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Source link: http://archive.mises.org/13433/the-illusion-fades/

The illusion fades

July 30, 2010 by

From the WSJ, growth is lower than expected and retroactively revised downward.

{ 59 comments }

J. Murray July 30, 2010 at 10:50 am

I love how they never bother to adjust the numbers for inflation.

Bogart July 30, 2010 at 11:01 am

There is absolutely no possible way that the GDP has grown through the creation of money and not through the creation of real wealth. The statisticians (The Level of Hell over Damn Liars) really adjust for inflation as the growth in the money supply vs growth in the CPI.

J. Murray July 30, 2010 at 12:21 pm

The problem is the CPI has been heavily massaged since 1982 to get the numbers to come out as beneficial as possible. Mainly, since they’ve started using the substitutes model, or replacing items year by year because some other item didn’t inflate in price as much, they’re able to get the inflation rates to come out fairly minimally.

Further, CPI only measures price changes, not the impact of inflation. Inflation is best thought of as where the difference between the price now and where the price would have been had new money not entered into the system. In a normal market economy, prices tend to decline over time as the production process improves and as competition drives down pricing through thinning out the profit margin. Logically, this would mean inflation is considerably higher than the CPI numbers as it only calculates the final impact of all price adjustment factors – money supply growth, changes in consumer preference for the item, changes in technology behind the production, alternatives entering the market, alternates leaving the market, discovery of new raw materials, exhaustion of raw materials sources, and a gigantic number of other factors – and then lumps it in as this overall “inflation”.

To get a better picture, all market related pricing indicators need to be segregated when calculating what inflation is. Inflation should only include artifical controls – changes in tax structure, changes in regulatory requirements, addition of new money – before it can truly be a valuable tool.

Jonathan Finegold Catalán July 30, 2010 at 11:40 am

What matters here is not necessarily inflation, since price inflation has been relatively marginal and most new money has not entered circulation, but the effect of government spending. The periods of “high growth” are also probably the periods in which the most government money was spent, as such if one adds government expenditure as a positive to the GDP then it’s only logical that GDP rise. If anything, it just seems to reinforce the idea that GDP can be a worthless indicator during times of recession.

Andras July 30, 2010 at 12:09 pm

Not only in recessions.

michael July 30, 2010 at 12:56 pm

So true. Price inflation in recent years has been marginal; and most new money is being held in reserve, so it has not entered circulation.

I don’t understand your distinction, though, between spending on the private market, which it sounds like you think of as ‘real’ spending, and government spending, which should not be included in the GDP as it does no legitimate work. (Please shout out if I misunderstand you.)

Much of government spending goes to support the military-industrial complex– which in turn supports the economies of dozens of cities throughout the country. Without such spending those dependent areas would languish in structural depression. Topeka would cease to be. A shame they have to justify such spending through their periodic wars against the fourth world, but that’s the way the economy is structured. It should properly be included in GDP.

Similarly the most useless bureaucrat in the bowels of paperdom, down in Southwest DC… still spends every cent he makes, on consumer goods and services. So his salary should also be included, just as are the costs of supporting two million prisoners in federal, state and local prisons. And people working to pay off debt? They’re still working, churning out money.

It’s all economic activity. I think I’d probably like to change some forms of activity to more socially responsible ones, same as you would. But they should all be included in the numbers.

Stephen Grossman July 30, 2010 at 1:12 pm

>I don’t understand your distinction, though, between spending on the private market, which it sounds like you think of as ‘real’ spending, and government spending, which should not be included in the GDP as it does no legitimate work.

How can you possibly be ignorant of opportunity cost, especially in a Mises Institute discussion?! What of the private spending that does not occur because govt steals the money? Should you not subtract that from your steroidal GDP? Govt steals from the most productive people and gives the loot to the lesser productive and even the unproductive. Merely because the latter groups spend the loot does not cause increased production relative to a market. Rothbard, in _Hist of Money & Banking_, discusses this. Or maybe in de Soto’s _Money, Banking and Business Cycles_ or in Skousen’s _Structure of Production_. Or maybe all; I forgot.

J. Murray July 30, 2010 at 1:19 pm

A simplification – if the government is doing it, the private market (including the customers) have already determined that it isn’t worth doing. Meaning we as a general population have decided we would rather not spend our money on that kind of thing, yet we are forced to anyway. Thus we are worse off in the end.

A basic understanding of GDP needs to be built before attempting to discuss the metric. GDP doesn’t measure value or prosperity, it measures the volume of paper money transactions. Just because the volume of paper money transactions increased doesn’t mean our prosperity or economic value has along with it. In fact, it’s very possible to increase GDP while destroying value and destroying prosperity. If we spent $7 trillion digging holes and another $7 trillion filling them up again, we would have a $14 trillion GDP. But, at the end of the day, we have nothing to show for it.

A Keynesian July 30, 2010 at 1:30 pm

But if 6 trillion of that 7 trillion was wages and those wages were spent on consumer products then it would drive demand and bring about economic prosperity, assuming that the workers earning the 6 trillion in wages were involuntarily unemployed.

J. Murray July 30, 2010 at 2:34 pm

There would be nothing to buy as all the labor required to dig and fill holes are no longer producing anything to buy with the money. The only available products on the market are digging or filling holes. If that’s what you wanted to buy, you have plenty of money to go around. If not, well, you’re SOL and holding onto worthless paper.

Stephen Grossman July 30, 2010 at 10:01 pm

There is a life and death difference between economic and political demand that Marxists evade. Wages from production are not wages from the govt’s counterfeiting of money and bank credit. Keynes, a Pragmatic Marxist, was a mere rationalizer of theft, not a scientist. He got away with it because the pseudo-morality of sacrifice demanded theft from the successful to the failures. The Austrian-Keynes debate is a moral debate. Does man have an absolute moral right to his own life or is he a moral slave of others? See _Atlas Shrugged_ for the answer.

michael July 31, 2010 at 1:16 pm

“There would be nothing to buy as all the labor required to dig and fill holes are no longer producing anything to buy with the money. The only available products on the market are digging or filling holes.”

That’s all you can come up with… digging and refilling holes? There’s no other work needing to be done? You’re not aware that we have big problems that don’t get addressed because no one wants to spend the money?

