s try this again. I’m going to use numbers. Please answer me with respect to the numerical examples provided. If you want to step outside my thought experiment and tell me why it’s unfair, missing the point, etc. etc., that’s fine, but let’s all get settled on what the answer is, in the numerical thought experiment below.

SCENARIO A: The United States has 8% unemployment and 1000 units of capital. Astronomers report that Martians are en route with an invasion force. The government spends \$350 billion to create 350 surface-to-flying-saucer laser turrets. There is no crowding out; it just so happens that the 350 turrets can be created purely from idle resources. Unemployment drops to 2.5%. In April 2013, the astronomers say, “April Fools!” and we dump the useless 350 turrets into the ocean. So all we have in terms of physical wealth is the original 1000 units of capital. But we now have full employment and actual GDP is at potential GDP; the recession is over.

SCENARIO B: The United States has 8% unemployment and 1000 units of capital. A hurricane smashes the Eastern coast and causes \$350 billion of damage, reducing the U.S. down to 650 units of capital, but fortunately no human is physically injured. The government spends \$350 billion to replace the destroyed 350 units of capital. There is no crowding out; it just so happens that the 350 units of capital can be created purely from idle resources. Unemployment drops to 2.5%. In April 2013, the reconstruction is complete. Our physical wealth has been restored to the original 1000 units of capital. But we now have full employment and actual GDP is at potential GDP; the recession is over.

SCENARIO C: The United States has 8% unemployment and 1000 units of capital. Mitt Romney becomes president and hires Bob Murphy as his advisor, because of the Austrian views “sweeping the GOP.” The Murphy plan foolishly chases that saucy minx, the confidence fairy, for 8 straight years to no avail, and the country stays mired in recession the whole time.

Now: Does anyone want to tell me that it would make sense for a person to say Scenario A is much better than Scenario C, but that Scenario B is clearly inferior to Scenario C?

#### 31 Responses to “One More Attempt to Understand Aliens vs. Hurricanes”

1. Arthur Krolman says:

I don’t accept your premise about “capital can be created purely from idle resources” at least in non-fairytale land. Who did those resources belong to? How is it anyone else’s business whether they should keep them “idle” or not? As I tried to make clear in my “completely unsatisfactory” previous post, I don’t believe in idle resources belonging to government to dispose of how they wish. Sorry teacher, that’s the best I can do as far as “lets try this again’. P.S. I think the scientists’ April Fools joke would suffice as an excellent excuse to disband NASA along with Sesame Street.

• Dan says:
• Gene Callahan says:

Arthur, when doing a “thought experiment” you either play by the rules of the experiment, or you are acting like someone who comes to “chess night” at the community center and keeps insisting that chess is a stupid sport and tries to play checkers with the pieces whenever he gets a game.

• Dan says:

LOL

• Arthur Krolman says:

Okay, okay…but Bob did say “if you want to step outside my thought experiment”. That’s like saying: we’re having chess night, but if you want to play checkers, that’s ok. Regardless, I get the hint. I’ll be quiet now.

• Joseph Fetz says:

Gene Callahan throws a strike. I love it.

• Bob Murphy says:

Shh Arthur I’m laying a trap for the Keynesians. You’re blowing my cover. It’s like the townspeople hear rumblings from inside the Trojan Horse, “I say we just take ’em! None of this sneaking around!!”

• The Existential Christian says:

Wait, capital created purely from idle resources requires too much suspension of disbelief, but laser turrets to fight flying saucers doesn’t raise a flag?

• Matt Tanous says:

How does “Mitt Romney becomes president and hires Bob Murphy as his advisor, because of the Austrian views “sweeping the GOP.”” not raise a flag?

2. Gene Callahan says:

No, anyone who prefers A to C should prefer B to C as well.

• Bob Murphy says:

OK great. I agree.

Now do you further agree that A is the kind of thing Krugman had in mind with his “shocking” TV discussion?

• Major_Freedom says:

“RUH ROH!!!” – Scooby Doo

• Gene Callahan says:

Yes, it was.

• marris says:

I agree with Bob and Gene that anyone who prefers A to C should also prefer B to C.

Also, I claim that there is a alternate scenario (A*) floating around in which the turrets are not dumped. I’ve seen most Keynesian articles which espouse A muddle toward A* at the end, usually with some kind of literary flourish.

3. Maurizio says:

These are very insightful mental experiments!

4. skylien says:

In April 2013 all three scenarios are completely the same again. In A the surface-to-saucer laser turret industry becomes bankrupt and you are back to 8% unemployment, so you are back in recession not out of it.
In B the parts of the economy that replaced the capital base also is out of business, and you are back to 8% unemployment like in case C, so again you are back in recession.

The main difference is that there was less unemployment but this didn’t come at no cost. There is a lot of leisure forgone that could be enjoyed in C. In scenario C it is only a problem if wages are really that sticky that the existing productive work to do could not be spread more even on all people, so that income and leisure are actually received by people in the proportions they actually value most.

So if you deny any “invisible hand” the world is doomed and can never reach real genuine full employment again. If that was the case plus sticky wages then I would prefer C and pay unemployment benefits that are well below wage rates, so they at least can enjoy leisure instead of letting them do useless stuff…

And another difference is of course that in B you have a lower average living standard until the capital base is completely replaced.

• skylien says:

C > A > B;

Another advantage of C is that maybe in 2014 people find a real use for those idle recourses that were wasted for useless lasers and thrown into the sea in scenario A.

