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Source link: http://archive.mises.org/13114/c-i-g-baloney/

C + I + G = Baloney

June 29, 2010 by

The key fallacy embedded in Keynesian economics is the idea that government spending adds to an economy’s health. In reality, the opposite is true. So let’s bury that equation baloney and get back to work. FULL ARTICLE by Patrick Barron

{ 111 comments }

david retardo June 29, 2010 at 6:58 am

This is such nonsense. Malinvestment by government is what you’re describing, which is what the government is currently doing by spending on wars, but sensible investment by government is the reason you have roads. When libertarians build a road I’ll be happy to drive on it.

“Governments forcing Central Banks to keep interest rates low”
Actually, the Fed is an independent bankster owned organization. If anything, it’s the Fed and its member banks that force the government to act, but they set their own policies on interest rates. Either we manage our own society through democratic self-government, or we’ll end up being ruled by others, that’s been true through all of history. I, for one, do not want to be ruled by a ‘market.’

Brent June 29, 2010 at 8:50 am

You want free market roads? Open up a history book… The Fed is a government organization. The head is appointed by the president.The market does not rule. It is just a place where people come together to do business.In democracy you are ruled by others. 51% control.

Inquisitor June 29, 2010 at 9:39 am

I hate to say this but “retardo” fits you well. And no, there is no such thing as “sensible” gov’t spending it.

Dave Albin June 29, 2010 at 9:48 am

Remove the shackles (regulation, taxation, destruction of property rights) and see what happens. We would have roads.

Ivan June 29, 2010 at 5:17 pm

Whenever you hear someone use the word “bankster,”or put the word market in quotations, you know they’re an idiot.

Craig June 29, 2010 at 6:26 pm

Government’s building roads is not an investment — it’s spending. Now, it may well be spending that many of us approve of, and it may well provide a benefit to society but it’s spending nonetheless. Don’t fall for the silly notion, popularized first during the Clinton administration, that government “invests” our money.

It doesn’t.

Jon June 29, 2010 at 10:24 pm

You do not want to be ruled by a market? So you would rather be ruled by a bunch of bureaucrats, power hungry politicians, and an organization that robs you blind every day through the hidden tax of inflation? The market is freedom. It is at its core the freedom of association and the freedom to exchange labor, money, goods, and services without fear of government coercion. It is The freedom to succeed for those who exercise frugality, discipline, and possess a drive to improve themselves for economic gain which leads to productivity gains throughout all society. Freedom is also the freedom to fail for those who make poor decisions whether it is the individual or a corporation.Yes a market will influence your decisions both short and long term, but you miss one thing. The market is always in existence. The market in the presence of government coercion may become distorted, but there is still a market. It is the government that makes this market so unpredictable and volatile. Look no further than the two worst economic disasters have taken place in the era of government intervention.

Daniel Kuehn June 29, 2010 at 7:47 am

Patrick, you are confusing an accounting identity they teach in econ 101 with Keynesian theory – and your confusion demonstrates your ignorance of what Keynesianism really is.

There are good Austrian critiques out there of Keynesianism that understand what Keynes and Keynesians were actually saying. They don’t always convince me, but they are solid critiques. This is not one of them.

Brent June 29, 2010 at 9:03 am

Daniel
His argument is centered around the fact that GNP does not necessarily measure national wealth. While this is true (or do you disagree with it?) it does not take aim at the central ideas of Keynesianism. I’ll actually agree with you. I am stunned.

Daniel Kuehn June 29, 2010 at 10:37 am

I agree it doesn’t measure national wealth. Who claims it does?

Matthew Swaringen June 29, 2010 at 12:01 pm

I don’t know that they “claim” it does, but considering aside from preventing inflation one of the purposes of the Fed is to keep the GDP growing it seems obvious they believe it is such a measure.

Josh June 29, 2010 at 1:46 pm

No, they believe it is a measure of national income…

Matthew Swaringen June 29, 2010 at 7:10 pm

Josh, it’s not GNI it’s GNP, just going by that I’d say they think it measures production, not income.

Craig June 29, 2010 at 6:36 pm

I agree it doesn’t measure national wealth. Who claims it does?

But plenty of people do pretend that it measures national wealth creation. Else why not include business-to-business spending? That would put consumer spending into proper perspective, but the wealth-creation crowd insists it would be double-counting.

GNP/GDP is a lousy proxy for, well, anything actually.

Mike June 29, 2010 at 7:58 am

The roads argument is so tired. I suppose if there was no government we’d all just starve to death on our own plots of land, unable to move about – just like all of our neighbors. So stupid.

How do you differentiate between sensible investment by government and malinvestment? If the government does such a good job at building roads, what is it that makes them not so good at national defense and war fighting? If they are so good and investing in and building roads, why not cars, computers, and agriculture? There is no middle ground here. They are just as bad at roads and everything else they do, as they would be if they decided to completely take over the internet or software industry. There’s nothing magical about roads, it’s just the way people have always known it to be done and some can’t imagine another way that it could happen.

Daniel Kuehn June 29, 2010 at 8:03 am

“I suppose if there was no government we’d all just starve to death on our own plots of land, unable to move about – just like all of our neighbors. So stupid.”

Why do so many libertarians jump on this extremist version of any argument? It’s always this ham-fisted reductio ad absurdum that never quite works. The argument isn’t that there will be no roads. The argument is that there will be sub-optimal under- (or over-) investment due to distorted incentives.

Beefcake the Mighty June 29, 2010 at 8:09 am

” The argument isn’t that there will be no roads. The argument is that there will be sub-optimal under- (or over-) investment due to distorted incentives.”

Fair point, but it’s clearly NOT the point the original poster (david retardo) was making.

Daniel Kuehn June 29, 2010 at 9:01 am

True, but it’s probably more emphatic statement than deep analysis. It’s a rough, broad-swipe response to a rough, broad-swipe initial post. I’m not sure we should be acting like either is a solid analytic argument. And that’s my point to Mike – don’t pretend that’s the actual argument.

neoaustrian June 29, 2010 at 10:10 am

I will address the argument that the private economy will make a sub-optimal investment in roads. It appears that Mr. Kuehn wants to say that government provision of roads will come closer to the optimal investment level.

First, is the optimum denominated in terms of money (real or nominal, it matters not at this point) or in terms of mileage (quantity)? This matters because, with anyone who has any knowledge of how a department of public works actually operates, one knows that the price per mile of road provided by a DPW is higher than the price per mile of road provided by a private company, given similar quality and constitution of road.

Therefore, if it is denominated in mileage, one must consider why the private economy would be led to a suboptimal provision of the good, relative to the government. This appears to be a knowledge problem. In other words, who knows better how much mileage is required? The answer is clearly the local provider. This makes sense, since either cities or counties build local roads, then states, and then only the feds provide the interstate system. I don’t think the issue is going to come from the quantity provision side, then.

