Friday, November 21, 2008

Consumers don't drive the economy, stupid [update 2]

bernanke-helicopter THERE'S A POPULAR misconception that, once exploded, explains why so called stimulus packages don't do what they're supposed to do. It's so popular that even luminaries like National Business Review editor Nevil Gibson subscribe to it: "Consumer spending," says Gibson in last week's NBR, "drives more than two-thirds of the overall ... economy," implying all that needs to be done to fix things is put more money in the hands of consumers and then everything will be sweet. What we need is a helicopter full of cash spraying its golden shower over the suburbs.

Simple, not to say simplistic.

As I say, Gibson's not the only one who's fallen prey to this popular yet facile misconception: you can read the same mistaken notion at Forbes magazine, Reuters, L'Express and Bloomberg, to name just a few, and closer to home at 3 News, TVNZ News, Radio NZ News, the Dom Post, the Otago Daily Times and Businessday --- all of them saying it's consumer spending that drives two-thirds of the economy, and consumer spending that must be supported. Urgently! What we need is shopping subsidies, and we need then now!

As I say, it's conventional wisdom. You can read it almost everywhere. Such a pity then that it's dead wrong. Insanely and destructively wrong.

FIRST OF ALL, as Bernard Darnton pointed out yesterday, that money put into the hands of consumers has to come from somewhere, else we're just committing another Broken Window Fallacy. As Brian Riedl points out in the Wall Street Journal,

Government stimulus bills are based on the idea that feeding new money into the economy will increase demand, and thus production. But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

And who knows what that first group (or groups) would have done with it? They sure as hell wouldn't have thrown it out of a helicopter.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged.
Yet Congress will soon borrow $300 billion from one group of people and then give it to another group of people and tell us we're all wealthier for it.
Lawmakers commit this fallacy repeatedly...

Yes, and so do newsmen and economists. You'll hear some of the latter group whining about something they call 'the paradox of thrift' -- they'll say that in times of recession people need to spend, spend, spend and if they don't -- if they save instead (the horror!) -- then everything will collapse in a heap. But this is just dumb. Saving doesn't mean "not spending." It simply means deciding to spend later, rather than spending it all now. And in the meantime, unless that money just goes into a hole in the ground, the money that people save goes into investment, which means it goes to producers (or would do if it weren't diluted by printing money to produce stimulus packages) which brings me to my second point.

YOU SEE, CONSUMERS don't drive more than two-thirds of the economy at all. This is just horse shit on a stick. Though it's hidden in the arithmetic of the GDP, by far the majority of spending and income payments in the economy are not consumer spending but productive spending, i.e., spending for the purpose of making sales. In other words, for the stuff that really makes the economy go round.

As George Reisman explains it, this productive expenditure constitutes "all the expenditures made by business firms in buying capital goods of all descriptions and in paying wages,"

"Capital goods include machinery, materials, components, supplies, lighting, heating, and advertising. In contrast to productive expenditure, consumption expenditure is expenditure not for the purpose of making subsequent sales, but for any other purpose. In the terminology of contemporary economics, consumption expenditure is described as final expenditure. Productive expenditure could be termed intermediate expenditure. Implicitly or explicitly, productive expenditure is always made for the purpose of earning sales revenues greater than itself, i.e., is made for the purpose of earning a profit."

And this figure is huge! It is

"an amount equal to the sum of all costs of goods sold in the economic system plus all of the expensed productive expenditures in the economic system. It is these costs which must be added to GDP to bring it up to a measure of the actual aggregate amount of spending for goods and services in the economic system... And because productive expenditure is the main form of spending, most spending in the economic system depends on saving. Even consumption expenditure depends on saving, inasmuch as saving is the basis of the payment of the wages out of which most consumption takes place."

Which means that it's not consumer spending that drives the economy at all: it's saving.

Just contemplate that for a moment.

So how can such an enormous figure be hidden in the arithmetic? Well, I blame Keynes. Essentially that GDP figure is his; when the GDP (or National Income figure) is totted up it counts profits, but it ignores completely the costs required to make those profits, i.e., it completely ignores productive expenditure, which by any rational measure is the spending that drives everything. In Reisman's words, that means that "Keynesian macroeconomics is literally playing with half a deck.