The function of wages is to provide a living to those who want to live… and are willing to work. If no jobs exist, such hopeful job seekers are forced either to obligingly die off or to resort to crime.

And the social costs of crime are very high:

“In 2005, about 1 out of every 136 U.S. residents was incarcerated either in prison or jail. The total amount being 2,320,359, with 1,446,269 in state and federal prisons and 747,529 in local jails.”

“In 2006, $68,747,203,000 was spent on corrections. “The average annual operating cost per state inmate in 2001 was $22,650, or $62.05 per day; among facilities operated by the Federal Bureau of Prisons, it was $22,632 per inmate, or $62.01 per day.”

http://en.wikipedia.org/wiki/Incarceration_in_the_United_States#Cost

Some of these are undoubtedly sociopathic. Most would have benefited from having an honest source of income available. They’re in there largely for “idle time” crimes like drugs, gang activity and petty property crimes. In other words, for the things you fill your time with when you can’t find work.

A useful federal or state program would be to take these people, once convicted, and put them to work in a CCC-type program, so they could perform useful work in an armed-services kind of atmosphere, and earn pay for performing labor on our public lands and at our hazmat and Superfund cleanup sites. It would be good business as well as a better program to train people for re-entry into productive society.

With a budget of $68 billion to work with, it would be very workable to put nonviolent offenders to work making this country a better, cleaner and safer place in which to live.

michael July 30, 2010 at 2:00 pm

No matter how you spend the money, Stephen, there’s always opportunity cost– that is, it could alternatively have been spent elsewhere, and possibly been more productive.

For example you might have bought bank shares in 2006, and seen all your value erode in the subsequent meltdown… instead of having paid taxes with it, and seen that same money go into some worker at the Kevlar factory’s paycheck, as he filled a military order.

In the first place, the money would have been a total writeoff. In the second, it might have made a valuable addition to our national bottom line. It might have nourished the bottom lines of the Kevlar worker, his local barber, the sandwich shop, the WalMart and some WM shareholder’s dividend check, all within the space of a single quarter!

Stephen Grossman July 31, 2010 at 1:02 pm

Your examples are arbitrary and out-of-context, w/no scientific value. Taxed money is taxed from production. It is consumed ,not a source of production. Taxes may support the govt in protecting production from force but taxes are not a cause of prroduction. Youre sneaking in a fragmented Marxism/

michael July 31, 2010 at 1:22 pm

Stephen: Every time money changes hands it is “consumed”. Buy something at WalMart and the profit portion goes toward the shareholders, while the costs portion goes to vendors and employees. It all gets “consumed” except the money you stash in your shoe.

Public money going toward schools and highways does important work. You’d notice if these amenities weren’t there.

I also note you haven’t commented on my concrete instance. Money put into investments that don’t pan out is money down the drain. It only offers the guy who sold you an overpriced investment any benefit. And routinely in modern life, investments lose value frequently, and in the trillions of dollars of investor wealth.

Meanwhile money earned in defense industries, provided by your taxes and mine, keeps many large cities alive. Does this observation really sound Marxist to you?

DD5 July 30, 2010 at 1:25 pm

“It’s all economic activity”

It’s activity alright. But economically? Hardly!

The value of any government activity cannot be ascertained in any meaningful way like the commodities offered on the free market, where consumers voluntarily bid with money for the various commodities. So the total amount of money designated to the government portion of the GDP simply assumes the costs to be the output value. That’s preposterous! Value is a function of subjective valuations on the part of the individual consumer and has nothing to do with the costs. If the government was, for example, to all of a sudden offer its services on the free market, it would most likely discover that their value in monetary terms is just a small fraction (if at all) of the costs.

Jonathan Finegold Catalán July 30, 2010 at 1:33 pm

Michael,

I don’t understand your distinction, though, between spending on the private market, which it sounds like you think of as ‘real’ spending, and government spending, which should not be included in the GDP as it does no legitimate work. (Please shout out if I misunderstand you.)

I thought you had read yesterday’s article? I’m pretty sure I outline the logic of my reasoning there (even if it’s just meant to skim both sides of the debate).

Regarding government expenditure that seemingly leads to other investments by the private sector, for example a road or a bridge, or even a military base, it doesn’t seem to me that it necessarily follows that said government expenditure was necessary to put these resources to utilization. Instead, it just seems to me that given the intervention, the market was distorted to the effect of centering the utilization of resources around that public expenditure.

In other words, what I am saying is that if a government-funded canal leads to high investment around the canal it doesn’t mean that without the canal the resources invested would have not been invested. It just means they would have been invested elsewhere. The resources spent by government were still wasted. There is no net benefit, as the benefits which seemingly were reaped would have been evident otherwise.

DD5 July 30, 2010 at 1:58 pm

“In other words, what I am saying is that if a government-funded canal leads to high investment around the canal it doesn’t mean that without the canal the resources invested would have not been invested. ”

Here’s another one for you. The growth of Real Time Traffic reports and the technology involved should be associated with government roads, since traffic jams themselves are not the product of the free market but of Socialism in roads. In this respect, it is not even enough to simply omit the government spending of roads from the GDP. All of the private investment in traffic report technology is itself a “fix” of the previous damage caused by a previous “broken window”. Investment that would have been used differently if not for the government roads causing traffic in the first place. If we could somehow ascertain all of the endless collateral damage by government spending, we would have to subtract it from the private spending part of the GDP.

J. Murray July 30, 2010 at 2:38 pm

No, you can’t subtract the private spending part because all that money otherwise used on real time traffic reports would have been used elsewhere. You’ve made the assumption that if the resources were not used to produce the traffic reports were not expended, they would simply lie fallow. That isn’t the case. Instead of having a real time traffic report, we would have something else of greater value.

Attempt to tie it back to some resultant private industry product as a result of a socialistic policy, but no matter how far you go back, you will never be able to claim that the resources will have remained underutilized. As such, socialism is never justified as it always starts with a misappropriation of resources that will just compound themselves down the line, further removing resources from other uses that are currently being used to eliminate the problems created by the socialistic act.