The other way to denominate the investment is in dollar terms. How does the private provision of roads operate? Two ways: either toll roads whereby the users pay at entry/exit points, or fee-based roads, whereby a periodic fee is paid to the road provider for continued use. Fee-based roads are exposed to free-rider problems such that fees may be set higher to account for use by people who do not pay the periodic fee. When a private road provider sets up to build a road, then, the provider will make calculations based on expected revenue and expenses, discounted to the present, and net of initial investment. If there is some economic value, the road will be built. If not – no road. Thus, for an individual firm, it seems that unless they make consistent mistakes the non-optimal investment problem is likely to be minimized.

How about from the road users’ perspective? Will there be too much road or not enough? If people find there is not enough road currently available, will they not pay fees for more roads to be built? Or seek other modes of transportation? This latter gets into the public provision of mass transit, which is a related issue and goes by many of the same principles as roads. Clearly if one is paying for road usage then one will moderate usage according to the subjective value. If I have to pay five dollars to use the highway every time I go to work, do I not have great incentive to car pool in order to minimize payments?

Due to the price-induced equilibrating forces, I do not see how sub-optimal investment in roads can be persistent.

On the other hand, public provision of roads does not operate according to an economic profit scale. It operates on a political profit scale. Legislatures allocate budgets for DPWs every fiscal year. It is in the interest of politicians to overinvest in roads in politically sensitive precincts, and underinvestment in non-sensitive precincts in order to maximize the chances of re-election. The underinvestment is required because raising taxes too quickly, overall, is a political killer. Thus, the budget must be followed, more or less.

Second, DPW-built roads always end up costing much more than privately provided roads because of public unions which mandate high wages and fixed-hour work days. Overtime, then, is paid, which is very costly. Union workers have an incentive to shirk and draw out the length of time it takes to build a road since they can gain higher income in this fashion. Note that this will also be true of private firms if they have unionized labor. So, total investment in roads, in dollar terms per mile built, will likely be higher if they are provided by the public. The total miles built is likely to be misallocated across precincts. One cannot say for sure if too many or too few total miles will be built.

By the way, for anyone who wants to look into the academic research on such issues, this is commonly known as “the lighthouse fallacy.” Or – private provision of public goods. It’s a very worthwhile area of research.

Daniel Kuehn June 29, 2010 at 10:43 am

It appears that Mr. Kuehn wants to say that government provision of roads will come closer to the optimal investment level.

Well, it could. I don’t think I ever said that it will.

Therefore, if it is denominated in mileage, one must consider why the private economy would be led to a suboptimal provision of the good, relative to the government. This appears to be a knowledge problem. In other words, who knows better how much mileage is required?

No, it’s not a knowledge problem – it’s an incentive problem (as Hoppe would describe it, a Misesian property problem rather than a Hayekian knowledge problem). The question isn’t whether the market is better able to use information regarding roads – the question is whether the market, which responds to the prospect of private benefit, is able to adequately provide roads, which offer a great deal of social benefit. This problem stands no matter what metric you use.

Due to the price-induced equilibrating forces, I do not see how sub-optimal investment in roads can be persistent.

I don’t think I would be able to see either if I only thought of it as a knowledge problem.

On the other hand, public provision of roads does not operate according to an economic profit scale. It operates on a political profit scale.

This is (one reason) why I never said that government will provide the optimal amount of roads (or anything else).

neoaustrian June 29, 2010 at 10:49 am

Thanks for your reply. I believe I can clear up one issue.

I see only a quantity-denominated sub-optimal investment as a knowledge problem. In other words, absent price signals, how are we to know what the correct amount of roads to provide really is? Thus, using a money-denominated investment changes it from a knowledge problem into an incentive problem.

My impression was that you were arguing that the government would provide roads in preferable fashion to the private market. If that is a misrepresentation of your position, then my apologies, since this is what a I set out to refute.

RWW June 29, 2010 at 11:12 am

…the question is whether the market, which responds to the prospect of private benefit, is able to adequately provide roads, which offer a great deal of social benefit.

And what is the “social benefit” of roads which is not encapsulated in private benefits?

Mike June 29, 2010 at 9:58 am

I don’t know which is more boneheaded, the OP’s argument that there would be no roads or your argument that someone knows the right amount and type of investment needed for roads. At least his error springs from a lack of imagination, which is understandable, rather than shoddy analysis.

RWW June 29, 2010 at 10:32 am

Mike, don’t you know that when someone talks about the optimal level of something, in the way Daniel has, he means “the level I desire”?

Daniel Kuehn June 29, 2010 at 10:45 am

???? You either don’t understand the argument or you do and you’re being disingenuous in representing it. I’m guessing it’s the latter. What is the point of that, really? Why don’t you just disagree with me – why do you have to falsely impute things?

RWW June 29, 2010 at 11:09 am

All right, then, Daniel, please define “optimal,” as you have used it, in some objective way.

Daniel Kuehn June 29, 2010 at 10:44 am

I never said someone knows the right amount and type of investment needed – you should probably reread my comment before accusing people of being “boneheaded”. Let’s try and keep this civil.

Beefcake the Mighty June 29, 2010 at 10:49 am

Perhaps you can clarify what you ARE claiming; you wrote:

“The argument is that there will be sub-optimal under- (or over-) investment due to distorted incentives.”

Are you simply re-stating what you believe anti-libertarians are actually arguing (in contrast to the reductio ad absurdums you clearly oppose), or is this in fact your position? Honestly, it’s not clear (to me at least).

Daniel Kuehn June 29, 2010 at 8:04 am

*If you use that argument, that is. I think the positive/negative externalities case is a decent argument against the anarchist perspective, but it’s certainly not the only one, nor is it slam dunk.

Inquisitor June 29, 2010 at 9:40 am

It has so many implicit assumptionts it can’t even come close to being decent.

RWW June 29, 2010 at 11:27 am

Indeed; a cursory glance through this website would explain why we dismiss the idea that coercion is justified by the specter of externalities.

J. Murray June 29, 2010 at 8:29 am

The whole thing is a mess. G should be a negative with a multiplier greater than one. It’s pretty easy to understand, if it was valuable, someone would be doing it, not government. Other major problems with the whole thing is that it also fails to consider production. What good is consumption and investment if nothing is being produced? Further, it also ignores growth in the money supply. The entire calculation is designed as the easy way out of trying to convince the population everything is good. GNP goes up when government spends more (G), creates malinvestment through inflation (I), and pushes consumption of things that don’t exist (C).

