Paul Krugman, iPhones, Planned Obsolescence, and Economic Growth

In his latest column, Paul Krugman talks about the Apple iPhone 5 and argues that its sales will add measurably to economic growth, and draws the further conclusion that the government should spend more. He asks:

Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.

Paul Krugman

Well, no, I don’t find it plausible, but let’s set that aside for now and come back to it later and first continue to examine his argument, which is that the iPhone 5 will boost the economy simply because it will induce people to spend more. And then he comes to this:

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.

So if “obsolescence” is “Good”, then why don’t companies like Apple just design their products to fail after a certain time? And then people will have to go out and buy more of them again, which will help the economy! It’s funny, I’ve owned several iPods and that’s pretty much what happens with them. The batteries wear out over time and for the cost of sending it in to get it replaced, it just makes more sense to upgrade to the latest model. Does Apple design its products that way on purpose? After all, even if it can’t design a battery to last the lifetime of the product, it could design it so you could just easily open the thing up and replace just the battery instead of the whole thing. So is this planned obsolescence?

And, if we follow Krugman’s argument through to its logical conclusion, wouldn’t planned obsolescence be “Good” for the economy? Conversely, if a company was to produce light bulbs that lasted a lifetime, so that you never had to replace them, that would be bad for the economy because people wouldn’t have to go out and spend more money to replace their bulbs regularly? Doesn’t this mean that if we could all own homes and furniture and electronic goods and cars and appliances, etc., that lasted a lifetime and never needed maintenance or replacing, that must mean the economy would be in a very sorry state, since there would obviously be so little spending since there was no need?

Wouldn’t it follow from Krugman’s logic that if computer companies deliberately designed computers to fail after only a month or so of use, so that every month people had to go out and buy a new computer to replace their obsolete model from the previous month, then that would be “Good” for the economy because it would mean people would be spending more? In fact, if obsolescence is so good for the economy, why don’t we just design everything to fail after a short time? We could manufacture cars to expire after you drive them 10,000 miles! What a tremendous boost to the economy it would be if everyone had to buy a new car every single year! Think of all that spending!

But, now, hang on just a minute here…. Where would the money come from for all this spending? And what about the vastly greater resources that would be required to constantly replace everything we buy on a regular basis because it becomes “obsolete” quickly and relegated to the trash bin? Don’t we live on a planet with finite resources? And because of the scarcity of resources, wouldn’t real economic growth come from efficiently directing resources to the most productive ends? And wouldn’t planned obsolescence mean resources are just being directed wastefully?

Hmm…. Let’s think this through a bit more. Can it really be true that economic growth comes from people spending money? Doesn’t growth actually come from people deferring spending and saving so that capital is available to invest in capital goods and such in order to advance productive capacity and more efficiently produce better consumer goods at lower costs in order to meet the demand for them? Isn’t it really saving, then, and not spending that drives economic growth?

Hmm… And shouldn’t we measure economic growth not in terms of how much everybody  in a society spends money, but in terms of what quality of life people in a society have? And wouldn’t having to spend more money just to replace goods all the time be wasteful and lower everyone’s standard of living since it would mean scarce resources aren’t directed to the most productive ends and people wouldn’t be saving to invest capital into effecting more efficient means of production to produce better goods for lower cost, rather than cheap crap needing constant replacing for higher total cost to consumers? If nobody ever had to replace another light bulb in their house, wouldn’t that just mean all that money could be saved and capital made available to focus on similarly improving other goods to make our lives better, as well? If everyone actually had to spend very little money to maintain a very high standard of living in a particular year, wouldn’t that by definition, mean the economy was doing very well; and yet, under Krugman’s paradigm, wouldn’t that mean, by definition, that the economy had done very poorly that year? Does Krugman’s argument make any sense at all?

Let’s go back to Krugman’s argument. It’s worth repeating:

[E]ven 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.

So Krugman sees how investment in capital goods leads to economic growth. But he doesn’t attribute that growth to people having created capital to invest in those capital goods by saving, by deferring consumption. He doesn’t even consider where companies get capital to invest in this manner at all; the only thing he sees is that people then go out and buy the resulting new products, and he thinks that is the point in the process where the economic growth comes from. He doesn’t consider where people get money to buy these new products, such as whether they are just racking up credit card debt; he just defines any and all spending as “growth”.

Krugman continues:

But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.

Hmm… But where will the government get the money from to spend?

Taxes? Then that means the assumption is that government bureaucrats know better than you do how best to spend your money, and that politicians in Washington know better than the free market how to most efficiently direct scarce resources to the most productive ends. Is that really a reasonable assumption?

Borrowing, maybe? But isn’t it plain nonsense to count government spending as “growth” when it means the the accumulation of even greater debt?

Printing money? But can wealth really come from a printing press? Doesn’t inflation and artificially low interest rates just mean people lose their purchasing power, savers are punished, and people are incentivized to borrow and spend more, which in turn just means more debt and less capital available to invest, which in turn has a detrimental effect on economic growth?

My final question: Should we really be listening to the guy who advocated that the Federal Reserve create a housing bubble to replace the dot-com bubble for advice on how to get out of the mess the policies he advocated created in the first place?

Read more about Krugman’s abysmal record in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.

  • Hemant Sreeraman

    We share similar feelings towards Mr. Krugman’s professorial outpourings.

    I’m surprised he hasn’t suggested that we don’t just dig up roads and pull down bridges, only to reconstruct them. Demand, something that he so admires, will surely go up, were this to happen. Or, perhaps, Ben Bernanke might consider printing iPhones. Mr. Krugman might well nod in agreement.

    An Estonia bucks his anti-austerity rhetoric and shows some semblance of returning to normalcy, and he sees Red. Of course, Estonia cannot be held up as a poster boy for austerity and there are specific factors in its economy that probably aided its passage to recovery; but Mr. Krugman will have none of it. He’d rather follow his Keynesian pontifications of mounting ever greater debt on top of a mountain of existing debt.

    Mr. Krugman is a well-paid individual, and it so happens that he earns his bread in Paper Currency. I wonder what his prognostications might be if he earned his bread in Gold.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      I’m surprised he hasn’t suggested that we don’t just dig up roads and pull down bridges, only to reconstruct them.

      LOL! That’s right! I made a similar observation in my book.

  • Zachriel

    Of course, it wasn’t Krugman, but analysis from JP Morgan, that calculated a possible increase of 1/4 to 1/2% to GDP.

    Your problem is you think that Keynes recommended stimulus at all stages of the business cycle. That’s how you can reach your erroneous conclusion about planned obsolescence.

    Stimulus creates economic activity at the expense of wealth. According to Keynes, that’s appropriate during an economic decline, but the process should be reversed when the economy is expanding. Money should be set aside for a rainy day.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      That Krugman cited a JPMorgan report is irrelevant to what I wrote. If you think a conclusion I drew is “erroneous” you are welcome to explain what error in fact or logic you think I made (without the use of strawman arguments, i.e. telling me what I think instead of actually addressing what I wrote).