DD5 July 30, 2010 at 4:19 pm

You have completely misunderstood the point. If GDP is to provide some meaningful information regarding economically productive output (even if it’s only in theory) then it cannot just be about spending per se, but spending that result only from voluntary market transactions.

In the case of the traffic reports, I was giving an example of a private industry that itself is a manifestation of of some previous government policy. Traffic reports are “productive” only to the extent that they mitigate some market failure that can be attributed to government intervention. If it wasn’t for the government intervention in the first place (socialization of roads), there would be no problem of traffic that would have to be mitigated. Those resources used currently for traffic report technology could be utilized for other things. Such opportunity costs cannot be objectively accounted for, but they certainly do exists. It is in this respect, that the money diverted for government roads is not enough to take as an estimate for the cost of government wasted spending on the productive output.

michael July 30, 2010 at 2:18 pm

“Regarding government expenditure that seemingly leads to other investments by the private sector, for example a road or a bridge, or even a military base, it doesn’t seem to me that it necessarily follows that said government expenditure was necessary to put these resources to utilization. Instead, it just seems to me that given the intervention, the market was distorted to the effect of centering the utilization of resources around that public expenditure.”

So if it doesn’t matter where the funds are spent/invested, we might just as readily spend them on public works. You’re just saying that money not spent in one place will just get spent at another.

At the moment Wake County is expanding its freeway system incredibly fast, to accomodate the anticipated growth (it’s one of the nation’s hottest growth centers right now). And the more intelligently planned this growth is, the more people will be able to come to Wake County and join in the process of mutual wealth creation.

How are these projects being funded? The way most freeway expansion projects are, with a mix of federal and state money and bond issues. So everyone is gambling on the same positive outcome, whether they are a state legislature or a private investor. All have a stake in the game.

We could have instead just lowered taxes, forgotten the project and told people to spend that money at the drive-in. Then they could have consumed food, and still had an antiquated freeway system unable to handle existing traffic loads, much less increased loads. Then Wake would not be able to comfortably expand, and companies hoping to relocate here could have stayed put. Paving contractors could have laid off help and highway planners could have become WalMart greeters.

Instead we have the Triangle Expressway system, the Western Wake Expressway, the Outer Wake Expressway and segments currently being planned or ground broken. It benefits both the locality as a whole, the individual who either drives to work or purchases bonds, and the citizen who sees more jobs locating in the area. The lost opportunity is to… take no action. And watch as the money drifts elsewhere.

Don’t get me wrong. Entirely private investments are often as productive as are government-led ones. I’m just saying there’s no general rule. Wise growth is often better than an unplanned array of private opportunities, some of them beneficial, some of them fraudulent, others bound to flop through bad planning. With a wise growth plan you end up with a usable metro area and a solid jobs base.

DD5 July 30, 2010 at 2:31 pm

“Don’t get me wrong. Entirely private investments are often as productive as are government-led ones.”

Almost an hilarious statement.

Jonathan Finegold Catalán July 30, 2010 at 2:31 pm

I’m not sure one can get more conceited than to believe that government is infallible.

Capt Mike July 31, 2010 at 11:57 am

Hey, don’t forget the tax advisors, lawyers, accountants, and MY TIME due to IRS.

Jonathan Finegold Catalán July 30, 2010 at 2:31 pm

Michael,

So if it doesn’t matter where the funds are spent/invested, we might just as readily spend them on public works. You’re just saying that money not spent in one place will just get spent at another.

No, that is not what I am saying at all. The argument I make is that investment revolving around government expenditure by the private sector is investment which would have been made by the private sector anyways. The public expenditure itself still represents a net loss, even if it leads to more private expenditure in the area (because, this investment would have resulted regardless).

Also, I think it’s important to distinguish between this concept of “spending” and the concept of “investment”. The former can mean anything, including investment and consumption. The latter is far more specific. An investment leads to the creation of wealth, while consumption leads to the destruction of wealth. I hold that most expenditure which takes place in the private sector is basically investment, and that it is difficult to draw the line between what is a luxury and what is an investment.

You are not making this distinction, and it may cloud my argument. I maintain, for reasons stated in yesterday’s article, that government cannot produce wealth.

Now, regarding the rest of your response, it seems as if you are arguing that government spending on infrastructure is absolutely necessary to allow for economic growth. Or, more accurately, that despite economic growth there is no mechanism by which the private sector can build the infrastructure necessary to adapt to this growth.

Just because in the present system entrepreneurs prefer to lobby government to build a highway or a road doesn’t mean that without government the private sector couldn’t preform the service. Hopefully, I am returning to Spain soon, and once there I plan to write an article about the road network throughout the autonomous community of Castilla-La Mancha. This includes dirt roads, paved roads, and paved highways. The agricultural road network in Castilla-La Mancha was entirely funded by the private sector. It was built by farmers who funded for themselves the infrastructure necessary to profit from their business.

Don’t get me wrong. Entirely private investments are often as productive as are government-led ones. I’m just saying there’s no general rule. Wise growth is often better than an unplanned array of private opportunities, some of them beneficial, some of them fraudulent, others bound to flop through bad planning. With a wise growth plan you end up with a usable metro area and a solid jobs base.

It is unfortunate that the majority of those who study economics continue to hold the same naïve opinions on government expenditure that you do. You make the assumption that government spending is “wise” and “planned”, while that of the private sector is not (and you continue to hold that only the private sector can preform fraud).

It is as if government is a single organ, which always acts benevolently and with good intentions. It’s as if those who champion government refuse to realize that government is nothing but a web of individual market agents, each with their own reasons for different actions. These humans are just as a fallible as those which operate in the private sector. The only difference is that those who operate in the public sector can make use of the government’s monopoly on force.

mr taco July 30, 2010 at 2:55 pm

three words michael

YOU GOT OWNED

michael July 30, 2010 at 5:25 pm

With all due respects…

Spending on a freeway network connecting all of Wake County is vitally needed for the economy here to expand. And the costs of such a project are beyond the scope of anything private investors, the county, the state or the federal government can individually provide. Rights-of-way alone make this an ambitious, cost-intensive project. But it is needed, and intrinsic to our continuing growth.

