Sun, 29 Feb 2004

We Owe it to Ourselves

Hezekiah Niles, writes, in Niles' Weekly Register (10/21/1826),

"The making of the New York canals did not really cost the people of the state the value of one cent, except so far as foreign materials may have been employed in the construction of them, or for that small portion of the profits on labor which the artists and laborers may have carried out of the state. On the contrary, they gave a large and wholesome circulation to money, and enriched many individuals; and the increased value of property, and of profit, resulting from them, must be supposed by counting up hundreds of millions of dollars, if, indeed the benefits of them be within supposition at all!

Niles was probably not the first person to express that economic fallacy, nor has he been the last. Keynes said we owe it to ourselves," by way of excusing public debt. Yes, you can be pedantic and say that yes, literally, had the canal been paid for with dollars that had "New York" written on them, only a few of them would have been initially spent or taken out of state. But that's not really Niles' point. His point is that it literally didn't cost anything, just like Keynes' point is that public debt doesn't cost anything because we're just paying the interest to ourselves.

This all is yet another flavor of Bastiat's broken window fallacy. In this fallacy, a vandal breaks a window, and creates employment for the glazier. And yet that doesn't make sense, because the world isn't made better, and more people aren't employed by destroying things. The key is what is seen and what is not seen. What is not seen -- and it's hard to see because it ends up not existing -- and not seeing is not believing -- is whatever the homeowner would have done with the money besides repairing windows.

Similarly, what Keynes and Niles miss is what would have been done with the money had it not been spent on a canal, or borrowed and spent by the government. Don't be fooled by "We owe it to ourselves."

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Wed, 25 Feb 2004

Infinite Resources

I've been having a discussion with someone about the value of recycling. I said: William, the resource stream from a physical point of view is obviously not endless. From an economic point of view, the economic value of the resource stream *is* endless. Since you have to use economics to weigh recycled versus virgin materials, you can't rely on a physical analysis to come to an economic conclusion. It would be like trying to use algebra to solve a problem that needed calculus.

William responded:

You're still thinking inside the box. Step outside and take a look around.

The problem with the assumption of infinite resource value is that it does not match the real world. Economic theory based on such an assumption may be very beautiful and very coherent, but it has no practical value whatsoever. Just as I have problems with environmentalists refusing to recognize the implications of sound economic theory, I have problems with economists refusing to recognize the implications of sound ecology. The real world is NOT infinite. Therefore, any theory that assumes that resources have infinite value cannot be trusted to guide practical actions in the real world. That is a good, old-fashioned QED.

William is confused, so I must be writing badly. I'll try responding at length.

Economic Subjectivism

Over a century ago, economists generally agreed that something was worth what it took to make it. That is, something had an intrinsic value. We now know that's not true. It completely fails to explain trade in a free market.

If you had intrinsic value in a free market, nobody would bother to trade anything. Whenever anybody traded two things, they would be just as likely to trade them back, because they're of equal value. In a market is free of coercion, nobody would bother to trade one thing for another unless it was of equal intrinsic value. The only way out of this failure is to claim that free markets don't exist, and that all trades occur because the traders have unequal power.

If you can coerce people by applying power to the trade, then you will have trade. The more powerful party will force the less powerful party to hand over something of greater intrinsic value. Clearly, there is trade, so if you assume intrinsic value, then you must deny the existance of free markets.

Remember, Marx devised his theories in the face of intrinsic value theory.

What economists know, and what many people seem not to know, is that value is not intrinsic to the item, but is instead an attribute that each person applies to the item. This insight, although seemingly simple and perhaps even obvious, explains many things previously thought paradoxical.

Everyone has likely had the experience of going grocery shopping before dinner. Everything on the shelves looks so good. Doing the same shopping after dinner will produce different results, and yet the groceries haven't changed. You have, so you place different values on the foods. If food had an intrinsic value, you would purchase the same food before or after dinner.

Free markets are easily explained by the fact that parties trade for things that they value more. If I'm buying milk at the store, the store values my money more than their milk, and I value their milk more than my money. That's why they bothered to keep their store open and pay cashiers, and that's why I bothered to drive to the store. Sometimes I've traded a dollar for a dollar, because I had a bill and wanted four quarters. I valued the one form of a dollar higher than the other form, and the other party was indifferent to the form but desires the intrinsic pleasure of being helpful.

Infinite Value

Infinite value is the proposition that a finite amount of something can have an infinite amount of value. People who are not economists, and are stuck in the 1870's objective value see this as being obviously false. How could a finite amount of something be valued infinitely high? The idea is, as William said in the opener, false, QED. Unfortunately for him, he hasn't proved anything, but is simply assuming his result.

Infinite value is an inevitable result of relative value. Let's say that you were using natural resources at a certain rate, and you were increasing the relative value of these resources faster than you used them. Specifically, let's say that you produced a certain amount of value out of consuming the first half of a resource. You were able to double the value of a specific unit of the resource, so that you could consume half of the remaining resource and produce the same value. Like Zeno's paradox, the resource continues to produce value forever.

In the real world, you reach the atomic level sooner or later, and effectively run out of the resource. Does this invalidate the idea of infinite value? No, because in time, the substitutes for a resource become cheaper than the resource, and people will switch to those substitutes. What this means, though, is that people can consume resources based on the price, rather than having to worry about running out. You can act as if resources were infinite even though they're physically finite. That's a surprising result, but if a science doesn't surprise you from time to time, why bother studying it?


What lesson does this have for recycling? Simply put, it means that you don't have to worry about running out of resources. Recycle when it makes sense for you. If it's cheaper to recycle something, then recycle it. If it's not cheaper for you, don't recycle it.

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Thu, 05 Feb 2004

External Benefits

"K J" has these comments about a recent issue of The Quaker Economist:

The debate about who should pay for higher education is so squalid. Everybody benefits, not just the graduate. It is proper that the whole of society should pay for training and education (vocational as well as academic)so that the massive burdens of expense and debt do not discourage and deter candidates from poor backgrounds.

This is an anti-economic idea. First of all, there are no subjects of study which are "squalid". To say that is to expose ignorance of what economists actually do. Economists study spontaneous order. To suggest that we shouldn't study something is to suggest that economics should not exist, as a profession, as a science, as a way of thinking.

Second of all, the mere existance of external benefits is not, a priori (and since K J rejects the idea of studying the issue because doing so is "squalid", they don't want there even to BE an postori) reason to spend coerced money on the source of the positive exernalities.

At a minimum you should ask the question "Will the recipient of the benefit pay for it anyway?" before deciding whether taxation is necessary. If they will, then there is absolutely no need to take money from other people and spend it against their wishes. For taxation by definition is spending money against people's wishes. If they wished to spend the money, they would do so with no need to threaten to hurt them if they don't.

Taxation is violent. You would be surprised how many leftists oppose war in the name of justice but promote violence in the name of justice. Poor justice, to be used and abused so!

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Tue, 03 Feb 2004

The Churn

The following reprint from the Federal Reserve Bank of Dallas explains why job destruction is an essential part of job creation. Yes, it's a PDF, but download it and read it anyway. It's good, like everything I've seen come out of the Fed of Dallas. Good people there.

Economists, questioning why America's job creation in the recovery of the early 1990s fell short of expected levels, have reconsidered the ideas of Joseph Schumpeter, who offered the first scholarly explanation of the churn in the 1930s. Schumpeter advanced the paradox that economic progress destabilizes the world. Progress and job destruction go hand in hand in a dynamic process he called creative destruction. Today, as in the 1930s, Schumpeter's insights help explain how jobs emerge and disappear through the innovation and entrepreneurship of free enterprise.


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