"It purports to be a study of the economic system as a whole, yet in ignoring productive expenditure it totally ignores most of the actual spending that takes place in the production of goods and services. It is an economics almost exclusively of consumer spending, not an economics of total spending in the production of goods and services."

And being an economics almost exclusively of consumer spending it sees "stimuli" only in consumer terms.

But once you realise where most of the deck of cards resides -- i.e., in productive spending -- you really do see what you're doing with consumer stimulus packages: you're taking real resources away from the behemoth that really does drive the economy, which is productive expenditure, and you're pissing it up against a wall.

That might be popular, but in the long run it's just flat-out dumb.

LINKS:

UPDATE 1:  If you would genuinely like to make sense of the wider discussion here, the clearest and most integrated pieces are these:

  • Bastiat: 'What is Seen and Not Seen.'
    "There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."
  • Bastiat: 'What is Money'
    "I cry out against money, just because everybody confounds it, as you did just now, with riches, and that this confusion is the cause of errors and calamities without number.
  • Rand: 'Egalitarianism & Inflation'
    "If I told you that the precondition of inflation is psycho-epistemological—that inflation is hidden under the perceptual illusions created by broken conceptual links—you would not understand me. That is what I propose to explain and to prove."  And she does!

UPDATE 2: Don Boudreaux's brilliant letter to the Washington Post has much wider relevance than just the proposed auto bailout [emphasis mine].  See if you can spot the Bastiat reference:

Dear Editor:
Martin Feldstein and George Will each offer excellent reasons for opposing a bailout of Detroit automakers (Opinion, Nov. 18). Here's another: resources given by government to these corporations must be taken from somewhere else. Government cannot conjure billions of dollars of resources out of thin air.

The number of different places from which these resources will be taken is large and spans a continent. So it's easy to overlook the fact that each of many productive firms from across the country will, as a result of this bailout, pay more for steel, machine tools, fuel, and other inputs they use in production. These other firms will contract their operations; they'll employ fewer workers; they'll produce less output.

The bailout might well save GM, Ford, and Chrysler. If so, politicians will celebrate it as "successful." But that success – which will be easy to see and capture on video tape – will likely really be an economic failure because of the resulting (if hard to see) contracted economic activity throughout the economy.

Sincerely,
Donald J. Boudreaux

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37 Comments:

Blogger Julian said...

Brilliant PC, this should be reproduced in every newspaper in the country. But instead we will just read the same wrong analysis from the same failed and discredited commentators. That is a real tragedy as well.

Julian

11/21/2008 08:23:00 am  
Anonymous phil sage (sagenz) said...

shame its not quite true. "Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. "

when the government turns on the printing presses they are creating new spending power. it is reduced by the impact of inflation which takes some of the value out of the hands of savers and into the hands of the lucky recipients of printing press largesse.

wealth is created by people collectively creating or valuing something more highly.

if the effect of that spending in the current environment is to keep the money out of the dead hand of banks busy reducing their exposure to money markets and to keep it cycling through the economy then its impact will be to add to wealth in the economy.

to the extent that they buy and consume more black hydrocarbons and more iron ore and coal the world has become wealthier because of the value of oil and cars that have been monetised rather than left as minerals in the ground.

inflation and inflation of the money supply have had the effect of increasing global wealth by enabling all that monetisation of raw materials.

to me your view is a very simplistic and repetitive classical economic view which has not been able to keep up with the modern world. The money that has been created has turned hydrocarbons in the ground, coal, iron ore, gravel, sand, lime cement into highly valuable buildings, cars, roads and consumer products.

without the consumer they would remain as not very highly valued unextracted minerals.

11/21/2008 09:27:00 am  
Anonymous phil sage (sagenz) said...

ats heart your attitude is the same miserable socialist zero sum redistributionist game. I just read your darnton post. "funds for this project would just have to be redistributed from elsewhere" give me a fucking break. When I build a house I am creating value from the constituent parts. That allows me to borrow more money on the basis of my newly created wealth and build another house without selling the first, thereby creating even more.

ah this is going to be sweet after all the abuse I have taken for backing the pragmatist key. :^)

Just another dirty redistributionist like helen you are peter. :^)

11/21/2008 09:34:00 am  
Blogger Berend de Boer said...