Therefore the solution has been to make it more affordable for everyone through broad participation. This project depends as much on private funds as on public ones (in fact more so). It has also been very wisely planned, through county and state participation. Those sections that have been opened for several years now have achieved precisely those objectives they were aiming toward. It’s a good project, and benefits us all.

Without the involvement of various governments it would not, could not, have happened.

You can argue from theory all you like that there’s no way such a project could ever have been a good idea… but it has been. And we are all prospering here in the atmosphere of prosperity that this road system has helped create.

Jonathan Finegold Catalán July 30, 2010 at 5:59 pm

Michael,

Spending on a freeway network connecting all of Wake County is vitally needed for the economy here to expand. And the costs of such a project are beyond the scope of anything private investors, the county, the state or the federal government can individually provide. Rights-of-way alone make this an ambitious, cost-intensive project. But it is needed, and intrinsic to our continuing growth.

Ugh, you are really missing the point. And, I’m not so sure it’s “beyond the scope of anything private investors”; it may just be that private investors prefer to leave the costs to the public sector.

Therefore the solution has been to make it more affordable for everyone through broad participation.

If you had experience with private road networks you’d know that this is exactly what the free market does. Or, do you think that the road network in rural Spain was built by one man?

Without the involvement of various governments it would not, could not, have happened.

You can argue from theory all you like that there’s no way such a project could ever have been a good idea… but it has been. And we are all prospering here in the atmosphere of prosperity that this road system has helped create.

Ok, can you now please accurately interpret my point? I already addressed this above, “with all due respect”.

Matthew Swaringen July 31, 2010 at 12:42 am

michael, consider the following possibilities:

Person A buys bread.
Person A gives money to person B to buy bread on his behalf.

Do you think that person A is better at judging cost/benefit for himself and thus making the best determination of what type of bread he wants and what price he is willing to pay for a given quantity?

So what about
C and D ask B to take money from C,D, and A (who didn’t like the idea) for bread for all 4 of them. B’s only job is taking money from the 3 and spending it on bread. C,D, and A work productively. B’s job is dependent on C and D’s requests, but not on A. So if he skimps on provisions to A or takes more money from A than C or D is this surprising?

Why would anyone outside this scenario believe that B is benevolent? And how can the claim be made that B is better at buying for A what A needs than A?

Shay July 31, 2010 at 9:22 am

Without the involvement of various governments it would not, could not, have happened. You can argue from theory all you like that there’s no way such a project could ever have been a good idea… but it has been.

Your first statement itself amounts to a theory.

michael July 31, 2010 at 9:48 am

“Ugh, you are really missing the point. And, I’m not so sure it’s “beyond the scope of anything private investors”; it may just be that private investors prefer to leave the costs to the public sector.”

Jonathan, have you not even read my comments? It’s a POOL of investors, both private and public, that makes modern freeway projects happen. It’s not a top-down government imposing on us what they think is best for us. It’s a cooperative venture. We split the costs and we participate in the planning process, to the degree that we take an interest.

Therefore: it is an artificial distinction to contend that publicly funded roads and privately funded ones are at cross purposes, and that one approach is inherently better than the other.

Here is your point:

“No, that is not what I am saying at all. The argument I make is that investment revolving around government expenditure by the private sector is investment which would have been made by the private sector anyways.”

They would not and could not. For one thing, without the power of eminent domain, no road project would ever be built. The land is all taken, and too many holdouts would prefer to keep their property no matter what the price being offered. Only government has the ability to purchase a planned route.

And any cost required to overcome those in opposition would become unaffordable. No consortium of buyers less than a government would have the scope to raise that kind of money. That, at least, is my opinion.

But please, point to a private road created with no government participation. There are no laws against them. They only have to pass through the permits and approvals stage, same as any road built WITH government participation.

Jonathan Finegold Catalán July 31, 2010 at 10:22 am

Michael,

Jonathan, have you not even read my comments? It’s a POOL of investors, both private and public, that makes modern freeway projects happen. It’s not a top-down government imposing on us what they think is best for us. It’s a cooperative venture. We split the costs and we participate in the planning process, to the degree that we take an interest.

Have you been reading any of our comments? I understand how “modern freeways” are built (and, by the way, not all modern freeways are built with public finance). But, you are still missing my point.

Therefore: it is an artificial distinction to contend that publicly funded roads and privately funded ones are at cross purposes, and that one approach is inherently better than the other.

No, it is not an artificial distinction. This just proves that you really aren’t reading what we’re writing.

They would not and could not. For one thing, without the power of eminent domain, no road project would ever be built. The land is all taken, and too many holdouts would prefer to keep their property no matter what the price being offered. Only government has the ability to purchase a planned route.

Wow, I guess empirical evidence flies in the face of your claim. Empirical evidence you continue to ignore.

And any cost required to overcome those in opposition would become unaffordable. No consortium of buyers less than a government would have the scope to raise that kind of money. That, at least, is my opinion.

Your opinion is obviously wrong. I’m sorry to be blatant, but it’s clear that you obviously have no experience about what you’re talking about. Your entire argument is based upon a series of assumptions.

But please, point to a private road created with no government participation.

I already have! Please read what you are replying to.

Given that you are seemingly unable to actually address our arguments, I really don’t see the point in continuing this debate.

michael July 31, 2010 at 2:02 pm

Jonathan: This is your example of private highway development?

“The agricultural road network in Castilla-La Mancha was entirely funded by the private sector. It was built by farmers who funded for themselves the infrastructure necessary to profit from their business.”

Around here we have lots of private farm roads too. And logging roads. And there are roads put in by mining firms, oil and gas drillers, ranchers and lots of other people out in the country. They are all roads built on private property to serve private industry. They are not through roads to anywhere, nor are they in use by any large part of the general public.

In no way do they compare to major metropolitan arteries, put in place for the express purpose of attracting new business. Every time a major corporation moves or opens new plant there are negotiations between them and the local governments as to who pays for which roads, which curbs, which new schools for the new population that will be coming, and which infrastructure like water, sewer, fiber-optic and sidewalks. These are all combined public-private efforts. There is no onerous government forcing them to comply and pay taxes to do government’s bidding.