      • Zachriel

        Jeremy R. Hammond: If you think a conclusion I drew is “erroneous” you are welcome to explain what error in fact or logic you think I made …

        We did, by pointing out that you were arguing against a strawman version of Keynesianism that means spending all out all the time. Rather, Keynesianism counsels countercyclical policy.

        Jeremy R. Hammond: So if “obsolescence” is “Good”, then why don’t companies like Apple just design their products to fail after a certain time?

        Obsolescence is not an unmitigated good in Keynesian theory, but an inevitability. During an economic downturn, people will delay spending, but some spending can only be delayed for so long. Per Keynes, even during a downturn, this will happen naturally, eventually, righting the economy.

        Jeremy R. Hammond: And, if we follow Krugman’s argument through to its logical conclusion, wouldn’t planned obsolescence be “Good” for the economy? … Wouldn’t it follow from Krugman’s logic that if computer companies deliberately designed computers to fail after only a month or so of use, so that every month people had to go out and buy a new computer to replace their obsolete model from the previous month, then that would be “Good” for the economy because it would mean people would be spending more?

        No, because Keynesianism is countercyclical, and planned obsolescence doesn’t meet this requirement. Rather, planned obsolescence means a loss of wealth without any countercyclical advantage, usually the contrary, as people will delay such purchases. However, if investment to replace outdated or worn out equipment can be encouraged during a downturn, then this can have a stimulatory effect. If the investment also provides a long term efficiency, such as with smartphone technology, then it can lead long term growth.

        • http://www.jeremyrhammond.com Jeremy R. Hammond

          Saying I argued a strawman version of Keynesianism is a strawman. What I argued is that Krugman’s logic leads to ridiculous conclusions. Krugman in fact did say obsolescence was “Good” because it meant people would spend more to replace goods. It follows from this logic that therefore planned obsolescence would also be “Good” for the economy. Krugman’s argument is fallacious. That is the point.

          • Zachriel

            Keynes noted that obsolescence will eventually work towards ending a recession, because even though people may avoid spending, at some point things wear out, and people will spend. This is descriptive, not prescriptive.

            Krugman is speaking in the context of an “economy in its time of trouble”, so the iPhone 5 may spur demand and act as a stimulus.

            Your claim is that, therefore, Keynesianism says that all obsolescence is good, the more obsolescence the better. Obsolescence is not countercyclical, and usually works in procyclically, because people delay purchases during a recession. This demonstrates that you have a distorted view of Keynesianism, which prescribes countercyclical policy. From that distorted view, you then argue to your absurdum conclusion.

            We’ve pointed this out twice, but you have yet to acknowledge or respond to it.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Krugman did in fact stated that obsolescence was “good” because it would mean people would spend. The point is that he thinks economic growth comes from spending, which is a fallacy. You have yet to acknowledge or respond to this.

          • Zachriel

            Jeremy R. Hammond: Krugman did in fact stated that obsolescence was “good” because it would mean people would spend.

            That’s right. The U.S. is experiencing sluggish growth in the aftermath of the financial meltdown and ensuing recession. Hence, Keynesianism would prescribe stimulus.

            Jeremy R. Hammond: The point is that he thinks economic growth comes from spending, which is a fallacy.

            Stimulus comes from spending when 1) there is slack in demand, 2) there money is idle. When there there is plentiful demand, then stimulus results in inflation. When money markets are at capacity, then stimulus results in higher interest rates. During periods of rapid growth, countercyclical policy means taking actions to slow the overheated economy, and saving for a rainy day.

            Jeremy R. Hammond: You have yet to acknowledge or respond to this.

            We have responded. Keynesianism prescribes countercyclical policy. That means encouraging spending during downturns, not at all phases of the business cycle. Obsolescence is not countercyclical, but generally procyclical.

            Notably, your response still neglected to address the point. Clue: you have to discuss countercyclical policy.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Economic growth does not come from spending, whether the economy is in good times or in a recession. You are still repeating Krugman’s fallacious argument, which I addressed in the post, and not addressing the points I made therein to that end.

          • Zachriel

            Jeremy R. HammondReply: Economic growth does not come from spending, whether the economy is in good times or in a recession.

            Which is a universal statement.

            We know that spending can increase economic activity under certain circumstances. Consider a simple situation. A king has a chest of gold. There are idle workers. The king decides to spend his treasure on a new wing to the castle by hiring the idle workers. We can see the result directly as previously idle workers begin to lay the foundation and collect the stones, spending their pay in the local markets. The same is true if the king borrows gold from a neighboring kingdom.

            Of course, the trade-off is that the king’s wealth decreases.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            If you think I’ve erred on any point of fact or logic in my post, you are welcome to point it out. Quote what part you think is in error and then explain what fact or point of logic you think is faulty.

  • http://wp.me/p3ZHC-wC Obaid Karki

    THANK YOU JEREMY FOR YOUR INCITE PUNCH

    Paul Krugman! Go Keynesian carpe diem to Rescue Beyond-Repair-America throughout iPhones Apriorism Wholesale spree to replace Prehistoric Technologies. If Bernanke ain’t printing Fiat Money outta thin air beyond global market tolerance. Bernanke hedged his overtrade by Outfucked Redundant Underconsumption Monetary of Crushed Economy System, Petrodollar Surplus of Thugocracies and Narcotics Cash Uhauled by HSBC & CITI to fed. Take for instant (it’s an farthest metaphor but good for health). Bernanke burned Billions to bailout New Zealand. Have any of you tracked Feds Revenue gained outta such Overfucked Transaction. Federal Reserve chairman Ben Bernanke lied to the house when he was confronted by Congressman Alan Grayson about $9 billion dollar package to New Zealand. Grayson ousted from the House for that and yelling elsewhere. Wow. Everyone exited. Euro is getting stronger. Oh Yeh! Because the Dollar is devaluated as we speak. Damn it! Krugman. Going Ludwig von Mises, Henry Hazlitt, Friedrich A. Hayek, and Murray N. Rothbard are better than John Maynard Keynes Keynesianism to fortify unapologetically strawman Economiss Argument.
    And now to Disney, the Legends of Googledjunk, Wikitrash, the Mayhem, and the Misinformation! ………. Your discretion is advised. Go get them boys:
    THE IPHONE STIMULUS
    By PAUL KRUGMAN
    Are you, or is someone you know, a gadget freak? If so, you doubtless know that Wednesday was iPhone 5 day, the day Apple unveiled its latest way for people to avoid actually speaking to or even looking at whoever they’re with. Design Thrills Apple’s Partners, but Will Cost Users (September 13, 2012) Apple Unveils an iPhone That Is Lighter and More Powerful (September 13, 2012) So is the new phone as insanely great as Apple says? Hey, I’ll leave stuff like that to David Pogue. What I’m interested in, instead, 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. Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy. Before I get there, let’s talk about where the buzz is coming from. A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.
    It’s all pretty straightforward. But the implications are wider than most people realize. The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more. And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back. We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills. Instead, willing and able workers can’t find jobs because employers can’t sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work. So where can more spending come from? Businesses are sitting on lots of cash but, for the most part, have seen little reason to do a lot of investment. Why expand your capacity when you don’t have enough sales to make full use of the capacity you already have? And because businesses aren’t spending a lot, incomes are low, so consumer demand is low, which perpetuates those low sales.
    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. But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private. Yet far from using public spending to support the economy in its time of trouble, our political system — driven by a combination of ideology, exaggerated deficit fears and Republican obstructionism — has moved to make the depression worse. Yes, unemployment benefits and food stamps are up, because so many more people are in need; but government employment has plunged, as has public investment. Now, despite all this, we will eventually recover. Over time there will be more equipment that needs replacing, more iPhone-like innovations that boost spending, and, in the long run, we will exit this economic trap. But, as Keynes famously pointed out in another context, in the long run we are all dead. To borrow a phrase from myself, why not end this depression now?
    Aside from all-that-jazz
    First they ignore you, then they laugh at you, then they fight you, then you win. Time is up! Standup like a man or die like a coward 1000 times.
    Obaid Karki is a Sexagenarian UAE Paleoconservative Provocateur Arabspringer with a Picassoic Attitude, Blackbelt Diehart Paulite Constitutionalist Libertarian, Diogenesist, Spinoziste, Qutbist, Kabbalist, Pantheon, Hexalingual, Automath, Antitribal-Gentiles-Cabal, Unaffiliated to State or any Religiosity Cult and Seigniorage Banksters Sharia Scam. In short. I am the one your mom never warned you about.