PC, I think you should shut down a little bit. This kind of knowledge hampers my bets against the stupids.

This is a time where money is to be made by betting against Keynes. Just this morning the DOW went below 7900, so my intrade bet had a 150% return :-)

So I suggest you keep quiet, and start trading!

11/21/2008 09:51:00 am  
Blogger Berend de Boer said...

For people who want to trade futures: the best places at the moment are S&P above X before end 2008. The futures on S&P abovee 750 are getting cheaper all the time, or in my case more expensive as I'm short, so you better hurry. We need more volume in these markets.

11/21/2008 09:53:00 am  
Blogger Jeff Perren said...

"all that needs to be done to fix things is put more money in the hands of consumers and then everything will be sweet"

That canard goes back to Hoover and his buddies. You'd think people would have learned that lesson once and for all since those on all points of the ideological compass agree his policies were a disaster.

Just one more dreary proof of the bromide that those who don't learn from history are doomed to repeat it.

11/21/2008 10:03:00 am  
Anonymous Ann said...

Jeff, learning from history would be a hell of a lot easier if people didn't keep changing it.

11/21/2008 10:07:00 am  
Blogger PC said...

Phil, you might have head the saying that it's better to keep your mouth shut and be thought a fool, then to open it and remove all doubt.

Did you think about that before you did?

Because you've just failed two of the most basic economic lessons.

First of all, you seem to think that lots of pretty coloured bits of paper constitute wealth. If that were true, then Zimbabwe would be the richest place on the planet. If you really believed that, and and of the rest of the rubbish you've just written, you'd be re-mortgaging your house to invest in Zimbabwe's exploding prosperity.

So why aren't you?

You'd be able to show us how much new spending power Robert Mugabe has created by turning on his printing presses and running them day and night? How much, Phil?

Perhaps you could tell us how much black hydrocarbons and iron ore and coal Mugabe has "monetised," how much global wealth he has increased -- or, more accurately, you could identify for yourself how many people he has impoverished, and how much real capital he has destroyed.

You see, it is not pretty little bits of coloured paper that has turned turned the planet's hydrocarbons, coal, iron ore, gravel, sand, lime cement into highly valuable buildings, cars, roads and consumer products - it was the work of entrepreneurs, using the resources and by means the capital that savers had made available by not consuming them: the very savers and entrepreneurs who are stolen from by monetary inflation.

There is no need to increase the money supply to reflect new wealth - there is no special quantity of money that is needed, just. All that's needed is sound money. A stable money supply backed by real value. Governments have shown beyond doubt they're incapable of doing that job.

The second lesson you fail is this. You say, "I just read your Darnton post: 'funds for this project would just have to be redistributed from elsewhere,' give me a fucking break."

Your argument is not with me, Phil, it's with reality. It's reality that you're pleading with, and the sight is not pretty.

You just cannot have your neighbour's cake and eat it too, no matter how much Keynesian gobbledegook to the contrary you might have already consumed. Reality simply does not allow it.

Might I suggest you avail yourself of the link supplied in the post above to the 'Broken Window Fallacy,' or to the online 'Economics in One Lesson.' These are lessons of which you are clearly in desperate need.

11/21/2008 10:15:00 am  
Blogger PC said...

Pleased to hear you're making money, Berend. I'm always happy to accept commission for my advice. :-)

11/21/2008 10:17:00 am  
Anonymous LGM said...

Phil

I've got a Harbour Bridge and a Sky Tower to sell you!

LGM

11/21/2008 10:57:00 am  
Blogger Sean said...