One thing that I do take offense to in this article is that nothing in Keynesian economics is theory. Theory requires there to be a hypothesis first, which is then tested to see if the hypothesis is anywhere near reality. Keynesian economics, and other forms that attempt to justify the State (such as the Chicago School), don’t operate on theory, or even hypothesis, but on wishful thinking.

The reason economics is viewed as a dismal science is because the most public faces operate on the notion of how they would like the system to work, not how it really behaves. Wouldn’t it be great if all we needed to generate prosperity was to have government just spend a ton of money (Keynesian)? Wouldn’t it be great if all we had to do is set inflation on autopilot at 3% (Chicago)? These systems claim that there is nothing wrong with how they set things up, it’s the rest of us refusing to make it happen.

Sure, Keynesian economics, Chicago School economics, all other forms of economics outside the Austrian approach would work wonderfully if that obstinant creature called reality quit spoiling the soup and changed itself to fit the mold.

Mainstream economics just picks and choses what it wants to show to “prove” its approach, all other data be damned. It shares much with modern climate change “research”. There isn’t anything remotely scientific about it. Simply coming up with numbers and math equations doesn’t move the entire approach out of illegitimacy. Math is a language and all I hear out of the Keynesian camp, Chicago camp, all other statist camps, is the equivelent of the babble that 6 month old babies spew.

All of the government recognized economic fields will always remain a joke since they attempt to force the data into their view of the world. It’s the data that dictates reality; we can’t dictate reality and expect the data to fall in line.

Daniel Kuehn June 29, 2010 at 9:02 am

“It’s pretty easy to understand, if it was valuable, someone would be doing it, not government.”

No. If it’s something that has benefits that can be privately realized then someone would be doing it. But there are more benefits to be considered than private benefits.

The government is bad at activities that primarily result in private benefits. It does not follow that to be a good investment something has to have private benefits.

Inquisitor June 29, 2010 at 9:42 am

It has to follow that the person considers it worth their time and the benefits worth recouping. So yeah, it sort of does follow, and sorry but the government will never be able to measure whether the benefits involved exceed the opportunity costs to the individuals taxed.

J. Murray June 29, 2010 at 10:31 am

There is no such thing as a public benefit. Public is just a collection of private individuals. If we benefit the private individual, the “public” is also benefitted by simple proxy. The idea of government benefit usually results in one part of the system being harmed. No one voluntarily harms themselves. If a part of the system is being harmed, the whole system cannot benefit. Because some people do not wish to be harmed, government steps in and harms them on their behalf.

Private benefit is public benefit. The two are inseparable. The current concept of public benefit harms the private benefit, therefore, there is no public benefit.

RWW June 29, 2010 at 10:34 am

But there are more benefits to be considered than private benefits.

Right, there are “benefits” that you desire but can’t achieve without resorting to force.

Daniel Kuehn June 29, 2010 at 10:47 am

No, some I may not actually desire personally. I’m not talking about that.

You would personally benefit much more from engaging actual arguments, rather than trying to dress-up every non-libertarian as a crony capitalist.

RWW June 29, 2010 at 11:15 am

No, some [benefits] I may not actually desire personally.

If you do not desire something, then to call it a benefit at all is a contradiction. As elaborated by J. Murray above, there is no such thing as a non-private benefit. You are making a meaningless distinction. The phrase “private benefit” is redundant.

Of course, this is all explained in detail in Human Action, for starters…

You would personally benefit much more from engaging actual arguments…

I am trying to nail down your vague (and possibly meaningless) terms. Your unintentionally ironic meta-commentary isn’t helping anyone.

Matthew Swaringen June 29, 2010 at 12:08 pm

Daniel, are you saying you don’t agree with the idea of using government force to achieve these public goals?

I understand you think this is ok (probably that it’s a necessary evil), but no one called you a “crony capitalist.” The argument we’d make in that regard is that even if you don’t like crony capitalism your views lead to it by virtue of providing the government that power. I don’t think it’s possible to argue against that, unless you believe you can make a government full of angels who don’t care about themselves.

J. Murray June 29, 2010 at 1:59 pm

Even if the government was full of selfless angels, it would still fail. There’s still the problem of diffuse information. No matter how benevolent the state, it can’t effectively run anything since it lacks the information to do so. And by the nature of it being a state, it can never tap into the pricing information or other information since it can continue its existence wholely independently of worry about bankruptcy or being underpriced.

Matthew Swaringen June 29, 2010 at 7:24 pm

I’d agree with your view point in general (talking about government running everything) but I think Daniel’s argument was about government just using it’ s force to create a road system or other things of that nature.

I think a private system can do this best, so I don’t think government needs to do it, but I wouldn’t say that government can’t possibly do it in a reasonably effective way (because at least in most cases I’ve seen they aren’t utterly horrible).

I’m sure you may argue that we are paying more than we should be or should have more and better roads than what we have for this cost. I’m not disagreeing with that.

J. Murray June 30, 2010 at 8:07 am

You’d have to define what utterly horrible means. When there is nothing to compare to, then it’s hard to see if it’s bad or not. I would consider the construction system to be utterly horrible. Government construction typically blocks off lanes miles before and after the actual construction zone, keeps the area blocked off even when no workers are present, and make disgustingly little progress. This sort of thing would never be tolerated on a priately run road as it would severely cut into revenue. Government doesn’t care how long the highway is out of commission becuase the department of transportation of the State isn’t threatened by the lack of activity. All we can do is just put up and shut up. A private entity would have to minimize the delays due to repair and expansion becuase the lost revenue of people finding alternate routes would bankrupt them.

Matthew Swaringen June 30, 2010 at 9:20 pm

Fair enough, I suppose I can’t argue with the huge delays in road construction with seemingly no progress made in some cases. It doesn’t happen all the time, but even the Soviet Union managed to survive several decades before collapsing under it’s own weight.

Derek June 29, 2010 at 8:59 am

Patrick, where do you propose the private sector finds the money to fund investments if the government does not spend it first? It’s simple accounting that if the government sector is in surplus, then the private sector must be in deficit. Therefore, the government must spend in order for the private sector to save.

Inquisitor June 29, 2010 at 9:43 am

Ugh, what? So how did saving occur before government “surpluses”?

J. Murray June 29, 2010 at 10:36 am

I’m an accountant and your entire claim is bogus. There is only one pot of resources that can be ultimately drawn from. Available resources are finite. If government spends the resources, those are resources that cannot be used by the private sector. Think of it in terms of percentages:

100% Resources = % Government used + % Private sector used + % In Reserve (saved)

If the government portion increases, it HAS TO come out of either the private sector portion or the reserve portion. There is no way around it. Resources just don’t magically appear out of nowhere.

We can grow the usable portion, but only at the expense of taking it from the reserve as reserve could be either amount saved intentionally or amount undiscovered. Government “savings” can only be dumped back into the reserve pile, after first being confiscated from the private pile and its use disallowed.