  • Will

    Your making a mistake, one that would probably lead to failing an intro economics class.

    Krugman is suggesting spending RIGHT NOW would be good because the unemployment RIGHT NOW is very high. So RIGHT NOW, sacrificing some wealth could lead to more employment, and a quicker end to the depression.

    You are arguing that sacrificing wealth ALL THE TIME is bad. But no one takes the position you are advocating against!

    Do you understand the difference between RIGHT NOW and ALL THE TIME?

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      My point remains the same whether we are talking about ALL THE TIME or RIGHT NOW. Economic growth does not come from spending.

      • Will

        Economic growth can come from either growth in fundamentals or simply putting more people to work.

        If tons of people are unemployed but want work, you can get them back to work simply by spending more.

        • http://www.jeremyrhammond.com Jeremy R. Hammond

          But Krugman isn’t talking about putting more people to work. He’s talking exclusively about how “obselescence” is “Good” because it means people will go out and spend more. Moreover, even if he was making an argument about putting more people to work through this spending, which he wasn’t, if the putting people to work simply by spending more helped the economy to grow, then the government could pay half of the unemployed to go around digging up holes and the other half to go around filling them in. Your argument is a fallacy.

          • Will

            First, thats exactly what Krugman is talking about. Its what Krugman literally always talks about. When he said “in a depressed economy” he means “when lots of people are unemployed.” His mechanism is obsolescence -> spending -> higher employment -> larger GDP.

            Also, if the government gave a substantial fraction of the unemployed money to do whatever (as you suggest) what would happen? The people would try and spend the money. Some grocery stores might need to hire a few more people to meet demand, maybe Apple sells a few more iphones, whatever. So more unemployed people get pulled in to sell to people the govt gave money to. Now those newly employed people will start buying groceries and what have you, so the grocery store hires more people, so-on. The so-called virtuous cycle.

            THIS IS DIFFERENT than when most people are employed. If everyone has a job, and the government tries to pay people to dig ditches then some people quit their jobs to dig ditches, and move from productive work to unproductive work. Same with broken windows-> if everyone is working spending just gets rearranged and people move from productive to unproductive work.

            This is literally econ 101.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Yes, it is Keynesian Economics 101, indeed. You just keep repeating Krugman’s fallacy. Economic growth doesn’t come from spending. Ever. I’m not sure what part of that you don’t understand.

          • Will

            What do you count as economic growth? If a grocery store hires more people is that economic growth? If the local car dealer ship sells more cars, is that economic growth?

            Imagine the following situation- the government pays unemployed people to dig ditches, and they start spending the money. All of a sudden, the local grocery store can’t handle the demand, so it advertises some jobs. Some people quit their ditch digging to work at the grocery store.

            Some of the ditch diggers and grocery store workers decide that now that they have income, they can afford cars and apartments, so the rest of the ditch diggers quit to build houses, sell cars, sell houses, and build cars.

            Now, no one works for the government digging ditches, the economy has more cars, more grocery stores, more houses. But you claim the economy didn’t grow?

            Also, do you see why this can ONLY work when there are lots of workers idle?

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            So, just to be clear, you think if we pay half of the unemployed to go around digging holes and the other half to go around filling them in, that will create economic growth?

          • Will

            I’ll answer your question when you answer mine- in particular what do you count as economic growth? If we have more cars, more houses, more grocery stores,etc has the economy grown?

            If you aren’t going to respond to what I’m saying, I’m done here.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            But I made this point first: “if putting people to work simply by spending more helped the economy to grow, then the government could pay half of the unemployed to go around digging up holes and the other half to go around filling them in.” And you haven’t responded to it. Hence my question. So when you respond to my point and answer my question, then I will answer yours.

          • Will

            I did respond, most of my post dated September 18, 2012 at 1:25 pm explains how the situation you describe (government paying unemployed people to do whatever) can lead to more cars, more grocery stores, more houses, with no one being employed by the government long term. You responded by reiterating your question.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            So is that a “Yes, if we pay half of the unemployed to go around digging up holes and the other half to go around filling them in, that will create economic growth”? I just want to be clear here.

          • Will

            Yes, BUT CONDITIONAL ON WHAT YOU MEAN BY ECONOMIC GROWTH. If you consider more cars, more grocery stores, more houses,etc to be growth, then yes. If you don’t, THEN IT DEPENDS ON WHAT YOU CONSIDER GROWTH.

            I’ve laid out the mechanism fairly clearly, you haven’t responded to it at all, you’ve just asked the same question repeatedly.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            How does paying one group of people to dig up holes and another group of people to fill them in again lead to more cars, more grocery stores, more houses, etc.? This is a bizarre, alien economy of which you speak in which digging up holes and filling them in again leads to more cars, stores, houses, etc. Please tell me about this planet you live on. This is so fascinating.