PC,

That was a sustained knock-out of an inept and unarmed opponent. Come on now, fight fair...;-)

11/21/2008 11:37:00 am  
Anonymous phil sage (sagenz) said...

pete - you miss the point again and i have no high expectation of getting it but here goes. zimbabwe is a chicken shit argument. the problems there have been caused by removal of productive farmers through violent means. The printing presses have been turned on to compensate for loss of productive wealth rather than to drive additional wealth creation. there is a substantial difference

make your argument better by rebutting this. and you cannot use immediate and sustained 10% inflation cos it does not work that way in the real world.
2 economies side by side. 1 backed by your gold standard with $100. and 1 backed with $100 of gold and $10 of newly printed pretty pieces of coloured paper. assume the first $100 has been fully invested in productive enterprise and that both economies have unextracted minerals. assume also that $100 of gdp is created and consumed each year from the money supply. $10 of wealth is created and saved. all the wealth is owned by a mean old man in each country who does not want to share

your economy can only invest $10 per year. Either in a new building for $10 or investing $10 in mining extraction and refinement. your mean old man is not interested in mining as he wants a new house for his wife and the mine will be noisy and against the rma.

my economy uses the extra $10 printed to invest in both a new building and mining in the first year. The all knowing Prime Minister John Key repeals the nasty RMA and ensures that the new mine is owned by everyone, including the mean old man's brother who lives in my economy.

There is no inflation in your economy. The mean old man gets to keep all the wealth.

There is inflation in my economy.

After that first year you have a new building owned by the mean old man and my economy has the building and the mine which is now producing an additional $100 of goods.

You can see where it leads. my economy grows faster than yours because it is creatng wealth faster. In ten years time when my increased wealth has allowed me to build tanks and finance an army my economy invades yours and repeals your rma. the world is happy and joyous.

and all the denizens at not pc bow their heads and say - yes we were talking crap when we said "Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. "

11/21/2008 08:59:00 pm  
Blogger Sturminator said...

Sorry Phil. All that your $10 has done is create the illusion of wealth, hence somebody has gone and invested their time and energy into something that the markeet didn't actually need. Those raw materials could have been quite happily left in the ground. Instead, new businesses have been created that will fail to earn their cost of capital.

Fake money can have this effect - funneling activity into the wrong activities. And to be more specific, holding interest rates below the market clearing rate will always inflate asset values. The ensuing investment in assets is not an advance but is a misallocation of resources that will have to be unwound at some point.

11/22/2008 01:46:00 am  
Anonymous Vancouver realtor said...

Perfect article! The problem is, you can repeat these words 25000x and still, when The Leader stands in front of the crowd and says by his thundering voice "don't worry citizens! We will save you! We will put billion trillions into the economy!" the crowd loves him.
This should be taught in elementary, than it would maybe help (but first you must have the teachers, mustn't you..)
Take care
Jay

11/22/2008 03:26:00 am  
Blogger Sean said...

Have to agree with the sturminator here: Best case scenerio Phil has discibed a classic bubble. Misallocation of resources. More likily the inflation will punish savers, encouraging concumption leading to a decrease in the capital stock (as insufficient savings are availiable to maintain it). Which is the opposite of growth for those keeping score at home.

11/22/2008 08:49:00 am  
Anonymous phil sage (sagenz) said...

sturm and sean. here is the point. my illusion of wealth has lasted long enough to develop the mine that petes gold standard has left in the ground. that is real wealth creation. not illusion.

and to cut the plaudits. every producer needs a consumer. thats economics 101. supply and demand. one does not exist without the other. but it is an awful long way from there to shopping subsidies. its the man and the woman of making a baby. you cant have one without the other.

and pete. in the long run everything is consumption expenditure. my machine might last 20 years but my productive company still consumes the machines productive capacity. that is the point of depreciation.

"Those raw materials could have been quite happily left in the ground." - precisely. where they would create no new wealth. "Instead, new businesses have been created that will fail to earn their cost of capital." - wrong. the capital for the mone cost me nothing cos I invented it, so its productive capacity is pure profit to the economy.

I am not arguing that any of petes arguments in the original article are 100% wrong, just 50% wrong. There are 2 sides to every story.

11/22/2008 11:24:00 am  
Anonymous phil sage (sagenz) said...

oh and the broken windows fallacy is true, but totally not applicable here. I am using the printed money for productive purposes, essentially to bring forward that expenditure, not to piss it against the wall

11/22/2008 11:26:00 am  
Blogger PC said...

Phil, there are so many errors implicit in your comments that it's almost impossible to know where to start, not least the ridiculous comments that Zimbabwe's printing presses "have been turned on to compensate for loss of productive wealth."