Derek June 29, 2010 at 9:03 am

“In reality, the opposite is true: government spending subtracts from an economy’s health.”

So the interstate system made everyone worse off? So the space program made everyone worse off? I call anti-statist religious fervor on this one.

JJ June 29, 2010 at 9:54 am

“So the space program made everyone worse off?”

Uh, yes.

And with a free market, an emergent, organic interstate system of roads would have arisen far before the government made one.

Dave Albin June 29, 2010 at 9:56 am

The issue is that we have created these ever-growing monsters that may not be able to be sustained. The shuttle program and NASA may already be on its way out. Look at this more long term. Not to mention that we didn’t choose where the roads were built…

Mike June 29, 2010 at 10:04 am

Who knows if it made everyone worse off? My guess is yes, but it most certainly made the people who count worse off. You know, the people who created the resources that were then taken and used by someone else for some other, less desirable, purpose. They were made demonstrably worse off. Normally, we recognize that as theft and don’t have a big debate about it.

Derek June 30, 2010 at 9:00 am

I actually agree with the bunch of you about the future of the space business, given the way things are going, if not with the past. However, I think you’re pushing things more than a little to call it theft. You live in a democracy, which means you get to choose the leaders, which means you make choices and choose the system that you want.

If you don’t like the system, change it or start your own. You can call democracy tyranny of the majority if you want, but you certainly can’t call it theft any more than you can call condo fees theft. Sure, some of the money might not go where you want, but if you really don’t like it, you can elect different board members or move out. If they take their condo fees and waste it on extra security guards and the such, do you really call it theft? You chose to live there, and you agreed to abide by the contract. Likewise, by choosing to reside in the country of your choice, you agree to abide by their contracts. That can be called waste but it cannot be called theft.

Likewise in the world, we still have international anarchy and a free market of nations on a global scale. If you truly don’t like where your money is going, then vote for a different system or move to a different country that uses their “condo fees” in a different manner. The only real change will come if enough people either vote to change the system or if enough people move to a different country that economically outperforms the old. Given the past voting history of people, I don’t place too many bets on the former.

J. Murray June 29, 2010 at 10:43 am

Yes, the space program has made us worse off. The entire program wouldn’t have even existed if it weren’t for the government’s long standing policy to mock Robert Goddard was lifted. Further, most of the benefits that NASA has claimed for itself over the decades were developed PRIOR TO the existence of the agency. Some of the famous inventions that NASA has lain claim to at one point or another (or claimed to have a major role in the improvement thereof) that were invented years before, decades before, or completely independent of NASA was formed are:

Teflon
Microwave
Rocketry
Wireless data transfer
Integrated circuitry
Silicon based processing
Aerogels
Radiation shielding
Heat shielding
Ceramics

And this is just the tip of the iceburg. NASA hasn’t provided a single whit of benefit to mankind. Not one. Astronomy, aeronotics, everything used by NASA was first developed outside of NASA by private parties, many of which weren’t even involved with the agency at all. NASA can vanish tomorrow and not only would the space industry NOT fail, it would succeed like never before.

Just like the age of colonial exploration before it, space travel won’t start to truly find its way into our daily use until government gets out of the business.

Mike June 29, 2010 at 11:24 am

Well it made some people much better off. The heart of the matter is that some people were made better off by being robbers while others were made worse off by being robbed. While it may be possible for the robber to provide benefits to mankind with his spoils, it is nonsense to try and weigh that benefit against the costs to mankind. Benefits are either maximized or not – there are no values to add or subtract and there is no scale. The ONLY way that maximization of benefits to society even makes sense, is if benefits are maximized by every individual in his/her own subjective opinion. Which occurs by allowing each individual to choose what they prefer.

Daniel June 29, 2010 at 11:49 am

The only party benefited was the military which has dreamt for years on how to use space as a weapon :(

RWW June 29, 2010 at 11:06 am

It should be pointed out that even if the Space Program had somehow made “everyone” better-off (whatever that means), we know a priori that it couldn’t do as much good as allowing people to use their resources as they choose.

The argument about whether specific instances of theft have positive effects (as in another example, when proponents of freedom criticize the quality of health care in Canada) is dangerous, since there’s no theoretical reason to bar the possibility of stolen property being put to good use (though it seems this somehow rarely happens). The indisputable fact available from perhaps an hour’s reading of basic economic reasoning is that government spending can never do as much good as voluntary actions.

There’s also the small issue of the morality of theft itself…

SirThinkALot June 29, 2010 at 2:07 pm

So the interstate system made everyone worse off?

Yes, a private road system would be much preferable.

So the space program made everyone worse off?

It drained resources from the private sector…and for what? Landing on the moon is an impressive engineering feat, but what did it actually accomplish?

Jon Christianson June 29, 2010 at 10:39 am

David is pretty funny – he must be about 12. If government is the reason we have roads what is the reason we have cars? If you want to try some of those libertarian roads go to Disney World, about 40 square miles worth. Also how are you ruled by a market? It takes coercion to be forced to do anything, government has that power, not the market where you are free to buy or not buy. Try not buying government products, push it far enough and you will be shot.

Daniel June 29, 2010 at 11:54 am

[State] Roads are, to a government, primarily a strategic asset, since it allows for the rapid transportation of armed forces, and secondarily, a subsidy to automakers and their lobbies

Bill Miller June 29, 2010 at 11:55 am

I believe that David may be a troll.

MDK June 29, 2010 at 11:56 am

Hi,
I know nothing about economics. Here is the issue I wish to bring to attention: loyalty. Individuals living on a landmass which is labeled as a nation-state feel loyalty to that label and landmass. This loyalty is very powerful. It is meaningful for many. For some, it is the most meaningful value in their lives and it guides their life decisions. I believe many large-scale projects would not be possible without having a surplus of loyalty/patriotism support initial savings, decisions, and expenditures.

Perhaps I am interpreting these things from an ignorant perspective but I can’t understand why none of these economic discussions mention the importance of loyalty and patriotism in government large-scale projects. I guess its because patriotism is for ignoramuses.

Matthew Swaringen June 29, 2010 at 12:14 pm

Well, you seem to be conflating patriotism and nationalism in your post, but provided you are talking about a love for a land and it’s people/culture/scenery/etc. I think that is an integral component of how humans act.

You don’t need a state to have patriotism or to work together with your fellow community. You’ll do that naturally through mutually beneficial exchange, and you’ll probably not even know what all of the goods you produce or service accomplish.

MDK June 29, 2010 at 12:32 pm

Well, you seem to be making a strict delineation between patriotism and nationalism. Is it remotely as clear as all that?