          • Will

            Please read my comment dated September 18, 2012 at 11:05 pm where I laid out how this works. The fact that I’m constantly referencing older comments where I explicitly answered questions you are asking makes me feel as if you aren’t actually reading things.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Imagine the following situation- the government pays unemployed people to dig ditches, and they start spending the money. All of a sudden, the local grocery store can’t handle the demand, so it advertises some jobs. Some people quit their ditch digging to work at the grocery store.
            Some of the ditch diggers and grocery store workers decide that now that they have income, they can afford cars and apartments, so the rest of the ditch diggers quit to build houses, sell cars, sell houses, and build cars.
            Now, no one works for the government digging ditches, the economy has more cars, more grocery stores, more houses. But you claim the economy didn’t grow?

            Why were those people unemployed in the first place? Why couldn’t they get a job at the grocery store? Why couldn’t they get a job building houses or cars, something that is actually productive and actually satisfies demand? Where did the money come from to pay them to go around digging up ditches and filling them in again? How can economic growth come from directing scarce resources away from productive ends (as opposed to towards productive ends)?

          • Will

            Because the demand they are employed to fill is partially their own. Until they have money, they have no ability to demand goods. Until they have an ability to demand goods, there is no reason to hire them, so there is no way for them to get money.

            Because these people are initially unemployed we don’t have to move people from productive sectors to unproductive ones (nothing is less productive than unemployment)- people are the limiting economic resource. We aren’t moving scarce resources away from productive areas.

            I think your mental economic model is assuming full employment, which is not the economic condition we currently live in, and not what I’m describing (or what Krugman is describing for that matter).

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            So impoverished people have no demand for food unless and until they come by some money? You can’t possibly be serious. Any fool with half a brain in their head can look at a moneyless, hungry child and recognize the demand that needs to be met for that poor child to survive. You just continue to pile one nonsensical Keynesian argument upon another. Tell me, when housing prices were at their peak before the bubble burst, did that represent economic growth?

          • Will

            I was using demand in the technical, economic sense of the willingness/ability to pay for a good at given price. If you have no money, you have no demand, in this sense. If you are given money, your demand for life necessities (food,transportation,shelter) will immediately spike. I think we both agree on this principle generally (people with no money don’t buy stuff), its just you are choosing to use a different, less technical sense of demand.

            And you are making my point for me- give people who can’t afford food money and they will buy food. If they buy enough food, the farms and grocery stores have to hire more people, so some of those very same impoverished people people will be hired.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            This is not a mere technicality. I asked you why the farmers didn’t just hire the poor, hungry workers, and you answered it was because those hungry workers had no demand for food. Call it “technical” usage of the term, if you like, but it remains just plain, old-fashioned nonsense. You haven’t provided an answer to the question. Which is okay, I didn’t expect you to be able to do that, because it’s a stupid example, which is the point the question illustrates. Obviously, the farmers, assuming they aren’t complete idiots, would recognize that (a) there are hungry people who have a demand for food and that (b) in order to meet that demand, they would need to increase production. The elementary obvious solution would be to hire those same poor people to work on the farm and they could even be paid in food out of their own productivity, if need be, and money needn’t even be a factor at all. Pointing this out certainly doesn’t make your point for you, but nice try!

          • Zachriel

            Jeremy R. Hammond: I asked you why the farmers didn’t just hire the poor, hungry workers, and you answered it was because those hungry workers had no demand for food.

            Being hungry does not constitute economic demand. Will used the term with its conventional economic meaning. You know that, so why are you pretending otherwise? Rewording it here:

            W: Until the unemployed have money, they have no ability to pay for goods. Until they have an ability to pay for goods, there is no reason to hire them, so there is no way for them to get money.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Being hungry does not constitute economic demand.

            People being hungry most certainly does constitute an economic demand for food. I hardly see any reason to argue that perfectly obvious fact.

          • Will

            Jeremy, to be clear, you are arguing that people who have no money can buy food. Thats clearly silly. No economy serves people with no money. Thats why India is a net food exporter while millions of people starve.

            Anyway, I’ve laid out the mechanism that causes growth. However you think about the economy, you are implying that their cannot be unemployed people, which is empirically wrong.

            I’m not going to make the points again and again- its clear you haven’t actually studied economics (you don’t understand what ‘demand’ means when economists use it, which makes it unlikely you’ve ever seen a supply/demand graph), so I’m just wasting my time.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Jeremy, to be clear, you are arguing that people who have no money can buy food. Thats clearly silly.

            LOL! Nice strawman argument. Are you that incapable of recognizing the fact that impoverished people who have no money have a demand for food? Are you so deluded in Keynesianism that you just refuse to acknowledge that hungry people have demand for food? This is hilarious.

            Anyway, I’ve laid out the mechanism that causes growth.

            You’ve laid out the mechanism that you, in your delusional Keynesian framework, think causes economic growth. But paying half the unemployed to go around digging up holes and the other half to go around filling them in fact cannot cause economic growth.

            However you think about the economy, you are implying that their cannot be unemployed people, which is empirically wrong.

            Ah, another strawman argument, only this time a repitition of the same one you made earlier:

            “The implication of your position is that there can’t be unemployment, which is contrary to fact.” — Will

            “That conclusion is not implied by my position at all. I’ve no interest in debating strawman arguments.” — Jeremy

            I still have no interest in debating strawman arguments. You are right, if that’s what you are trying to get me to do, you are wasting your time.

  • Zachriel

    Will is correct. We gave a simple example above about a king.

    A king has a treasure chest of gold. There are idle workers. The king decides to spend his gold on a new tower for the castle by hiring the idle workers. We can see the result directly as previously idle workers begin to lay the foundation and cut the stones, spending their pay in the local markets. The same is true if the king borrows gold from a neighboring kingdom. Of course, the trade-off is that the king’s net worth decreases.

    This is clearly an example of increased economic activity through spending.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      Yes, it is most certainly clearly an example of “increased economic activity”. It is not, however, an example of economic growth. The same way paying a bunch of people to go around digging up holes and a bunch of other people to go around filling them in would clearly be an example of “increased economic activity” but not a way to produce economic growth.

      • Zachriel

        Jeremy R. Hammond: Yes, it is most certainly clearly an example of “increased economic activity”. It is not, however, an example of economic growth.

        Well, it took a while to get to that point.

        It is certainly economic growth. Even assuming the new castle tower has no value, the market is seeing an increase in business. The grocer expands his store. Farmers plant more fields. Production increases. Unemployed workers from other towns emigrate to find work. Production increases even further.

        • http://www.jeremyrhammond.com Jeremy R. Hammond

          Let me ask you something: If the king paid half those workers to dig holes and the other half to fill them back in, would that create economic growth? Because it seems to me that according to your logic, this is so.

  • Zachriel

    Jeremy R. Hammond: If the king paid half those workers to dig holes and the other half to fill them back in, would that create economic growth?

    Yes. We already granted that the new castle tower had no economic value (though, it may increase security and therefore provide more stability for trade). That’s because the poor and jobless now have money to spend in the market. The grocer expands his store. Farmers plant more fields. Unemployed workers from other towns emigrate to find work. This only works, however, when there is idle capacity and idle money.

    Now, what if the king spends his treasure to build homes for the poor. Does that increase GDP?

