Tuesday, October 16, 2012

Destruction Does Not Create Prosperity

I may have missed something in my c.v., but I don’t think I have ever written a critique of any leftist economist. In searching through my own publication records, my targets have almost always been scholars perceiving themselves as, or widely being seen as, right wing supporters of free markets, but who either are really no such thing, or who fall short of this honorific mark. For example, my past targets have included Tom Bethell, James Buchanan, Ronald Coase, Harold Demsetz, William Easterly, Richard Epstein, Milton Friedman, Friedrich Hayek, Deirdre McCloskey, Elinor Ostrom, Richard Pipes, Ayn Rand and Andre Shleifer. I am a strong advocate of product differentiation, and these people are improperly interpreted, I contend, as uncompromising advocates of free enterprise, private property rights and laissez faire capitalism. They are not.
But today I am embarking on a new mission: putting lefties in their place, starting with Paul Krugman. I had long eschewed this sort of thing, thinking it akin to taking candy from babies, intellectually speaking. I was glad that "child-molesters" like Robert Murphy and William Anderson have long been doing this sort of dirty work. I am of course speaking tongue in cheek here; I greatly admire all of Bob’s and Bill’s work, particularly their willingness to step down into the trenches with the likes of Paul Krugman. But today, thanks to Murphy’s and Anderson’s example, I am entering this bog. However, my sense of disgust must be more finely honed than Bob’s (who has publicly challenged Krugman to a debate). The thought of actually debating with this creep, coming face to face with him, really gives me the willies. These people really have no brains, and it is really unfair to debate them. But, what the heck; Krugman has won the Nobel Prize in economics, and is a Princeton professor, so, maybe, it is not exactly like criticizing a mentally handicapped person to take him on.
My target is Krugman’s "The iPhone Stimulus" which recently appeared in his regular New York Times column of September 14, 2012. In this essay he looks forward to the release of the Apple iPhone 5, as a way of stimulating the economy. He states: "What I’m interested in … are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two."
But wait. This doesn’t sound so crazy at all. If the expectations of this new improvement are even partially met, this item will indeed give a boost to the economy along the lines of other breakthroughs such as increasing the quality of cars, oil drilling, air conditioners, marketing, retailing, etc. If communications can now be even somewhat improved with the release of this new initiative, it must enhance our economic well being. Have I entirely misjudged the acumen of this economist? Has my prejudice against socialist and Keynesian economists blinded me to the veracity of his argument?
Krugman is not looking to Apple iPhone 5 to improve the economy through ease of communication. Rather, very much to the contrary, he sees its benefits as stemming from the obsolescence of already existing plant and equipment of the same type. He says: "Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was ‘use, decay, and obsolescence’: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good."
I am glad you are sitting down as you see these words, gentle reader, otherwise you would topple right over as I did when first encountered them, while mistakenly standing up on my two feet. The economic benefits of the Apple iPhone 5 do not come from its merits, merely from the fact that the introduction of this item embodies obsolescence? My goodness gracious. If this were true, then wouldn’t it be even better if the rate of capital destruction were even greater? And wouldn’t it help the economy even more if this devastation were not confined to communication implements like the Apple iPhone 5 but ranged widely over the economy, poisoning everything in its path including housing, factories, pipelines, mines, etc. In the extreme, we might as well just bomb our capital, buildings, etc., so that we are left with no food, no clothing, no shelter, no anything. Think of all the aggregate demand we would have then!
It used to be, many moons ago, that critics of the market would attack the free enterprise system for purposefully imbedding obsolescence in their products. The charge was that more profit could be earned that way, as if Mercedes Benz, Volkswagon, Toyota and Honda owed their splendid reputations to the unreliability of their automobiles. But now Krugman actually calls for the undermining of quality in order to help the economy. This man never should have been given the Nobel Prize in economics. MIT, which awarded this economic illiterate a Ph.D., ought to engage in a recall. After all, if commercial firms commonly do so for defective products, the same ought to hold true for academia.
At least the old critics of the market were correct in citing needless obsolescence as a flaw (their mistake was thinking this could be profitable in the long run, given people’s experiences, and private rating agencies such as Consumer’s Reports, Good Housekeeping Seals of Approval, etc.) But Krugman does them one better: he actually calls for the faster breakdown of capital goods. For shame.
In Economics in One Lesson, an entirely uncredentialled Henry Hazlitt correctly labeled the economic fallacy now being peddled by Krugman as "the broken window fallacy." When the hoodlum throws the brick though the baker’s window, he does no economic favor to anyone (well, the juvenile delinquent probably enjoys this destruction of other people’s property). Yes, there will be new business for the glazier from the baker, but the latter would have spent the money on something else anyway. And, even if he did not, if he stuck this money into his mattress, everyone else’s currency would have been worth a bit more. Spending would not have suffered with an intact window. But throwing the brick is economically indistinguishable from have a weak pane of glass in the first place, one that is likely to fall apart on its own due to obsolescence. And the latter is precisely what Krugman is calling for!
Maybe I had better get back to criticizing right wing critics of the market. They are far more of a challenge. I really feel somewhat ill in having to instruct an obviously very bright man like Paul Krugman on one of the most basic elements of microeconomics, the broken window.

October 8, 2012
Dr. Block [send him mail] is a professor of economics at Loyola University New Orleans, and a senior fellow of the Ludwig von Mises Institute. He is the author of Defending the Undefendable, The Case for Discrimination, Labor Economics From A Free Market Perspective, Building Blocks for Liberty, Differing Worldviews in Higher Education, and The Privatization of Roads and Highways. His latest book is Ron Paul for President in 2012: Yes to Ron Paul and Liberty.
Copyright © 2012 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Does destruction create jobs? After natural disasters, terrorist attacks, and wars, some people argue that these disasters are good for the economy, because they create jobs and prosperity. As Prof. Art Carden of Rhodes College explains, this is an example of the "broken window fallacy," a term coined by Frederic Bastiat. When a shopkeeper's window is broken, he will spend money on a new window, which gives income and jobs for glaziers. This activity is "seen," but the "unseen" is just as important: the money spend on a new window could have been spent on other things. Wealth has not increase, but only reallocated from some people to others, and society is worse off by one window.

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