As for “stateless patriotism,” can you offer some historical examples…

Matthew Swaringen June 29, 2010 at 12:39 pm

Why do I need to show something historically when it’s easy enough to just to point to individuals? I don’t have any kind of pride in the “United States” right now, but I like the land/culture/etc. I have an interest in not only promoting my own welfare but in promoting the welfare of those I care about, even if they aren’t within my own family.

I’m just not for using a government to steal from other people in order to accomplish that. I think a lot of the people here probably feel the same way.

MDK June 29, 2010 at 12:50 pm

This is getting complicated.

I guess an important question is: “Is a nation-state’s government an important aspect of its culture.” Meaning, when people say they love America, or support America, or feel loyalty to America, do they mean an American culture which may be separate and above its government, do they mean an American culture which is intimately tied to the government, or do they mean the American government as the essential characteristic of the nation-state? I believe most people, when they say they love America, they are saying they love its present government despite all its flaws (and that others should feel the same). I could be wrong.

I realize governments change and can be changed but I am interested in a purely descriptive definition.

I am not particularly proud of America either but “liking the land/culture/etc…” sets your sympathies at a far lower degree than 99% of the human race who feel “love,” “loyalty,” “undying respect,” for their “motherlands” in other words, adjectives of a much more passionate tenor…

Joshua Park June 29, 2010 at 1:58 pm

I seem to recall someone who had a passionate tenor for his Fatherland. One problem was that he wanted his Fatherland to be everyone else’s Fatherland, too.

In terms of your comment about certain sympathies being at “a far lower degree” than love of the American government: how do you measure that? Can you say with objective certainty that one man’s love of the color blue is greater than another’s love for green? It’s the same thing as judging whether Bill’s love of America (the federal government) is greater than Steve’s love of America (the culture and people).

Your important question, “Is a nation-state’s government an important aspect of its culture,” assumes that the culture is part of the “nation-state.” As if the people, their values, actions, traditions, etc. are at least owned in some fashion by the government. What I personally love about America is the people, the scenery, the history of liberty. I cannot see how adding into that the idea that I should love a coercive government would… improve the measure of my passion.

Love, however, is tempered by the faults of its object. Love is a verb, not a noun. It is not the red, white, and blue a person bleeds. It is not unshakable loyalty to the state. Love is acting on behalf of your community and fellows. Attempting to shake the sinuous grip of Leviathan from oneself and ones neighbors is an act of love. (Leviathan is a descriptive metaphor for the state.)

Since loyalty is the subject, I’d ask you this: is it better to be loyal to your own family, or to to the local criminal gang?

Matthew Swaringen June 29, 2010 at 7:43 pm

In my personal history I’ve had various different opinions about patriotism as I used to conflate it with nationalism myself. It was only recently that I saw this differently, and I feel much better about it than I did before.

The discovery of libertarianism is really what opened up my view of nationalism and patriotism as distinct ideas, and I could never see it differently now. I’m not a committed anarchist yet, but if I end up believing in the state at all it will only ever be as a “necessary evil” that should be treated with suspicion at all times.

Jay June 29, 2010 at 12:21 pm

In answer to the first, ‘david retardo’ (“When libertarians build a road I’ll be happy to drive on it.”) and others who have engaged the question of private roads: perhaps you are all already aware but, if not: There have been any number of private roads built already, for centuries, in the United States (and elsewhere). Some parts of the US are looking into the idea again as well, such as New Jersey (New Jersey Turnpike).

Private Highways in America, 1792-1916 has some relevant data, as does an article at openmarket.org titled “The Private Provision of Surface Transportation Infrastructure in the United States”, among many others.

ChanceH June 29, 2010 at 12:32 pm

This makes me want to see a long term graph of :

(GDP-2G)/Au

I.e. Nominal GDP minus 2 time nominal G (since G is already in there once), as reported in ounces of gold, instead of funny money. Just for kicks.

Keith June 29, 2010 at 1:03 pm

The basic equation C + I + G = GNP is not the problem. There is a flow to this that is sometimes overlooked. GNP or National Income originates from production, which comes from capital and labor. It is the successful exchange of production at some price that generates money income, which we measure as GNP or income. Consumption and investment can be looked at as either what we spend money income on or how we allocate production: at a simple level on consumption goods or investment goods (means of production).

At a simple level, consumption and investment are the only two options, whether the allocation is made by the private individual or government. And yes, governments do invest: roads, bridges, schools, sewer & water systems, education, lots of things. So, C + I + G = GNP is ok, it is just that GNP comes from capital and labor, that creates the means for C + I + G. Without production, there is no consumption or investment or government spending. Investment creates the means for future production and future income. Without investment, future GNP will fall.

From what I see, our primary economic problem is that we are allocating too much of our income toward consumption and not enough toward investment. Over the long haul, this will lower our standard of living. The problem with government spending today is that most, the vast majority, is not investment spending but rather consumption oriented: social security, medicare, medicaid, welfare, wars, etc. This is the nature of government: the politicians want to show how they provide. But by orienting our economy so much toward consumption, we are doing substantial harm to our and our childrens prosperity.

One last point, there are things which we will likely continue to invest in collectively, such as roads. However, it would behoove us to keep the vast majority of investment in the private sector. Knowledge is widely distributed in society. Right now government has control over far more of the nation’s income than it has the knowledge/competence to allocate. Five percent of the workforce is unlikely to have any more than 5% of the nation’s knowledge. If they are allocating 25% of the nation’s resources, they are destined to do a bad job.

Josh June 29, 2010 at 4:47 pm

“By viewing the GNP equation, one can easily see why Keynesian economists, who control the levers of government, believe that it is possible to “stimulate” the economy with government money.”

No, there’s more to it. C + I + G = GNP is just a definition. The question is whether raising G can also raise GNP. According to you, it can’t:

“Government spending must come out of the private economy.”

But that’s what the whole debate is about. Keynesians believe that market failures can sometimes be resolved by facilitating cooperation through the government. That means raising G can also raise GNP in some circumstances.

“As harsh as the idea may seem, unemployment insurance payments actually slow down labor redeployment and must be stopped.”

I’m not convinced unemployment insurance always slows labor redeployment. Even if it does, it does not follow that unemployment insurance payments must be stopped. Consider something you wrote earlier:

“Unemployment is high, which, according to Austrian theory, is to be expected.”

exactly. Regardless of who is to blame, and I think you blame the government, there is going to be some unemployment. Then you have to answer some questions:

1. Can unemployment insurance prevent enough suffering to be worth it, even if there is less wealth to go around?
2. Can unemployment reach a level sufficient to make order impossible to maintain? That is, will unemployment reach such high levels that there will be riots on the streets, making it impossible for the government to enforce contracts and protect property?

I think an answer to those questions is a necessary part of an argument that unemployment insurance payments must be stopped.