Do you ever read back what you write and feel embarrassed? Zimbabwe's printing presses have not been turned on to compensate for loss of productive wealth, but to buy off Mugabe's supporters with short-run "wealth" - the "wealth" that comes from holding lots of pretty coloured pieces of paper.

But only a dumb savage would fall prey to such stupidity, eh.

Fortunately, the Sturminator has already knocked the props out from under the crux of your primary error: that inflationism produces new wealth. It doesn't.

Instead, in the real world, it simply dilutes existing wealth, and diverts existing productive resources (i.e., existing labour and capital goods) into areas that the markets have already shown are unaffordable at present prices (because if there were profits to be made in your mine at present interest rates the market would have already started working it).

In other words, as Sturminator say, what your inflation has produced is not a real asset, but something akin to a useless pyramid. You've produced a malinvestment that will have to be liquidated once the days of easy credit are over -- and since the easy credit is unsustainable, as the examples of Zimbabwe, Weimar Germany and the like can tell us, you have to stop the easy credit at some stage, or else you end up with the crack-up boom we're almost about to experience.

Such malinvestments are the inevitable result of a boom created by inflationary credit, and to shake them out we need the correction we're having now -- a correction made more severe by the number of previous busts that were 'averted' by great gobs of easy credit that the dumb savages in charge of central banks figured would fix things in the short term.

Frankly, you've fallen prey to bad teaching; to the error pointed out by Hayek:

"The public at large have learned to understand, and I am afraid a whole generation of economists have been teaching, that government has the power in the short run by increasing the quantity of money rapidly to relieve all kinds of economic evils, especially to reduce unemployment. Unfortunately this is true so far as the short run is concerned. The fact is, that such expansions of the quantity of money which seems to have a short run beneficial effect, become in the long run the cause of a much greater unemployment. But what politician can possibly care about long run effects if in the short run he buys support?"

You'd think that with 'sustainability' being all in vogue that 'long run thinking' might have become somewhat more fashionable. But it's sadly apparent that it still hasn't.

By the way, if you mean the old man in your example to represent the so-called 'liquidity trap,' it simply shows how foolish such examples as these are. The so called 'liquidity trap,' i.e., people holding more of their cash than before, is a rational response to uncertainty and wildly fluctuating values (fluctuations and uncertainty caused and made worse by all the political meddling). And the result of people saving more of their cash is to build up the pool of real savings, which have been greatly diminished by all of the short-run credit inflation introduced by your Mr Greenspan, who after each of the busts over which he presided followed your prescription (of printing more pretty paper) to the letter -- a 'fix' for which we're all now paying.

In other words, the 'long-run' that his injections of inflationary credit was designed to put off has now arrived. With a vengeance.

11/22/2008 11:27:00 am  
Blogger Callum said...

To back up PC, I don't think Zimbabwe's inflation rate of 8,970,000,000,000,000,000,000,000% per year is merely to accommodate for the loss of wealth wrought by destroying Zimbabwe's farmers!

11/22/2008 12:07:00 pm  
Anonymous phil sage (sagenz) said...

pete. you still dont get it. zimbabwe is a useless example. i accept your definition of why because the difference is meaningless semantics. you have not yet rebutted why my bringing forward the investment that mean old man might make in year 2 but did not is a "misallocation of assets" that is simply falling prey to the limitations of your definitions. If you would make either investment on pure economic terms in year 1 my invention of money to enable both in year one is a brought forward lunch. not a free lunch but one i get to eat earlier. the spending power is created earlier.

the liquidity trap is a little bit of a meaningless distraction in terms of the point i am trying to make. another time perhaps on that one.

unless you can explain why i should wait to make 2 equally productive investments rather than have them both now you cannot rebut my argument. the rest is just ad hominem. (which i started to be fair but that was just taking the mickey).

11/22/2008 12:14:00 pm  
Anonymous phil sage (sagenz) said...

ok reading back that is a little garbled. reason for zim inflation. i agree with your definition.

liquidity trap is all about timing. i wanted to argue separately but it is relevant.

I want to use the creation of credit to bring forward the wealth creation. if you do it once it is your zero sum PC/helen redistributionist game.