BTW the search term “castilla-la mancha private road” turns up nothing of interest. These would appear to be not very well known.

“…what I am saying is that if a government-funded canal leads to high investment around the canal it doesn’t mean that without the canal the resources invested would have not been invested. It just means they would have been invested elsewhere. The resources spent by government were still wasted. There is no net benefit, as the benefits which seemingly were reaped would have been evident otherwise.”

If government didn’t enter into joint ventures with corporate business, and consequently lowered taxes, people would probably pay down their debts with the money they saved. (That’s what they’ve done with recent tax rebates.) That does provide a good. But not especially a superior good.

“I understand how “modern freeways” are built (and, by the way, not all modern freeways are built with public finance).”

Increasingly, bond issues provide funding for new highway projects. The states are no longer flush with cash, and federal spending is undergoing severe constraints. In recent years it has become standard to fund major improvements with bond issues.

But you’re about to provide me with examples of highways built exclusively through private initiative, design and funding. I only know of one that’s been heavily used and has made money for its investors: the Dulles Greenway. It’s a rare instance where there was room to put a second highway to a major airport, parallel to the existing public road. And Washingtonians who use Dulles do have enough money to afford the tolls.

http://www.downsizinggovernment.org/transportation/highway-funding#2

Google “private highway funding” as I have, and you’ll read quite a lot about how roads are typically funded today.

In closing, I do read and consider your comments. And I go beyond that, to find other data that may support your contentions. (Like the link above.) But the way I see it, there’s no governmental barrier against the creation of privately owned roads. There’s only practical constraints. And still, we can only point to a single one that has ever gotten off the ground: Dulles Access Road.

I do not think the rural roads of Spain’s farm country were built by one man. They were built by farmers, pooling resources. Just like the dirt roads of North Carolina’s eastern counties. They had to buy no land as they allowed one another access across their fields. All they needed was a Bushmaster to clear the brush, a Caterpillar to level the dirt and a backhoe to cut two drainage ditches. Put down gravel and it’s a fancy, all season road. Logging roads? We have them by the hundreds. People don’t locate new businesses along them the way they do along new stretches of county connector roads, linking places like Raleigh and Durham.

“..but it’s clear that you obviously have no experience about what you’re talking about. Your entire argument is based upon a series of assumptions.”

Not assumptions. Observations. Factual evidence, for which assumptions are not required.

Please don’t go away mad. I’ll be happy to look over more instances where someone has created a model that can create useful highways without public participation. Right now I’m up to one example, a $360 million private investment that looks like it has paid off.

Matthew Swaringen August 2, 2010 at 5:30 pm

Why would we find more roads privately when the government makes it unprofitable to make roads?

Old Mexican July 31, 2010 at 1:43 am

Re: Michael,

Much of government spending goes to support the military-industrial complex– which in turn supports the economies of dozens of cities throughout the country. Without such spending those dependent areas would languish in structural depression. Topeka would cease to be. A shame they have to justify such spending through their periodic wars against the fourth world, but that’s the way the economy is structured. It should properly be included in GDP.

Gang, meet another bloke that espouses the Broken Window Fallacy.

Actually, most of government spending goes to pensions and welfare of some kind. There’s nothing productive about this, since spending by bureaucrats is the same as spending by thieves: SOMEBODY is without in order for both to have something to spend.

Bogart July 30, 2010 at 3:06 pm

Inflation is rising. Prices are rising. The government numbers are just lies. Shadow stats has the previous computation (Even that is adjusted significantly) of inflation using the CPI. And it does not include energy and food, well nobody I know eats and moves so I guess that is fine? The real money supply has just exploded. The only thing saving the people this time is technology has made us less dependent on inflation sensitive things like energy and metals.

Bruce Koerber July 30, 2010 at 1:50 pm

True Economic Indexes Need To Replace The Bogus GDP.

It is regrettable that ‘economists’ have to use the bogus GDP statistics to talk about the macroeconomy and to be regarded legitimately as an ‘economist.’ I am sure that most Austrian economists go along just to maintain their reputation as an economist. There is no other science or technology that has an index that is so full of fallacies, except maybe global warming.

The empiricists want a number, fine. What about savings from income? It is real, it is empirical, it signals economic growth.

When will the science of economics gain precedence over the quackery of Keynesianism and the irrelevance of positivism? It may not yet be the time for subjectivists to present indexes that tell the economic story but let’s not forget that GDP can be interpretted in a million different ways since it actually has no real substance other than GDP at time #2 is different than GDP at time #1. Even that is probably of little value since what makes up GDP over time changes to satisfy corrupt political aspirations.

doug July 30, 2010 at 1:58 pm

That thing looks like a sine wave.

Stephen Grossman July 30, 2010 at 9:51 pm

>[Michael]And we are all prospering here in the atmosphere of prosperity that this road system has helped create.

In 1922 Mises identified the economic law in which only market prices, and not socialist pseudo-calculation based on short-range Pragmatist political power, provide the most productive uses for always limited resources. You know rationalizations of indirect, complex socialist theft from production but you do not know economics. You say above, “we are all prospering HERE,” because you know that they are not prospering THERE because your socialist road system was built with always limited resources stolen from the most productive people and given to others. I could sell your body to cannibals and buy a Mises book with it. I would prosper with my new reading. This, in essence, is your sleazily evasive pseudo-argument. Spread the wealth. Your money or your life. But theft from the most productive uses is theft whether by 1930s bank robber John Dillinger or pretentious, leftist, Obama. Obama, however, has the pseudo-morality of sacrifice, not economics, on his side. See Ayn Rand’s _Atlas Shrugged_ for more.

michael August 2, 2010 at 3:16 pm

“In 1922 Mises identified the economic law in which only market prices, and not socialist pseudo-calculation based on short-range Pragmatist political power, provide the most productive uses for always limited resources. You know rationalizations of indirect, complex socialist theft from production but you do not know economics.”

I wish I could convey to you how pretentiously preposterous things like that sound. It makes absolutely no sense, and is in fact an a priori opinion for which you’ve provided no foundation. Mises has decided unilaterally that he only assigns value to things to which one can put a market price. And that’s beyond dumb.