J. Murray June 29, 2010 at 5:40 pm

The problem you have to consider is that unemployment isn’t a single concept. You have to distinguish voluntary vs involuntary unemployment.

Involuntary unemployment is entirely a government problem. It is partially caused by forced unemployment insurance which is paid primarily by operational businesses based on current employment levels. As such, it specifically damages the ability of the more healthy businesses to actually hire more individuals as the more they hire, the greater the “premium” (tax) becomes. In effect, the company is now forced to “hire” someone that provides no work in return and the more the company does, the more effective the employee and better run the company is, the larger number of people it is now expected to support that are not employed with them. This system creates strong disincentives to employ additional bodies as it is a double hit on the company – existing resources are being diverted away from capital expansion and the additional employee will only increase the rate of capital drain into the pockets of the unproductive.

It also creates additional incentive for employers to drop marginal employees as the insurance costs are part of the cost of employment. Unemployment insurance does tip the balance between a beneficial employee and a harmful one, driving additional bodies into the system, which puts yet more pressure on the more successful businesses and moves marginally successful business into the marginally unsuccessful category.

Involuntary unemployment is also caused by other factors. Taxation, minimum wages, union protectionism, required benefits, maximum work-week law, overtime legislation, etc. Involuntary unemployment is any effect caused by government that blocks a mutually agreed pact between employee and employer because it failed to fit into the draconian rule-set dictated by the governing body. This sort of behavior does not protect the employee, as they’re usually claimed to, as superior working conditions and salary is something that must be built up over time and over generations through proper savings, capital improvement, and strong property rights. This is why even after sinking multiple trillions into African countries they’re poorer than when we started the effort, the proper steps weren’t taken and our government leaders had the hubris that they could actually solve the problem using easy steps.

Voluntary unemployment is what Austrian economics recognizes. This kind of employment is entirely at the choice of the individual. When an individual chooses not to partake in available employment opportunities due to whatever reason – geography, type of employment, salary, any other reason – this individual simply decided to withhold his services for an offer that fits his demands. Such an individual has withdrawn from the employment market by his own volition. As such, it is unnecessary to support this individual with any kind of coercive insurance as he has made the decision that he can survive without a source of income on savings.

Unemployment insurance creates a vicious downward cycle, the more who are on it only accelerates the rate of job losses. And the second scenario, street riots, are only possible in an economy that has State restrictions blocking employment in the first place. There is an infinite amount of work that needs to be done. There will always be a job available for whoever wants one. The only question is if there is a government force keeping that job unfilled by dictating the conditions above a point where it would be reasonably expected to be filled.

Unemployment under any circumstance is unethical and immoral. On one side, its existence is one of the factors creating unemployment. On the other, should all the restrictions blocking employment be removed, only those who chose to be out of work remain and there is no moral or ethical reason to provide them with resources.

Basically, unemployment insurance has no purpose in existence whatsoever. It’s effectively immoral and unethical.

Josh June 30, 2010 at 10:33 am

“Involuntary unemployment is entirely a government problem.”

I was pretty careful not to contradict this, since I know Austrians tend to view things in this light. But I do disagree with it, and here’s why. When a business goes bankrupt, it must be liquidated and absorbed back into the economy, along with its employees. Those employees will be involuntarily unemployed while they look for work.

I think it’s clear that bankruptcy is the result of “malinvestment” and can occur even in a free market. But businesses can be very large. Is there a certain size of company that simply cannot go bankrupt? If a company had 100 divisions across 100 countries, would it be guaranteed never to go bankrupt in a free market economy? Okay, now if a large, complex business can go bankrupt, why can’t smaller, tightly interconnected businesses all go broke at the same time and for the same reason? I think that can happen, and in fact I think large chunks of the economy can essentially go bankrupt as a result of large-scale malinvestment. I don’t think any of this requires government intervention, although I think political forces will usually work in the favor of policies that will make the malinvestment (and resulting asset bubbles) worse.

The larger and more complicated the business, the more of a pain it is to liquidate it and absorb it back into the economy. (as a general rule) If a huge chunk of the economy goes bankrupt all at once, I think people will be involuntarily unemployed for some time.

Beefcake the Mighty June 30, 2010 at 11:28 am

What you call here “malinvestment” is probably better termed “error,” which no Austrian would deny is possible in any economic environment. What Austrians term “malinvestment” is something different.

Josh June 30, 2010 at 2:16 pm

Ah, maybe I have the terms wrong. I’m just saying that errors lead to involuntary unemployment. I believe errors can require large chunks of the economy to restructure just as they require businesses to restructure. So I think large-scale errors can lead to long-term unemployment regardless of government policy.

J. Murray June 30, 2010 at 7:39 pm

Ah, but it isn’t involuntary as there is always work to be done. The question that must be asked is are the newly displaced workers refusing to take any job that they can or are they insisting on remaining employed under their chosen profession or at a specified salary? Losing the job itself may be involuntary, but remaining as such is purely voluntary under a free market system.

Matthew Swaringen June 30, 2010 at 9:29 pm

Josh, I’m not sure your premise is correct here. I think there is the possibility of temporary unemployment (and real wage loss) due to supply shocks, accidents, severe weather, etc. but I don’t think large scale business errors would be commonplace.

Why? Because without a “cheap credit” federal reserve system and government subsidies business would have to survive entirely on their own profitability.

As it is now they can run a long period of time with huge losses and debt on their balance sheets. The situation post 2008 is even worse, given that any business that’s “too big to fail” or considered too important to the economy has an implicit bailout built into any considerations banks have for loaning money to them.

tralphkays June 30, 2010 at 9:55 pm

Josh
You are right, but you should follow Beefcakes lead here. Error is a fundamental fact of human life, we are not given perfect knowledge in anything. If enough people make errors, hardship will result, but is that not true of any system? Freedom is most valuable not because it eliminates error, but because no matter what goofy idea sweeps the land, there will always be a number of people who do the opposite, the ones who turn out to have been right, preserve society. A system that regularly rewards those who are right, works better than a system based on distorting the evidence people use to make their decisions. That is what causes mal-investment.

Beefcake the Mighty June 30, 2010 at 10:20 pm

To clarify (and follow up on tralph’s point), “malinvestment” suggests something more systematic than error as such; this latter one would expect to be more-or-less randomly spread across the economy. Some entrepreneurs make errors and go bankrupt, others do not, we don’t expect any systematic bias (as are revealed during a crisis — the bust stage). The point of ABCT is to highlight the factors that lead to such biases (e.g., central bank machinations). A point not adequately stressed (if at all) by the conventional theory (but see Huelsmann’s rendition in his paper on error cycles) is the *recurrence* of these biases. But this recurrence is precisely enabled by the illusion that the subjects of the state labor under (e.g., the illusion that the state is necessary, beneficial, etc.), allowing the state to repeatedly intervene in disastrous ways.