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      So if it works in your hypothetical medieval example, could the government today, in real life, help the economy to grow by paying half the unemployed to go around digging up holes and the other half to go around filling them in?

  • Zachriel

    Jeremy R. Hammond: So if it works in your hypothetical medieval example,

    You asked a question. We answered. We asked you a question and you diverted. If the king spends his treasure to hire idle workers to build homes for the poor, does that increase GDP?

    Jeremy R. Hammond: could the government today, in real life, help the economy to grow by paying half the unemployed to go around digging up holes and the other half to go around filling them in?

    If there is idle capacity and idle money, it would stimulate economic activity, because people would have more money to spend. If the king hands out a few gold coins from his treasure after church on Sunday to the poor, this also stimulates economic activity, albeit weakly, as people can now buy food in the market.

    However, an effective stimulus should encourage long term growth, so spending on infrastructure, whether castle towers, improved roads, or homes for the poor, makes more sense. Or, in the modern economy, on job training.

    In addition, stimulus should be limited to when there is idle capacity and idle money. This relates to your original misperception of countercyclical policy. If the government spends when there is no idle capacity, then the spending will compete with the private sector, driving up costs. If the government borrows money in markets that are already lending to capacity, then the borrowing will compete with the private sector, driving up interest rates.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      Your question about GDP is irrelevant, because it is not a reasonable measure of economic growth. When the government spends $17,000 that it taxed, borrowed, or printed on helicopter drip pans, for instance, that counts towards boosting GDP, but in reality represents not growth but waste. I think the fact that you believe that it will create economic growth if the government pays half of the unemployed to go around digging up holes and the other half to go around filling them in pretty much speaks for itself and requires no further comment from me.

      • Zachriel

        Jeremy R. Hammond: Your question about GDP is irrelevant, because it is not a reasonable measure of economic growth.

        So now to salvage your position, you redefine economic terminology. If the king spends his treasure to hire idle workers to build homes for the poor, does that increase economic activity?

        • http://www.jeremyrhammond.com Jeremy R. Hammond

          I already answered that question. Yes, of course, by definition, it increases “economic activity”. But “economic activity” is not “economic growth”.

      • Zachriel

        Just to be clear, economists *do* measure economic growth by changes in GDP.

        • http://www.jeremyrhammond.com Jeremy R. Hammond

          I know. Which is just one indication of how bankrupt the field of economics is. The idea that any and all spending = “growth” is plain nonsense.

          • Zachriel

            Well, then, please define “economic growth”.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            I would define “economic growth” as an improvement in society’s standard of living, such as occurs when an advancement in technology allows demand for whatever good to be met at lower cost, making the good available to an ever greater number of people who previously couldn’t afford said good.

        • Zachriel

          Jeremy R. Hammond: I would define “economic growth” as an improvement in society’s standard of living

          Someone might consider producing less and having more leisure to be an improvement in their standard of living. Any way to measure what you mean by “standard of living”?

          What if a farmer decides to work harder in order to plant two fields instead of one field? Is that economic growth?

  • Jacob Waldecker

    In the example of the king and his gold, we must understand where his gold came from. It is true that this spending will stimulate the economy, and create economic growth. The question is at what cost. We established that this king already had a chest of gold (idle capital) and he trades it for something he see’s as useful (a new tower). This is far different than if the king taxes those same workers in order to build the tower. Now he is taking away from the productivity of the same economy he is stimulating, and the deciding if the result is a net economic growth becomes a bit harder. If the king borrows that money from a neighboring king, with a promise to tax his people at a later time, then the economic growth may be true in the short term, but in the long term, it may end up worse as the loan will have to paid with interest. If the king decides to clip coins in order to pay for his tower, then the immediate growth is offset by the loss of purchasing power of the coins traded. If the king has the money that he has saved and he spends it, it will absolutely spur economic growth, but that really goes to Jeremy’s point, that true growth will always come from saving.

    • Zachriel

      Jacob Waldecker: It is true that this spending will stimulate the economy, and create economic growth.

      Then you disagree with Jeremy R. Hammond who says that economic growth can’t come from spending.

      Jacob Waldecker: The question is at what cost.

      Sure. In this case, from the king’s net worth.

      • http://www.jeremyrhammond.com Jeremy R. Hammond

        Yes, Jacob and I disagree on that point. Growth doesn’t come from spending, but from deferring spending and capital investment.

        • Zachriel

          Jeremy R. Hammond: Yes, Jacob and I disagree on that point.

          So if the king spends his treasure on a new factory for the idle workers, and they successfully sell the product to neighboring towns, that won’t spur “economic growth” in the town?

          Jeremy R. Hammond: Growth doesn’t come from spending, but from deferring spending and capital investment.

          But capital investment is spending. Didn’t you just say spending doesn’t induce growth?

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            So if the king spends his treasure on a new factory for the idle workers, and they successfully sell the product to neighboring towns, that won’t spur “economic growth” in the town?

            No, not necessarily. Where did the king get the gold from in the first place? He taxed it from the people or looted it from some destructive war. You see how it is spent by the king, but not how it otherwise would have been spent had it not been stolen by the king. And maybe it would have been used by individuals acting in a free market, with scarce resources directed to their most productive ends, thereby creating economic growth, but the king just uses it to build an arms factory for his next destructive war.

            But capital investment is spending. Didn’t you just say spending doesn’t induce growth?

            Yes, capital investment is spending. But the capital was created by deferring spending. It is the deferring of spending that leads to economic growth. Had that money just been consumed rather than saved, the growth wouldn’t have occurred.

          • Zachriel

            Jeremy R. Hammond: Where did the king get the gold from in the first place?

            He inherited it. His father had a gold mine long ago.

            Jeremy R. Hammond: And maybe it would have been used by individuals acting in a free market, with scarce resources directed to their most productive ends, thereby creating economic growth, but the king just uses it to build an arms factory for his next destructive war.

            Perhaps. Or he might be a wise king. But your claim, that spending never creates economic growth, concerned every circumstance; wise kings, foolish people, greedy kings.

            Jeremy R. Hammond: Yes, capital investment is spending. But the capital was created by deferring spending. It is the deferring of spending that leads to economic growth.

            Saving, defined as income minus consumption, is necessary for investment. That’s what the king did. He saved the money rather than consuming it. Then when he saw the need, he put people to work. The result was that the grocer expanded his store. Farmers planted more fields. Production increased. Unemployed workers from other towns emigrated to find work. Production increased even further.

            You seem to be saying that there is economic growth, but that there is no *net* economic growth, other than that brought about by investment. You seem to be just restating the classical equation.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Well, if we assume this king is just an honest, benevolent entrepreneur himself, who looted nobody and invested honestly accumulated capital in the free market to expand the means of production, thereby improving the standard of living of our medieval society, then, yes, there was economic growth, by definition. But that growth came not from the king spending his fortune, but from his deferred spending so as to be able to accumulate that capital to be able to invest it to that end in the first place.