If you have a car, is a road of any value? Of course it is. It serves the same useful purpose no matter who provides the funding.

Beefcake the Mighty August 2, 2010 at 3:29 pm

“I wish I could convey to you how pretentiously preposterous things like that sound. ”

Indeed, you are an undisputed expert in things preposterous and pretentious.

tralphkays August 2, 2010 at 3:44 pm

Right on Beefcake!

Scott D August 2, 2010 at 5:04 pm

Mises has decided unilaterally that he only assigns value to things to which one can put a market price.

I’ll try to clear things up for you with an analogy designed to appeal to your particular biases, because you’ve been quite persistent in your misinterpretation of the Austrian position.

Imagine showing up for the annual Christmas party thrown by your employer. The venue is fantastic, the musicians are nationally recognized and the food is delectable. You’re having a great time, but midway through, the company owner takes the stage to address the crowd. He thanks everyone for attending and then indicates that he has an important announcement. You see, the cost of the party, amounting to a few thousand dollars per person, was only possible because there would be no raises given out this year.

The first thing that you should realize about this scenario is that it is impossible to calculate whether the party is a net benefit or a net loss. Individually, some people might be angry at having been denied a raise, others might feel indifferent, and some (definitely those who wouldn’t have earned a raise) would be quite happy about it. Austrian economics predicts that on the whole, people will be worse off for having the choice of where to dispose of their income taken from them. Think about this common-sensibly and I think that you will recognize the truth in that.

Now, take away the announcement. Instead of telling people that the party is the cause, concoct some story about a downturn in demand or somesuch. Now, the employees only got to see the great party that they were thrown, without realizing that the funding from it was taken from their own future income. Like you and your praise for government funding of highways, wouldn’t they think that the party was a net benefit to them? This is what happens when the government taxes or borrows money from the private sector to fund its projects. We never get to see where the money would have gone and the lost opportunites that the government investment crowded out.

Turn the example around all you want. Maybe instead of a party, the employer decides to use the raise money to remodel a building or toi construct a new, larger and more functional employee parking lot. Again, despite the benefits of the new lot to employees, Austrian economics predicts that, on the whole, people would be better off having been given the choice of what to do with their income.

michael August 3, 2010 at 12:06 pm

Scott: I like your Christmas party analogy. But hasn’t the federal-budget aspect of this party been going on for the past century now? Those questions have long since been addressed.

So the boss holds his third or fourth party, and everyone knows by now that they have to pay for it out of their bonuses. Don’t they appoint someone to have a little chat with the boss, giving him their position on it? I think they do. And what they tell him is if it’s all the same to you, why don’t you just give the money to us. And we’ll have the party.

So the boss says instead, wouldn’t you rather have a group health plan? How about free maternity leave for the women, and child care on the premises so you don’t have to keep the kids in day school?

When workers see the benefits coming back to them, and when they realize they have a chance to give input, they feel a lot better about the boss’s ideas. Because the business is being run democratically. This is, of course, analogous to our own system of sending elected representatives to Washington, to decide how the funds are to be allocated and the party paid for.

If you feel like your own tax dollars are being misappropriated, maybe you ought to think about starting your own country. That way you could run the place any way you choose. And not have to pay a dime to any of those welfare types who seem to need a helping hand. or, god forbid, retirees too old to work! You can just cut them all off the rope.

Just don’t think about doing that around here. Too many people are invested.

2. “Austrian economics predicts that on the whole, people will be worse off for having the choice of where to dispose of their income taken from them. Think about this common-sensibly and I think that you will recognize the truth in that.”

In the United States people pay a desk rent, for the privilege of doing business here. They have the freedom to decide it’s not worth it. But then, of course, they have to move. And pay desk rent somewhere else. I happen to prefer the benefits package offered by the good old USA. Even though writing that check sometimes comes along at an inconvenient time.

I find there’s no desk rent to do business in either Brunei or in Macau. It’s something to think about.

Scott D August 4, 2010 at 1:22 am

You know why the analogy breaks down at this point? You’ve forgotten the politicians. It’s not simply a matter of negotiating with the boss. Because that person who was appointed to represent the employee’s interest manages to get a whole lot of perks out of the deal and is given great liberty with company expenses. Heck, he would do just about anything to hang onto that job, even if it means pressuring the boss to misappropriate funds for projects of dubious usefulness to the business.

Incidentally, if you’d like to see the eventual outcome of your “desk rent”, you need look no farther than California. I saw it all the time when I lived there. Businesses are leaving in droves, and so are people, to the tune of a net exodus of 144,000. The taxes and regulations just kept racheting higher amid the state’s awesome prosperity for most of the 20th century. When I lived there, I was always hearing about some business pulling up stakes and heading to another state. Your unshakable faith in the US economy and the US dollar are based upon a world in which bad policy has immediate and drastic effects, but the reality is that the effects of a bad law passed this year may not become apparent to the public until years or decades have passed.

Bala August 4, 2010 at 3:59 am

michael,I’ve seen you utter this garbage

” In the United States people pay a desk rent, for the privilege of doing business here. ”

so often, I am just unable to resist responding to it.

Only the owner of a property may seek rent from those who seek to use their property. Tax levied may be treated as “desk rent” paid for the privilege of doing business in the US ONLY if you say that the territory that is called US is the “property” of the USG. Are you saying it is? If not, treating it as rent does not seem appropriate.

So, your suggestion (fairly repeated and to many people) that they relocate to Macau or Brunei is utterly off-target and is fairly disgusting. It shows your arrogance that stems from being on the side of the “invincible” goons.

Jesse Forgione August 2, 2010 at 6:35 pm

“If you have a car, is a road of any value? Of course it is. It serves the same useful purpose no matter who provides the funding.”

You might even say a road is …worth paying for?

Stephen Grossman August 3, 2010 at 10:22 am

Agreed ,your rationalization of the socialist theft and destruction of production is not the science of economics. You are essentially ignorant of economics, knowing merely a cargo cult version that does not scientifically fly tho it obviously provides hope that another cargo plane will land. The vast and vastly complex ,constantly changing and interacting market of relative prices is the only way to know what and how to produce for man’s unlimited wants with always limited resources. Beyond the market, there is no economic knowledge available to socialist bureaucrats and scientific frauds like Keynes, Greenspan, Bernanke, etc. They can only arbitrarily select some production, ignoring others, arbitrarily select some factors of production, ignoring others and arbitrarily set some price, ignoring others. Shall more cars and less roads be produced? Or the reverse or some other goods? Science is not mysticism. You are an intellectual fraud.