Josh June 30, 2010 at 10:33 pm

@J Murray: Yes, there is always work to be done. However, people are never instantaneously employed after losing their jobs.

@Matthew Swarignen: You understand exactly what I’m trying to say! You’ve raised the important issues, I think. Without a central bank, would business errors be large enough to build up over many years and result in unemployment over a long period of time while the economy restructured? I think so, you think no.

Josh June 30, 2010 at 10:44 pm

“To clarify (and follow up on tralph’s point), “malinvestment” suggests something more systematic than error as such; this latter one would expect to be more-or-less randomly spread across the economy.”

Why?

“Some entrepreneurs make errors and go bankrupt, others do not, we don’t expect any systematic bias”

I expect systemic bias.

tralphkays June 30, 2010 at 10:57 pm

Josh
Beefcake was referring to a bias towards error. If you view the world in general as biased towards error on the part of human decisions, then there is no school of thought that can help you. Economics at its root attempts to understand the systems that result in correct decisions and to avoid those that result in errors.

Beefcake the Mighty July 1, 2010 at 8:08 am

I would simply say, if humanity is in fact biased towards error, it’s hard to believe we would have made it as far and for as long as we have.

Beefcake the Mighty July 1, 2010 at 8:10 am

And to say there is no bias towards error is NOT to subscribe to any rubbish like the myth of progress. There can be serious detours along the way, no doubt.

Josh July 1, 2010 at 10:06 am

“Beefcake was referring to a bias towards error. If you view the world in general as biased towards error on the part of human decisions, then there is no school of thought that can help you.”

A school of thought that allowed you to deal with large-scale errors certainly can. (Error is the wrong word. It implies that human beings can forecast correctly but get it wrong. In reality, uncertainty and our finite intelligence make forecasting impossible.) In my opinion, large-scale errors are the result of coordination failures and can only be resolved by cooperation.

“Economics at its root attempts to understand the systems that result in correct decisions and to avoid those that result in errors.”

That’s not my understanding of economics. And it’s not my understanding of reality, regardless of how you define economics.

“I would simply say, if humanity is in fact biased towards error, it’s hard to believe we would have made it as far and for as long as we have.”

Why? Didn’t the Great Depression happen? What about the Panic of 1873? There were other crises going back to Tulip Mania and doubtless before that. Regardless of how you think they happened, they happened, along with wars, plagues, and famine. We’re still here, even though we’re not perfect! (And “error” in this context comes pretty close to meaning “imperfection.”)

tralphkays July 1, 2010 at 11:11 am

Josh
Thanks for the laugh, I haven’t read anything that funny in a long time.

Josh July 1, 2010 at 11:13 am

@tralphkays: Wow, you need to read some more comedy. May I suggest Douglas Adams?

Matthew Swaringen July 1, 2010 at 12:02 pm

Josh, since you believe in large errors existing without government incentives I’m curious if you have any examples that you are pointing to?

Certainly businesses affected by replacement technologies can contract due to those technologies. Certainly business can be affected by natural disasters or accidents. But both of these issues can be dealt with by the market system and are going to occur even with government involvement.

I am unaware of a systematic problem inherent in the market system that is entirely uncorrectable without government-style intervention.

Josh July 1, 2010 at 7:03 pm

“Josh, since you believe in large errors existing without government incentives I’m curious if you have any examples that you are pointing to?”

The only way I can think to show such a thing would be to show some kind of a large-scale market failure in a completely laissez-faire economy. But I’m not enough of a historian to know of any such economies. Do you know of any? Can you point to an economy with less government intervention that is or was more stable? I’m interested, and one of these days I want to read about Scottish free banking. If all we had to do to stabilize the economy was get rid of the Fed, I’d be all for it.

“I am unaware of a systematic problem inherent in the market system that is entirely uncorrectable without government-style intervention.”

The question is, is unsustainable growth more likely to occur in an economy that has government interventions like a central bank? To be honest, I don’t know. I don’t think the answer is obvious. Beyond that, I’m not prepared to defend a position, but it’s been fun talking to you guys :)

tralphkays July 2, 2010 at 1:57 am

Josh
Keep it up, you are hilarious!

Inquisitor June 29, 2010 at 8:46 pm

“But that’s what the whole debate is about. Keynesians believe that market failures can sometimes be resolved by facilitating cooperation through the government. That means raising G can also raise GNP in some circumstances.”

Too bad that is mere belief and nothing more. And who cares about “GNP” anyway? Talk about a useless aggregate.

“I’m not convinced unemployment insurance always slows labor redeployment. Even if it does, it does not follow that unemployment insurance payments must be stopped.”

Why must it be started to begin with?

“Then you have to answer some questions:”

Not needed but…

“1. Can unemployment insurance prevent enough suffering to be worth it, even if there is less wealth to go around?”

Hardly even measurable (guess why.)

“2. Can unemployment reach a level sufficient to make order impossible to maintain? That is, will unemployment reach such high levels that there will be riots on the streets, making it impossible for the government to enforce contracts and protect property?”

One would hope so so long as by “government” you mean “state”.

I think an answer to those questions is a necessary part of an argument that unemployment insurance payments must be stopped.

Josh June 30, 2010 at 10:23 am

nice troll

Inquisitor July 1, 2010 at 11:58 pm

I’m sorry, did you think those pure assertions meritted more than the brief responses I issued? Do tell why…

Inquisitor July 2, 2010 at 12:00 am

Also…

“The only way I can think to show such a thing would be to show some kind of a large-scale market failure in a completely laissez-faire economy. But I’m not enough of a historian to know of any such economies. Do you know of any? Can you point to an economy with less government intervention that is or was more stable? I’m interested, and one of these days I want to read about Scottish free banking. If all we had to do to stabilize the economy was get rid of the Fed, I’d be all for it.”

If you’re worried about errors, contemplate the effect an agency subject to calculational chaos due to lack of requisite data that arrogates itself a monopoly over certain industries and tries to regulate others (as if it knows better) will have…

Bruce Koerber June 29, 2010 at 5:51 pm

Forced development by ego-driven interventionists does not result in the same type of civilization that comes about through voluntary mutual cooperation. To use roads as an example without broadening your vision to see the kind of civilization that comes about is naive.

Jeremiah Dyke June 29, 2010 at 7:51 pm

Keep the equation, rename G

C + I + Retarded + Net Exports = GDP

Mike Sproul June 29, 2010 at 9:29 pm

I’m always looking for good classroom examples to explain to my students the absurdity of Y=C+I+G. Any suggestions?

Bruce Koerber June 29, 2010 at 10:13 pm

It is like saying:

Health = nutrient intake + vomiting away nutrient intake + neighborhood thug stealing supply of nutrients.