            Now, our hypothetical medieval example has no parallel with our current reality.

          • Zachriel

            Jeremy R. Hammond: Well, if we assume this king is just an honest, benevolent entrepreneur himself, who looted nobody and invested honestly accumulated capital in the free market to expand the means of production, thereby improving the standard of living of our medieval society, then, yes, there was economic growth, by definition.

            Took a long time to get there. So, spending can result in economic growth, at least when that spending is used to expand the means of production.

            We have 100 workers in the town, but 20 are unemployed and destitute. Farmers and other vendors produce enough for 80 workers. The 20 do without. Now, the king hires 10 of the idle workers. Consequently, farmers hire five others to help plant additional fields. Do the additional fields count as “economic growth”?

            Did you ever provide a quantitative measure of “economic growth”?

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Took a long time to get there. So, spending can result in economic growth, at least when that spending is used to expand the means of production.

            “Took a long time…” What? I was perfectly clear on this point from the beginning. What did I write in my post?

            “Can it really be true that economic growth comes from people spending money? Doesn’t growth actually come from people deferring spending and saving so that capital is available to invest in capital goods and such in order to advance productive capacity and more efficiently produce better consumer goods at lower costs in order to meet the demand for them? Isn’t it really saving, then, and not spending that drives economic growth?”

            So, yes, it took a long time to go around in a circle and wind right back up to precisely the same thing I said in the very first place.

            We have 100 workers in the town, but 20 are unemployed and destitute. Farmers and other vendors produce enough for 80 workers. The 20 do without. Now, the king hires 10 of the idle workers. Consequently, farmers hire five others to help plant additional fields. Do the additional fields count as “economic growth”?

            Did you ever provide a quantitative measure of “economic growth”?

            We need to make some sense of this situation. Why were 20 of them unemployed and destitute? Was it because the king’s central bank blew up a bubble to create artificial “growth”, and it burst, causing this massive unemployment? And if the 20 have no food and no money to buy food, why don’t they go get a job on one of the farms since it is obvious that increasing the farm’s output is necessary in order to meet the demand for food from the 100 workers in town? Is it because the king has established minimum wage laws so that the landowners cannot afford to pay the workers a wage that is higher than their productive capacity? Why wouldn’t farmers hire five of these workers until after the king hired 10 of them? Why would they wait to hire? Was it because the king decreed that he would have the best pick of the 20 jobless individuals, and only then may others hire the less productive workers that remained? Where did the king get the money to hire these 10 workers? Did he tax it from the farmers and vendors in town? Did he loot it from some war? Did he obtain it by fraud by debasing the coin of the realm? Or is he this same benevolent ruler who obtained it honestly through his own entrepreneurship? If the latter, did he hire the 10 workers because he saw an opportunity to expand production in some area in order to meet demand? Or did he hire them so 5 could dig up holes and the other 5 could fill them in again? Etc.

          • Zachriel

            Jeremy R. Hammond: What? I was perfectly clear on this point from the beginning.

            Yes, you wrote this declarative sentence, “Economic growth does not come from spending.”

            Jeremy R. Hammond: Why were 20 of them unemployed and destitute?

            That’s funny. According to you, there was never any poor people before central banking.

            Jeremy R. Hammond: Why wouldn’t farmers hire five of these workers until after the king hired 10 of them?

            Most any fair reader can understand the scenario. Because the farmers were already producing enough to meet the needs of their 80 paying customers. The king hiring 10 for whatever purpose created ten new paying customers, so the farmers expanded production to meet that demand.

            You’re working very hard to avoid the implications of a very simple example. You didn’t answer either question.

            Do the additional fields count as “economic growth”?

            Did you ever provide a quantitative measure of “economic growth”?

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            As I said, I was perfectly clear on that point from the beginning, so it is rather odd for you to say it took me a long time to get to repeating the exact same thing I wrote in the post in the first place.

            According to you, there was never any poor people before central banking.

            I’ve no interest in debating idiotic strawman arguments.

            Most any fair reader can understand the scenario.

            Not without having the relevant facts, they can’t. Hence my questions. Like my question: “Why wouldn’t farmers hire five of these workers until after the king hired 10 of them?” To which you answered:

            Because the farmers were already producing enough to meet the needs of their 80 paying customers. The king hiring 10 for whatever purpose created ten new paying customers, so the farmers expanded production to meet that demand.

            So you’re just begging the question. So, once again: “And if the 20 have no food and no money to buy food, why don’t they go get a job on one of the farms since it is obvious that increasing the farm’s output is necessary in order to meet the demand for food from the 100 workers in town?”

            You’re working very hard to avoid the implications of a very simple example. You didn’t answer either question. Do the additional fields count as “economic growth”? Did you ever provide a quantitative measure of “economic growth”?

            I’m still trying to make sense of your example. When it makes sense, I might be able to provide an answer to your first question. But you first need to explain the situation so that it makes sense. Hence my questions, to which I’ll add: What new fields? As for your second question, you’ve read the post and all of my comments, so you can answer that one for yourself.

          • Zachriel

            Jeremy R. Hammond: And if the 20 have no food and no money to buy food, why don’t they go get a job on one of the farms since it is obvious that increasing the farm’s output is necessary in order to meet the demand for food from the 100 workers in town?

            Because farmers weren’t hiring as the they didn’t see a market for the additional production. However, when the king puts ten idle workers to work, that results in an increase in economic demand. Now, the farmers see an opportunity, and hire workers to plant additional fields.

            You do realize that cathedral building spurred trade, growth and technology? It was the like their space program.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Because farmers weren’t hiring as the they didn’t see a market for the additional production.

            Farmers couldn’t see that there were 20 jobless and destitute individuals in need of food that they couldn’t provide because they didn’t have enough people to work the fields and that they could solve that problem simply by hiring those same individuals? What are we talking about here, a society of medieval idiots?

          • Zachriel

            eremy R. Hammond: Farmers couldn’t see that there were 20 jobless and destitute individuals in need of food that they couldn’t provide because they didn’t have enough people to work the fields and that they could solve that problem simply by hiring those same individuals?

            Huh? It takes money to plant new fields. Farmers won’t plant them unless there is a market for them. The implication of your position is that there can’t be unemployment, which is contrary to fact.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Farmers won’t plant them unless there is a market for them.

            Right. So, since there is an obvious market for them, they would plant them.

            The implication of your position is that there can’t be unemployment, which is contrary to fact.

            That conclusion is not implied by my position at all. I’ve no interest in debating strawman arguments.

          • Zachriel

            Jeremy R. Hammond: So, since there is an obvious market for them, they would plant them.

            You’re not making any sense. What market is that? Try to explain in some detail how you think it supposed to work.

            Did you ever answer these simple questions? Do the additional fields count as “economic growth”? Did you ever provide a quantitative measure of “economic growth”?