Stephen Grossman August 3, 2010 at 8:40 pm

>If you have a car, is a road of any value? Of course it is. It serves the same useful purpose no matter who provides the funding.

Unless, of course, the state owner of the road has taxed gasoline so heavily to pay for the road that driving a car is uneconomical for some people. You drop the context of the market as a whole and look at a part of it. That is socialism, not science. You evade the market’s structure of relative prices.

Bala August 4, 2010 at 12:16 am

michael,

” Mises has decided unilaterally that he only assigns value to things to which one can put a market price. And that’s beyond dumb. ”

I am extremely surprised to see that no one else has yet picked on this statement of yours. It is very clear from this very statement that you are the one who is “beyond dumb”.

Mises did not say that he “assigns value” to things to which one “can” put a “market price”. He said that value is subjective, i.e., it is something assigned by each individual on his own based on the use he intends to put the object concerned to. He also said price is something that “emerges” or “is discovered” on a free market where people engage in voluntary exchange. His idea was that exchange happens because and only when both parties to the exchange see greater value in what they get than in what they give. For instance, if you and I have an exchange where I give 1 bag of rice and you give 2 bags of wheat. Mises’ point was simply that you accept the 1 bag of rice because it is of greater value than the 2 bags of wheat are while I accept the 2 bags of wheat because that is of greater value to me than the 1 bag of rice is.

Price, as I have understood Mises, is something that emerges out of a large number of such voluntary exchanges. Even in this isolated example I have taken, we can talk of price. The price of my bag of rice is 2 bags of wheat and the price of a bag of wheat is 1/2 a bag of rice. In effect, price is just the exchange ratio in the transaction. This price, however, has little bearing to the subjective “value” that both parties see in it except that it lies somewhere between the two.

So, it is not “value” that comes from “price” but “price” which comes out of the act of voluntary exchange which in turn is made possible by the difference in the subjective values ascribed to the same 2 products by the individuals involved in the exchange.

The conclusion is that you have it all backwards and have made a complete fool of yourself. Nothing new about that last bit, but just thought it would be helpful to mention it explicitly.

mpolzkill August 4, 2010 at 7:45 am

“I am extremely surprised to see that no one else has yet picked on this [beyond dumb] statement of yours”

There is just so much of it, plenty to around, and I think a lot of people stopped reading him altogether. Jump right in, Bala.

michael August 4, 2010 at 8:12 am

Your tutorial on price is very enlightening, Bala. I was responding to S. Grossman’s comment that “In 1922 Mises identified the economic law in which only market prices, and not socialist pseudo-calculation based on short-range Pragmatist political power, provide the most productive uses for always limited resources. You know rationalizations of indirect, complex socialist theft from production but you do not know economics.”

There are two ways to arrive at a price structure that best serves a society. The one, of course, is “how high can the market go?” Prices can be forced up until a maximum profit can be obtained by leaving out the bottom of your available market.

It works fine for the vendor to maximize profit by reliance on market mechanisms. That’s the way the price of rice tripled a couple of years back. Grain markets are known for having virtually no reserves. Typically at any moment we have less than a sixty day supply of grain on hand, so prices can become very volatile.

Increased use of the US corn crop for making corn ethanol forced a dislocation in world grain markets that pushed up all prices. And rice tripled in Haiti, where just a few years previously Haitian rice growers had been forced out of business by subsidised American imports under a Free Trade Agreement.

So rice became unaffordable, and people starved. It was a classic case of the price being set by the point where a willing buyer met a willing seller. Right? Only the seller was firm, while the buyer had no money.

The other, socialist approach would have been to also subsidise Haitian rice, so there remained a local alternative to buying from the only seller in town.

Here’s another example: labor. Around the world, companies offer jobs at a set rate that enhances their bottom line. Prospective employees, on the other hand, have a certain cost of living they have to meet. In the developing world, these two lines are normally very far apart. And even in this country we have a large proportion of working poor, who need access to credit just to be able to meet those basic living expenses their wages won’t pay for. Which is, of course, an unsustainable model.

So in this world, the idea that price is always a result of voluntary exchanges is an illusion, a myth that makes one feel good. Pressure on the vulnerable and desperate is always laughably easy to exert. Hence the perpetual popularity of “redistributional” approaches, without which many of us are left off the gravy train. Under the law propounded (I assume) by Mises back in 1922, the very best possible distribution of scarce resources is to always award them first to those who already have plenty… and who don’t want to share.

mpolzkill August 4, 2010 at 8:32 am

“the very best possible distribution of scarce resources is to always award them first to those who already have plenty… and who don’t want to share.”

What is it three months here? And this sums up nicely what he’s learned, Don and TT.

Bala August 4, 2010 at 9:31 am

michael,

Thanks for making me feel like I am speaking to a wall. However, you have said enough to damn yourself and

” There are two ways to arrive at a price structure that best serves a society. ”

Firstly, as I said, the “price” of any good and, by extension the “price structure” is something that is “discovered” on the free market when individuals engage in voluntary exchange. When you say talk of “arriving at a price structure”, please remember that left to its devices, the market will throw up its own price structure. So, there is nothing that you need to do. Keeping your grubby hands off is all that is required.

If, on the other hand, you wish to have a situation where you or the gang of goons that has your (and the public’s) endorsement to “arrive” at the price structure, you need to first read Mises’ note “Economic Calculation in the Socialist Commonwealth”. Any links, anyone?

That apart, taking on another part of the sentence I have selected, when you say “the price that best serves a society”, what is the nature of such a price structure? How is anyone at all to define the characteristics of this “ideal” price structure? Could you define them please?

How do you distinguish the “market” from the “society”? If “society” represents the set of all people who live in a geographical area, since every one of these people is also a participant in the market, it is impossible to differentiate the “society” from the “market”. So, what is good for the participants in the “market” is good for the members of the “society”.