If you keep using that fake credit to bring foward the creation of wealth all the way into the future you have managed to grow wealth and the real economy more quickly.

my assumption is that resources are essentially infinite, which for practical purposes they are. ( and on this site if you mention peak oil i will invoke godwins law)

the point, again, is to bring forward the wealth creation. follow that through people. you do not save every penny to buy your first house. you borrow from alan to start consuming the benefits of it earlier.

11/22/2008 12:33:00 pm  
Blogger PC said...

Phil, our comments crossed, and are still crossing.

I'll rebut your other blunders later unless somebody else gets to them first (so many, who has the time!) but let me do this one now:

"unless you can explain why i should wait to make 2 equally productive investments rather than have them both now ..."

Because, dear boy, there are only so many resources available NOW with which to develop these potential 'investments.'

The world is full of opportunities. But we can't exploit them all: There's only so much labour and so many existing capital goods available to exploit them all.

In other words, to use an agricultural analogy that's perfectly suited to this discussion -- there's only so much seed corn available to plant and make new crops. You can't plant every field -- even if there were enough seed corn there ain't enough other resources to nourish every field, so most would just die (that's malinvestment for you) -- and you wouldn't want to in any case, since there's no market for it all.

That's the case with your mine: you've withdrawn resources from other places to produce it (that's the broken window fallacy: you don't see what else might have been done with those resources), and you've produced something the market doesn't need or want yet -- or won't, once the inflationary boom has collapsed (just like all those overpriced starter homes pumped out in the US housing bubble that are still to be paid for).

Fact is, you can't magically exploit all the opportunities available to entrepreneurs simply by printing new money, or by tapping on a key and magically producing new credit.

All you do when you try is that you bid these existing resources away from one set of activities into another set of activities. The resources have to be drawn from somewhere -- either from existing labour, from existing capital goods, or from the stock of seed corn you've set aside to plant next year.

In reality, where your free lunch comes from is by eating your seed corn.

That's what the world has just done.

If you want to make sense of it all, the clearest and most integrated pieces are these:
Bastiat: 'What is Seen and Not Seen.'
"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."
Bastiat: 'What is Money'
"I cry out against money, just because everybody confounds it, as you did just now, with riches, and that this confusion is the cause of errors and calamities without number.
Rand: 'Egalitarianism & Inflation'
"If I told you that the precondition of inflation is psycho-epistemological—that inflation is hidden under the perceptual illusions created by broken conceptual links—you would not understand me. That is what I propose to explain and to prove."

11/22/2008 12:52:00 pm  
Anonymous phil sage (sagenz) said...

you talk of houses. what was a gehrey house right before it was commenced. a plan, trees, cement, gravel, silica sand, iron ore, coal. materials of some value to be sure but relatively worthless where they are. By building that house I have created wealth.

the housing stock created but unsold in the us still represents more wealth creation than leaving those constituent parts in the ground.

"You can't plant every field -- even if there were enough seed corn there ain't enough other resources to nourish every field, so most would just die (" - that is your paucity of vision. Part of my new mine is guano and my labour resource is those vast underemployed group of people in africa or gisborne. by bringing forward the extraction of guanao from the mine and using the newly created paper to pay these people we can nourish that extra seed corn. and we avoid inflation which is paying higher prices for the same set of goods by selling that corn to people who are bored with their gold standard diet of wheat.
we are talking about enabling the supply side with the creation of credit. so it is fair to assume my friends the consumers are there to demand these products with the newly created wages.
it is not a zero sum game helen.
hayek is referring to the zimbabwean situation where the created money is not used to bring forward investment in production.

I am certainly not denying the bubble that has taken place or the fact that in real life manufacturers have created that remain unsold. THat is real. But I am asserting that the creation of paper money has made genuine wealth creation much vaster than it otherwise would have been.

the paper bank loan creates that gehry house for me now rather than in 10 years time when i have saved enough.

the gold standard economy and the paper economy can equally malinvest. look at north korea as an example of an underinvesting economy and south korea as an example of the wealth creation brought forward by paper money. they started in the same place.