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            You’re not making any sense. What market is that? Try to explain in some detail how you think it supposed to work.

            You said there were 20 hungry people. Well, that’s a pretty obvious demand for food, and pretty obviously a market for the farmers to increase production to meet that demand. This is perfectly self-evident.

            Did you ever answer these simple questions? Do the additional fields count as “economic growth”? Did you ever provide a quantitative measure of “economic growth”?

            As I said, we need to be able to make some sense of this situation before I can answer that question. First of all, again what additional fields?
            Again, why were 20 of these people unemployed and destitute? And if the 20 have no food and no money to buy food, why don’t they go get a job on one of the farms since it is obvious that increasing the farm’s output is necessary in order to meet the demand for food from the 100 workers in town?

            Did you ever provide a quantitative measure of “economic growth”

            Again, you’ve read the post and all of my comments, so you can answer that one for yourself. Did I?

            LOL! You and Will are a real pair of comedians.

  • Jacob Waldecker

    Yes, Jeremy and I disagree on that point, but we agree on the more important one. That sustainable growth can only come from savings. In the case of the king, we’ve established that this was his chest of gold, that he already had (perhaps from looting a foreign land? Who knows). This is the case of saved capital spurring economic growth. If the king had to tax the people or inflate the currency to obtain the capital, than the negative effects of the tax would cancel out the growth, leading to a net of no real growth. Hence the loaded term “sustainable growth”.

    • Zachriel

      Jacob Waldecker: If the king had to tax the people or inflate the currency to obtain the capital, than the negative effects of the tax would cancel out the growth, leading to a net of no real growth.

      That’s right. Countercyclical policy doesn’t directly generate net growth. When properly used it is revenue neutral and just evens out the market cycle. Evening out the market cycle prevents damage to the economy, such as workers dying of starvation who won’t be available for the next market cycle. However, instead of just paying people to dig and fill holes, it is possible to hire them for community projects.

      Let’s assume the king is a benevolent and traditional conservative*, and saves money when times are good. When times are bad, he spends the saved money on capital projects. Maybe he hires the idle workers to build a new road to the neighboring town to encourage trade, one large enough for two wagons to pass! Would this encourage economic growth?

      • http://www.jeremyrhammond.com Jeremy R. Hammond

        Except that the “market cycle”, a.k.a the business cycle, is created by the central banks who follow Keynesian economics, e.g., how the Fed created the housing bubble with its inflationary policy of artificially low interest rates. The bust is the cure for the artificial boom, but you Keynesians treat it as the disease that needs to be dealt with by doing more of the same that caused the problem in the first place. Wealth doesn’t come from a printing press and “stimulus” that only comes from taxing the private sector, borrowing at interest, or running the printing presses doesn’t create growth. The argument to the contrary is just a reiteration of the “broken window” fallacy.

        • Zachriel

          Jeremy R. Hammond: Except that the “market cycle”, a.k.a the business cycle, is created by the central banks who follow Keynesian economics, e.g., how the Fed created the housing bubble with its inflationary policy of artificially low interest rates.

          It’s not really relevant to our example, which is an economy based on gold. There were good times and bad times in the olden days. And the building of cathedrals, for instance, spurred economic growth.

          • http://www.jeremyrhammond.com Jeremy R. Hammond

            Well, it is relevant to our example, because your logic leads to the conclusion that even spending to pay people to dig up holes and fill them in again leads to economic growth. Pointing out that the business cycle is caused by central banks following Keynesian prescriptions is extremely relevant.

          • Zachriel

            Jeremy R. Hammond: Well, it is relevant to our example, because your logic leads to the conclusion that even spending to pay people to dig up holes and fill them in again leads to economic growth.

            Yes, that’s the question, if that is possible and whether it depends on the economic situation. We provided such a situation, one where there are idle workers and idle money. You have continued to avoid giving direct answers.

            Jeremy R. Hammond: Pointing out that the business cycle is caused by central banks following Keynesian prescriptions is extremely relevant.

            We’re not concerned with any purported business cycle, nor had Keynes been born yet. We have idle labor and idle money, not an unusual situation in history. You’re working very hard to avoid the implications of a very simple example. You didn’t answer either question.

            We have 100 workers in the town, but 20 are unemployed and destitute. Farmers and other vendors produce enough for 80 workers. The 20 do without. Now, the king hires 10 of the idle workers. Consequently, farmers hire five others to help plant additional fields. Do the additional fields count as “economic growth”?

            Did you ever provide a quantitative measure of “economic growth”?

  • Joshua Rodd

    Perhaps next, Krugman could suggest that iPhone 4S displays be shattered to stimulate demand even further.

    What Krugman misses is the productivity drop I will have after buying an iPhone 5: for example, the Maps app in iOS 6 has a lot of shortcomings, so I’ll end up driving all over the place instead of getting places on time.

    Krugman would argue that the extra fuel I consume would merely stimulate demand further. Perhaps he thinks a poorly-written Maps/Navigaation app is good for the economy.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      Wouldn’t surprise me if he did, Joshua.

  • Zachriel

    Jeremy R. Hammond: Are you that incapable of recognizing the fact that impoverished people who have no money have a demand for food?

    That’s called conflation, a fallacy of ambiguity. Economic demand is more than beggars and horses. Economic demand includes not only the desire, but the wherewithal to pay the market price for something.

    http://www.merriam-webster.com/dictionary/demand
    http://www.investopedia.com/terms/d/demand.asp
    http://en.wikipedia.org/wiki/Demand_(economics)
    http://www.investorwords.com/1396/demand.html

    Jeremy R. Hammond: But paying half the unemployed to go around digging up holes and the other half to go around filling them in fact cannot cause economic growth.

    You defined economic growth as an increase in living standards. For the unemployed, having a job is an increase in their living standard, hence meets your definition of economic growth.

    Will: However you think about the economy, you are implying that their cannot be unemployed people, which is empirically wrong.

    We reached the same conclusion as a necessary consequent of Jeremy R. Hammond’s views.

    Jeremy R. Hammond: Ah, another strawman argument, only this time a repitition of the same one you made earlier

    You keep saying it’s a strawman, but you refuse to clarify your actual views. It’s not that difficult. These are the specifics:

    * In a village of 100, 80 people can afford to buy food. Farmers are meeting current economic demand for food, defined as people with money to spend in the market for food.
    * There are 20 unemployed, who cannot afford to buy food.
    * Your claim is that farmers will hire these people in order to increase production enough to feed those 20 people.
    * Hence, given your explanation, there can’t be unemployment, because as soon as someone is unemployed, they will be hired by farmers.

    This betrays an ignorance of basic business. A farmer has no profit motive to hire a worker merely to pay him enough to buy the food he produces. There’s additional costs, including seed and his own time to manage the new field. There’s always the possibility of a crop failure, so he could lose what he paid the worker, including the security of the value of the wages he could have saved. There has to be a profit advantage, and farmers are already producing enough to feed everyone who can pay.