• Arthur Krolman says:

I agree. Let people decide what to do with their idle resources in their own sweet time is choice one if we’re forced to choose.

P.S. Bob, I don’t like thought experiments that casually involve violating property rights — even when we’re trying to jump out of wooden horses and surprise Keynesians. What next, a new thought experiment about the best way to slaughter redheads to boost consumer morale?

• Dan says:

I think you don’t like this thought experiment because you don’t understand the problems it creates for Keynesians.

• Arthur Krolman says:

I’m trying to encourage our team to step back and look at the forest Dan. If Keynesians were convinced that aggregate demand would be improved with televised slaughtering of redheads, they would consider the merits of such a scheme. Would you have a polite debate with such monsters? No? Then why debate monsters like Krugman who openly promote slaughtering of private property rights? Though experiments like this are unwittingly dignifying Keynesian premises I fear.

• Bharat says:

Haha, Arthur, Dr. Murphy does things like this all the time. He is just analyzing it from their own point of view, so it’s silly to make it a completely libertarian analysis when that’s not the objective.

• Tel says:

You will never convince a Keynesian that property rights are valuable by attempting ethical arguments.

You might be able to undermine their position by showing it is inefficient.

Personally, I’m not totally opposed to the ethical arguments, but since they have no effect, what to do after that?

• Ken B says:

Not according to the specifications, which include that the country stays in recession for 8 years. Part of the hypothetical is that people do not find a good enough use to end the unemployment whilst Bob hunts.

• Bob Murphy says:

In April 2013 all three scenarios are completely the same again. In A the surface-to-saucer laser turret industry becomes bankrupt and you are back to 8% unemployment, so you are back in recession not out of it.

Not according to Krugman. The US didn’t go back into depression after World War II. We had been jumpstarted out of depression by the massive fiscal stimulus.

• skylien says:

Yes, that is what they say. And that is what I don’t understand. How do I ask, how does it actually work?

For me it has absolutely nothing to do with government stimulus, there is no causal plausible explanation that really seem to make sense…

5. Bob Rooney says:

“Now: Does anyone want to tell me that it would make sense for a person to say Scenario A is much better than Scenario C, but that Scenario B is clearly inferior to Scenario C?”

Yes, because of Arrow’s Theorem:
http://consultingbyrpm.com/blog/2012/10/notes-on-arrows-impossibility-theorem.html

6. Ken B says:

Question Bob. In A and B are you assuming the resources go back to being purely idle, or remain gainfully employed? I assume the latter if this is a trap for Keynesians, but I just want to be clear.

• Bob Murphy says:

The latter.

• Ken B says:

What can be the loss during those 8 years in case C? can it be as much as 350B? Likely not. After all, that’s what they can produce by hypothesis in A and B. It seems like it has to be the best use in A and B or they wouldn’t have been idle.
So in C we would have 8 years idlesness but get to keep the 350B. We can if we choose use it to provide welfare to those workers and still have some left over, plus they have their labor left over. To greatly prefer A to C you must value very highly the employment of the labor just to be employed rather than usefully employed. (You might for example enjoy watching chain gangs.) Given that preference it would be odd to greatly prefer C to B.

7. Chris H says:

Hmmm, going with this thought experiment I think there might be a way to make C superior to B even if one considers A superior to C. Here’s what I’m thinking.

Suppose that in scenario B the destroyed units of capital can have their monetary value replaced, but not their sentimental value. For instance say a fishing boat was lost and is replaced by a vessel equally good at it’s job as the first vessel, but which the crew has less emotional attachment to. Now suppose that this loss of sentimental value is considered greater than the gain in GDP and full employment. In such a circumstance a Keynesian might say B is inferior to C even as A is superior to C. Indeed the trauma of loss itself, even if all the capital lost had little to no sentimental value might still be considered greater than the gains to employment and GDP.

The arguments about the temporary nature of these gains and the lost value of leisure are still valid, but the narrower point about necessarily preferring natural disaster or war, even if it kills no one, can be worked around.

8. Tel says:

SCENARIO A:
* Government claims extra powers because we are at war, and our very survival is at stake.
* Government commandeers additional resources from society on the basis that this is absolutely necessary.
* Some of those resources get spent on the task at hand, while the rest go into pocket stuffing because even in the worst of scenarios, you can still find someone willing to feather their own nest.
* Eventually the gig is up and no doubt someone asks for their money back.
* Government never gives up their wartime special powers because if they ever did that, those people pointing out how they got ripped off would start to get uppity… but government needs to beat the crap out of quite a lot of protesters before they get the hint.

SCENARIO B:
* Government claims extra powers because it is an emergency.
* Government commandeers additional resources from society on the basis that this is absolutely necessary.
* Some of those resources get spent on the task at hand, while the rest go into pocket stuffing because even in the worst of scenarios, you can still find someone willing to feather their own nest.
* Eventually the rebuilding is complete, but at least no one can complain it was all a scam.
* Government never gives up their emergency special powers because they quickly move to something new.

SCENARIO C:
* Government doesn’t claim extra powers because, hey Romney wouldn’t do that would he?
* Government fails to snatch as much as it possibly can from the citizens.
* The pocket stuffing game gets lean because there just isn’t enough fat to go round, but a few manage to do OK (hey this is government after all).
* Eventually the clock runs out by which time a whole new crop of “great ideas” people are ready to push aside the pathetic do-nothing Romney/Murphy team.

Obviously, B is better than A is better than C.