I reiterate. paper money allows the investment to be brought forward. that creates new wealth more quickly and this effect is not cancelled out in some socialist zero sum game

11/22/2008 07:25:00 pm  
Anonymous phil sage (sagenz) said...

you talk of houses. what was a gehrey house right before it was commenced. a plan, trees, cement, gravel, silica sand, iron ore, coal. materials of some value to be sure but relatively worthless where they are. By building that house I have created wealth.

the housing stock created but unsold in the us still represents more wealth creation than leaving those constituent parts in the ground.

"You can't plant every field -- even if there were enough seed corn there ain't enough other resources to nourish every field, so most would just die (" - that is your paucity of vision. Part of my new mine is guano and my labour resource is those vast underemployed group of people in africa or gisborne. by bringing forward the extraction of guanao from the mine and using the newly created paper to pay these people we can nourish that extra seed corn. and we avoid inflation which is paying higher prices for the same set of goods by selling that corn to people who are bored with their gold standard diet of wheat.
we are talking about enabling the supply side with the creation of credit. so it is fair to assume my friends the consumers are there to demand these products with the newly created wages.
it is not a zero sum game helen.
hayek is referring to the zimbabwean situation where the created money is not used to bring forward investment in production.

I am certainly not denying the bubble that has taken place or the fact that in real life manufacturers have created that remain unsold. THat is real. But I am asserting that the creation of paper money has made genuine wealth creation much vaster than it otherwise would have been.

the paper bank loan creates that gehry house for me now rather than in 10 years time when i have saved enough.

the gold standard economy and the paper economy can equally malinvest. look at north korea as an example of an underinvesting economy and south korea as an example of the wealth creation brought forward by paper money. they started in the same place.

I reiterate. paper money allows the investment to be brought forward. that creates new wealth more quickly and this effect is not cancelled out in some socialist zero sum game

11/22/2008 07:25:00 pm  
Blogger Elijah Lineberry said...

You have built houses out of 'iron ore' and 'coal'?!?! ...wtf?!?!

(I quite understand how you property developer chappies do not have two $10 notes to rub together)... but building a house out of iron ore..hmmmm...interesting story; I am sure the Judge at your bankruptcy hearing will be impressed Phil!

11/22/2008 07:40:00 pm  
Anonymous phil sage (sagenz) said...

elijah - some of the basic ingredients of steel. http://en.wikipedia.org/wiki/Steel

the coal provides energy and carbon source. I skipped the clay to provide bricks and we have timber but you might get the picture now

11/22/2008 08:29:00 pm  
Anonymous sagenz said...

and elijah - the silica sand is for the windows. to make those houses truly marvellous

11/22/2008 08:33:00 pm  
Anonymous phil sage (sagenz) said...

pete - this has been an interesting exchange. we are in total agreement that simply printing money to expand consumption by dropping money out of planes, breaking windows or creating zim dollars is destructive because it creates nothing.

But and that is a big but given politicians are involved, if the creation of credit is used to enable market demanded production to take place now rather than at some future point given credit constraints, then it can be beneficial. if the new credit is used to produce bridges to nowhere then it is equally pointless.

I am actually making a very narrow point to disprove all the zero sum redistributionist comments.

11/22/2008 09:40:00 pm  
Anonymous phil sage (sagenz) said...

and pete - just for you :)
Crisis factoid du jour, via Bloomberg:

Alan Greenspan can stop worrying about “irrational exuberance” in the U.S. stock market, 12 years after he warned investors that share prices were rising too fast. The S&P 500 fell below 744.38 today, its closing level on Dec. 5, 1996, the day then-Federal Reserve Chairman Greenspan used the phrase in a speech on “The Challenge of Central Banking in a Democratic Society.”

11/22/2008 09:47:00 pm  
Blogger Sturminator said...

Phil, you are still mistaking money for wealth.

The investment in that mine due to paper money uses up resources (capital and labour) that would have been applied to other activities, were it not for the money illusion.

It is disingenuous to refer to this missallocation as "some socialist zero sum game". The zero-sum concept refers to the purported lack of gains from trade and the division of labour. That is a sseparate concept from that we are referring to here, which is that people are diverting their trade and production into the wrong areas.

By your argument the world would be wealthier if all of the world's coal, oil, and other natural resources were pulled out of the ground today, since by your thinking, that creates economic wealth. Surely you can see the fallacy in this...?

