August 10, 2003

Junk economics
(via Mises Economics Blog)

Excellent article by Pierre Lemieux on Keynesianism and other sorts of junk economics:

'U.S. economy soars on war spending," ran a newspaper headline on Saturday. This suggests a little economic puzzle: Why can't we have the economic boost without the dead soldiers? Suppose the state called a war on, say, the ocean, took $80-billion worth of real resources -- steel, aluminum, trucks, airplanes and computers -- and sank them off the continental shelf. Why wouldn't this stimulate the economy?

According to John Maynard Keynes, it would. In his famous 1936 General Theory of Employment, Interest and Money, he wrote: "If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is."

The problem is that there is no such thing as a free lunch. If defence expenditures increased by $80-billion, other expenditures -- consumer expenditures, in this case -- must have decreased by the same amount, because the resources grabbed by the state have been taken from the private economy.