In other words, C and I are inverses and G is always a negative factor.

When in reality health is a balanced diet (not just ice cream “C”).

Walt D. June 30, 2010 at 12:26 pm

Nice analogy Bruce. However, in Y=C+I+G , Y can be increased by the government borrowing money and spending it, or just creating money out of thin air through straw man transactions with member banks of the Federal Reserve System. I suppose this would be like the thug buying nutrients with IOU’s he has no intention of repaying.

Bruce Koerber June 30, 2010 at 7:57 pm

Thanks for the improvement.

Al Capone June 30, 2010 at 8:19 pm

The mafia is doing everyone a favor by stealing nutrients. It increases demand for nutrients and creates jobs in nutrient production. Nobody wants to be unemployed when they have all the nutrients they need.

newson June 29, 2010 at 11:44 pm

from the article:
“Government programs that do not provide essential security services are especially illogical.

a “property-protector” relying on expropriation is hard to top as far as illogicality goes. i’d say security heads the list.

Captain_Freedom June 30, 2010 at 11:28 am

Patrick, you wrote:

>Although many who lost their jobs are not minimum wage workers, a pernicious consequence of raising the minimum wage is that it forces up all wages.

That is not true. Raising the minimum wage forces DOWN the wages of others. The aggregate demand for labor is an independent sum of funds. If employers have to pay some people more, then they have less money with which to pay others, which means their wages will fall.

J. Murray June 30, 2010 at 7:36 pm

Wow, put down the Keynesianism while here, shall we? There are no aggregates. It doesn’t force wages down, it only displaces the marginally unproductive. If you’re generating $100,000 worth of value for a company, you’ll be compensated $100,000. Raising the minimum wage doesn’t impact the salaries of those above the new level.

Captain_Freedom July 2, 2010 at 12:00 am

>Wow, put down the Keynesianism while here, shall we? There are no aggregates.

Settle down. Aggregate analysis is not specific to Keynesian economics. And yes, there ARE aggregates. Aggregate spending, aggregate savings, aggregate wages, etc. Have you not heard of the quantity theory of money?

>It doesn’t force wages down, it only displaces the marginally unproductive.

Wrong. It does not only displace the marginally productive. Employers do not strictly abstain from hiring workers whose market rate is just below the minimum wage. In many cases employers hire these workers at the minimum wage, and pay other workers less. They can do this because other companies are also bidding for the same supply of labor, and they too pay submarginal workers at minimum wage, which means they too have less funds available to pay other workers.

This holds true for the entire economy.

>If you’re generating $100,000 worth of value for a company, you’ll be compensated $100,000.

No, that is not how wage rates are formed. Workers do not “generate” value. Capitalists generate value because they are making the decisions. Wage rates are formed on the basis of supply and demand for the relevant labor type.

>Raising the minimum wage doesn’t impact the salaries of those above the new level.

Yes, it does. If employers pay submarginal workers more than their market rate, that is, if they pay them minimum wage, then employers have less money available to pay those workers who make more than minimum wage.

Make 0 June 30, 2010 at 7:42 pm

That’s right. It reduces the wages of some to 0. If someone is worth less than the minimum wage, they make 0 instead of what they are worth.

tralphkays June 30, 2010 at 8:30 pm

If raising the minimum wage causes the low value employees to lose their jobs that can certainly impact the wages or job security of remaining workers. Choices are constantly being made between various combinations of factors in the production of all goods, including the amount of labor and type of labor. For instance, a skilled mason is usually employed along with a lower paid hoddy (assistant to you white collar types) because the combination is far more productive than a mason alone. If the minimum wage exceeds the wages of the hoddy there can be a couple of consequences. The employer could decide to fire the hoddy, the mason is now less productive, and on a free market would earn less as a consequence. The employer might go to the mason and say “it is best to keep the hoddy, but to pay him the legal wage you must take less, however that is still more than I can pay you if he is gone”. Minimum wage laws affect the efficiency of labor markets, and less efficient markets produce less wealth for those participating in them.

Al Capone June 30, 2010 at 8:06 pm

Mafia spending boosts GDP and reduces unemployment. Protection rackets are necessary to reduce income inequality. Mafia deficits are necessary to generate private savings, since the economy is a zero-sum game. SInce the economy is a zero-sum game, mafia deficits generate private savings. Therefore the mafia deficit should be maximized. Since C + I + M (mafia spending) is to be maximized, the mafia should protect and spend, print, and borrow as much as possible.

CliffyK July 1, 2010 at 6:41 am

When G consisted solely of wealth confiscated from producers by the “G”, then C + I + G did indeed represent our entire national product–it was when the government began borrowing and worse when it began monetising that debt, to support unsustainable levels of spending, that the model lost all validity…

mushindo July 1, 2010 at 11:52 am

The proper accounting identity is in fact C+I+G=Y, ( with Y denoting Income ) in a closed economy. Append (+X-M) to the left side to cover an open economy. That said, an accounting identity is a tautology and is not helpful as theory.

The first keynesian slleight of hand lies in assuming Y to be equivalent to GDP by definition. It isnt for a number of reasons, th emost obvious being that it does not feature production that remains in the hands of , or is consumed by, the producer himself.

The second Keynesian sleight of hand lies in th emasking of how the G component is funded – those who spend C and invest I must have produced more than C+I if any G at all is to be possible ( assuming no government borrowing) . SO G is in fact T.

But wait, theres more, whhich gives the lie to the identity itself: G in the hands of those paid by government is ITSELF spent and invested (and in turn taxed in their hands but Ill ignore th epotential infinite recursion therefrom here), so some portion of both C and I in any accounting period is double counted as expenditure on th eleft side of th eidentity. This overstates Y by th eamount of G exactly, but it overstates GDP by an even greater margin, to th eextent of the destruction of value inherent in th enegative-sum game of tax ( to wit, the value of G in the hands of its recipients is always smaller than when it was T. Still, ignoring this little subtlety, the proper accounting identity is in fact……

(C+I)-G=GDP.

which I htink reflects the central Austrian take on the effect of government quite succinctly.

Patrick Barron July 2, 2010 at 8:57 am

Yes, this is Rothbard’s conclusion in America’s Great Depression. Thanks.

Yuri Maltsev July 22, 2010 at 12:40 pm

I was rereading this piece several times and I think that the “C + I + G = Baloney” is the real classic of our time! In the most brief, concise, but comprehensive way it exposes fraudulent nature of all government “economics” whether it is Keynesian, Marxist or any other type of collectivist propaganda disguised as a “school of thought”. It is not suprising that the most horrendous crimes in the history of mankind were committed by people believing in the big G: Keynesians – Hitler and Mussolini, Marxists – Lenin, Stalin, and Mao.

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