Mao thought like that when he diverted a huge amount of China's resources into metal production. Mass starvation followed.

The point is that resources of capital and labour should only be applied to extracting those minerals out of the ground when the scarcity value of those minerals exceeds the cost of extraction. In your scenario the scarcity value is distorted by the illusion of paper wealth, so resources are diverted away from other activities and the world is worse off.

11/24/2008 01:15:00 am  
Anonymous phil sage (sagenz) said...

thats cool sturm. you keep thinking that my tanks dont represent wealth and power and illusory misallocation of scarce resource right up until i take your gold hoard. Unlike Mao I will remember to grow the corn and pay the workers.

Your flaw is that you are not thinking about it in real everyday terms but rather in theoretical concepts.

That illusion of paper money allows me to create real wealth now rather than wait until I can accumlate gold.

Think of the value of gehrys house unassembled vs assembled

11/24/2008 08:55:00 am  
Anonymous phil sage (sagenz) said...

paper money is just a promissory note that allows the real economy to work faster when it is applied to enable production rather than simply spent. If you let your neighbour borrow your tractor to plow his field you are both better off. you promise to repay him when you can and you get a plowed field.

the point you dont seem to get is that it allows the economy to work faster and build wealth more quickly than it otherwise would.

If I turn those minerals into houses, crops and tanks, i get wealthier

11/24/2008 09:01:00 am  
Blogger Sturminator said...

Sorry Phil, I can barely understand what you are trying to say in your posts, but I'll try and respond on those points I can make some sense of.

"the point you dont seem to get is that it allows the economy to work faster and build wealth more quickly than it otherwise would."

No it doesn't. You are fixated on the nominal value of money and you don't seem to understand the very basic concept that if a productive resource - like an hour of labour - is put to one use, then it is not put to another use.

The question isn't: mine the resource or don't mine it, the question is mine the resource or don't build a bridge (or whatever). The point is, your fake money doesn't create anything new, it just diverts activities from activities the market demands to activities it doesn't.

"If I turn those minerals into houses, crops and tanks, i get wealthier"

Maybe, or perhaps you just build houses that sit empty and crops that rot in the storehouse. Since you've distorted market price signals it's a bit of a lottery.

11/24/2008 09:30:00 am  
Anonymous LGM said...

Well said, Sturminator. Exactly true.


LGM

11/24/2008 10:00:00 am  
Anonymous phil sage (sagenz) said...

sturm - I wil persist. I could not give a rats bum if the bank will give me paper money, gold back money, tinsel ot lollipops. But if I can go use that to pay for something that is essentially valueless, like minerals in the ground, wasteland and underworked labour, the I can turn it into something of value.

That is called entrepreneurship. I dont know if the market will have a use for it but I am guessing they will.

You make the theoretically adequate but real world wrong assumption that markets always operate in perfect equilibrium.

Jobs bought the ipod to a market that did not exist at that point.

It is all those entrepreneurs who take things without much value separately and combine them into something of value that create the worlds wealth.

The use of paper money allows it to happen faster. insisting that money is 100% backed by gold means that the entire economy is constrained by the availability and price of that single resource, gold.

I have been distracting I apologise with some of the comments about tanks, but that is just messing with pete.

11/24/2008 01:00:00 pm  
Anonymous phil sage (sagenz) said...

"because if there were profits to be made in your mine at present interest rates the market would have already started working it"

That is the single biggest flaw with your thought process. You think the market is all knowing and operating in equlibrium.. It is not. I cannot borrow money now to pay for the minerals to create that gehry house knockoff. The constraint is the availability of credit, not the fact I cannot sell it.

Just to take you on a semi tangent. The reason that New Zealand has such an old car fleet in comparison to Japan america and britain is all those wrong socialist choices. If I turn those minerals into cars, the price overall might come down but the value of the previously for sale cars plus my newly built cars is still higher than the value of previously for sale cars plus minerals in the ground. there is a market at the lower price. wealth has been created.

11/24/2008 01:08:00 pm  
Anonymous Falafulu Fisi said...

Off topic:

LGM, I would like to offer you my personal, most sincere condolences on your loss. I hope that you and your family are doing alright in this difficult time.

11/24/2008 01:52:00 pm  

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