It is not so only if you wish to benefit certain members of the society irrespective of the harm that conferring such benefit on the select few (or many) brings upon the unfortunate many (or few). Going by your statements, that is what you wish to do. So, you are just a “wealth redistributionist” (just coining the term).

Then there is this

” The one, of course, is “how high can the market go?” Prices can be forced up until a maximum profit can be obtained by leaving out the bottom of your available market. ”

Ever heard of a concept called “competition” and how competition forces prices down? It almost sounds like you have suddenly landed up here from Wonderland.

However, this was the most hilarious one of all

” Increased use of the US corn crop for making corn ethanol forced a dislocation in world grain markets that pushed up all prices. And rice tripled in Haiti, where just a few years previously Haitian rice growers had been forced out of business by subsidised American imports under a Free Trade Agreement. ”

Pray tell me which of the two
1. Increased use of US corn syrup for making corn ethanol and
2. Haitian rice growers being forced out of business by subsidised American imports
is not an outcome of government action but an outcome of the operation of free-market forces?

With this one paragraph, you have openly identified an example that shows how government intervention in the market makes everyone worse off, especially the most vulnerable sections of society.

” The other, socialist approach would have been to also subsidise Haitian rice, so there remained a local alternative to buying from the only seller in town. ”

The third (since you have spoken of 2) is to withdraw US subsidies. I wonder why this simple solution fails to strike you.

Taking the main “punch line’ from your next paragraph

” Prospective employees, on the other hand, have a certain cost of living they have to meet. ”

Ahhh!!!! What drives the cost of living perpetually upwards? Is it not the non-stop money creation by the governments of these developing countries, governments that relentlessly incur deficits of gargantuan proportions in the name of running “welfare schemes” purportedly to benefit the weaker sections of society?

Just giving you an example from where I live. The Government of India is now running a make-work programme called the “National Rural Employment Guarantee Scheme” under which every person who wants to work can demand and get a minimum of 100 days of employment doing public works and get Rs. 100 per day for the same. They spend a measly Rs. 1 trillion on this scheme every year. A couple of years ago, the same Government of India announced a waiver of loans outstanding from farmers to the banking system, a waiver that amounts to around Rs. 600 billion (That’s a little around $5.5 billion). The Government of Tamil Nadu (the state of the Indian Union I live in) distributed TV sets free to around 20 million people. To make all this possible, the Reserve Bank of India and the banking system drove money supply up at a rate of over 22% per annum for the last 5+ years.

And you know what? Price inflation, especially of food products, has been running at around 15-17% for the last 2 years or so. And these are official figures. The reality on the streets is much worse. Prices have doubled or more in the last 3-4 years (clearly indicative of a rate of price rise well above the officially declared rates). Food is fast going beyond the reach of the ordinary person on the streets.

So much for your freaking governments and their benevolence!!!

mpolzkill August 4, 2010 at 9:38 am

Whoa, that was really good, Bala. My answer is always, see: THE FREAKING INDUSTRIAL REVOLUTION!!! Neither answer works on a blockhead like this, but mine is so much easier on me. Thanks for your efforts though, it is well worth it to third parties.

The link you requested:

http://mises.org/pdf/econcalc.pdf

Bala August 4, 2010 at 9:43 am

mpolzkill,

Thanks. It feels good to be appreciated, especially for me when it comes from you :)

Bala August 5, 2010 at 2:01 am

michael,

Just addressing your closing points.

” So in this world, the idea that price is always a result of voluntary exchanges is an illusion, a myth that makes one feel good. ”

Why is it a “myth”? What prevents price from being determined solely by voluntary exchange is government interventions of various kinds in the economy. Remove the government interventions and all we will have left is a free market where productivity improvements from technology and competition continuously force prices downwards.

” Pressure on the vulnerable and desperate is always laughably easy to exert. ”

Yes. It is easy to exert. But the key question is “Who finds it easy to exert and who actually exerts it?”. The answer is to both is “government”. The means to exert this pressure is all their interventions in the economy, interventions that distort the beneficial influence of the free market.

” Hence the perpetual popularity of “redistributional” approaches, without which many of us are left off the gravy train. ”

The word “popularity” always begs the question “popular among who and why?”. It also fails to address the important questions “Is that which is popular also necessarily good for those among whom it is popular and for others as well?” and “Is that which is popular implementable on a voluntary basis or does it require the initiation of force to expropriate from some for the benefit of the rest?”.

In simple terms “popular” and “doing the right thing” are not synonymous. Democracy per se is not a great thing. In fact, depending on how it is organised, it can be the ideal vehicle for the official sanction of tyranny. If you have any doubts, I welcome you to study India as a “shining” example of my statement above.

” Under the law propounded (I assume) by Mises back in 1922, the very best possible distribution of scarce resources is to always award them first to those who already have plenty ”

No one “awards” anything. Some take the resources and become rightful owners. It is all about property rights and voluntary contracts. You are guilty of misinterpreting the term “very best possible distribution”.

” and who don’t want to share ”

Why should they share? Why should they want to share? Is is wrong to refuse to share and keep one’s property to oneself? If so, by what standard do you judge it to be wrong? Please lay out the foundations of the ethical system that brings us to this conclusion.

Stephen Grossman August 4, 2010 at 1:17 pm

>[michael]There are two ways to arrive at a price structure that best serves a society

There is no rational justification for sacrifice and thus its not a basis for the science of economics. Economics help guide the individual in his selfish moral right to his own life as an individual. You have sleazily sneaked in your morally depraved and bloody collectivism.

Stephen Grossman August 4, 2010 at 1:28 pm

>How is anyone at all to define the characteristics of this “ideal” price structure?

Chanting, LSD, yoga and contemplating the wisdom in Bob Dylan’s lyrics from a postmodern
perspective. If this fails, hit your head against the nearest wall until an insight reveals itself.
It may help to look at a photo of North Korea at night. On the other hand, there are
rumors that graduation ceremonies for a doctorate in mainstream economics include a secret handshake in which the ideal price structure is revealed. At least, that’s the rumor…
I’ve taken an oath to say no more. Nudge, nudge, wink, wink.

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