    This is classical economics.

    Jeremy R. Hammond: You said there were 20 hungry people. Well, that’s a pretty obvious demand for food, and pretty obviously a market for the farmers to increase production to meet that demand. This is perfectly self-evident.

    But the unemployed don’t have any money!

    Zachriel: Do the additional fields count as “economic growth”?

    Jeremy R. Hammond: First of all, again what additional fields?

    Fallow fields. It’s not that difficult a question.

    Zachriel: Did you ever provide a quantitative measure of “economic growth”?

    Jeremy R. Hammond: Again, you’ve read the post and all of my comments, so you can answer that one for yourself. Did I?

    Not that we can see. You did disapprove of the normal economic measures, such as GDP.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      You are still trying to tell me that the farmers didn’t hire the jobless people because they couldn’t recognize that hungry people had a demand for food. That’s just plain idiotic, your technical economics definition of the word notwithstanding. I’m just talking common sense here, and using the plain, common sense definition of the word. The fact that these impoverished 20 had no money does not mean they did not have a demand for food. It is idiotic to argue that since they had no money to pay for food, therefore they didn’t have a demand for food. If the farmers couldn’t recognize that demand and recognize that they could expand production to meet that demand by simply hiring some or all of those jobless hungry people to work in their fields, then they are a bunch of idiot farmers in your example.

      I defined economic growth as an increase in the standard of living of society as a whole, not of particular individuals. Paying half the unemployed to go around digging up holes and the other half to go around filling them in is a drain on the resources of society and can only hinder economic growth. You are committing the “broken window” fallacy. You see that they now have jobs. You don’t see that the money to pay them to do non-productive work was taking from the productive sectors of the economy (or borrowed at interest or printed out of thin air thus robbing everyone through inflation).

      Your argument that I according to my logic, there can be no unemployed is a strawman. I have not argued that, and this conclusion does not follow from anything I have said. And to reiterate what I have said, in this example, there shouldn’t be unemployment, because the farmers, assuming they have half a brain in their head, can recognize that those people are hungry and in need of food and so they can hire them to increase production so as to be able to meet that demand for food. Why do you think this is unreasonable? Why do you think the farmers would/could/should not do that?

      Your answer is: “A farmer has no profit motive to hire a worker merely to pay him enough to buy the food he produces.” Ah, but you argue that these people should be paid merely to dig up holes and fill them in again, and there is obviously no profit motive in that. So your argument is schizophrenic. You can’t have it both ways. You also neglect other motives a farmer might have, like wishing to help people at no cost to himself so that they don’t die of starvation. You argue, “There’s additional costs, including seed and his own time to manage the new field.” And so you also neglect that the workers’ productivity could be greater than the cost of their labor, so that then the farmers, having met all the local demand, could export crops to neighboring regions. Maybe a neighboring kingdom specializes in producing really excellent hats, so the profit from the exports could be used to import hats for the locals. Everyone would be fed and they would have hats. And, as just indicated, the newly hired labor would pay for itself. There are, after all, costs to having those other 80 people employed and working in the fields, and the farmers hired them anyways, because they recognized those costs as an investment that would provide a return.

      It’s hilarious how you talk of “ignorance of basic business” and “classical economics” and yet such elementary observations somehow have managed to escape you. I think you need to unlearn what you have learned. (h/t Yoda).

      I said: “You said there were 20 hungry people. Well, that’s a pretty obvious demand for food, and pretty obviously a market for the farmers to increase production to meet that demand. This is perfectly self-evident.” You answered: “But the unemployed don’t have any money!” What, am I talking to a brick wall here? They don’t need to have money. They could be paid straight out of their productivity. They could barter. Or they could buy food that they help produce out of their wages earned.

      I asked, “First of all, again what additional fields?” You replied, “Fallow fields. It’s not that difficult a question.” Yes, if the farmers hired the 20 jobless people and expanded production to meet the demand for food, including the launching of trade relations with the neighboring kingdom and exporting food the exceeded local demand and importing those really excellent hats, so that everyone in our little economy both was fed and had a nifty hat, then that would be economic growth.

      I asked, “Again, you’ve read the post and all of my comments, so you can answer that one for yourself. Did I?” You answered, “Not that we can see. You did disapprove of the normal economic measures, such as GDP.” Well, there ya go.

  • Zachriel

    Moderation queue, please.

  • Zachriel

    Jeremy R. Hammond: You are still trying to tell me that the farmers didn’t hire the jobless people because they couldn’t recognize that hungry people had a demand for food.

    Farmers sell in markets. People who can’t pay for food don’t buy food.

    Jeremy R. Hammond: And so you also neglect that the workers’ productivity could be greater than the cost of their labor, so that then the farmers, having met all the local demand, could export crops to neighboring regions.

    It’s clear you can’t follow a simple example. Yes, there may be an export market, but for our simple example, it’s a closed system. It really isn’t that hard, and most readers can easily follow the logic.

    You have argued that there can’t be idle labor or idle money, yet it’s a common situation. That’s the situation our king is facing. The question is what happens if the king hires some of the idle workers to build a new castle tower. It’s pretty obvious that is causes a boost in economic activity. This, in turn, causes the rest of the economy to increase production by hiring more workers to meet the increased spending in the markets.

    Jeremy R. Hammond: I defined economic growth as an increase in the standard of living of society as a whole, not of particular individuals.

    Everyone else’s standard of living stayed the same, while the standard of living of the poor increased. That is an increase in the standard of living of society as a whole. Nor did you provide an actual measure of the standard of living.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      The farmers, assuming they aren’t idiots, would recognize that the hungry people represent demand for food and hire them to expand production in order to meet that demand. Period. Let’s just drop your silly example and return to the real world, since your example makes no sense according to your restrictions on it. It isn’t realistic, so it’s a useless exercise.

      No, I have not argued that there can’t be idle labor or idle money. Another strawman. Obviously, there can be. I have merely pointed out that in your example, the farmers could hire some or all of those jobless people to work on their farms.

      Yes, it is pretty obvious that paying those people to build a new castle tower, or paying them to dig up holes and fill them in a gain, for that matter, “boost economic activity”. But that’s a meaningless statement. When the Fed held interest rates artificially low, it boosted economic activity in the housing sector, but it didn’t create economic growth. It created an illusion of growth. But it was unsustainable because the investment didn’t come from savings, didn’t come from capital.

      No, everyone else’s standard of living would not stay the same if the government paid half the unemployed to dig up holes and the other half to fill them in. You see only that those diggers would be paid. But you refuse to see where the money comes from to pay them. Taking money from the productive sector to pay workers who do idiotic, non-productive labor can only hinder economic growth, reducing the standard of living of society.

  • Zachriel

    Jeremy R. Hammond: The farmers, assuming they aren’t idiots, would recognize that the hungry people represent demand for food and hire them to expand production in order to meet that demand.

    The problem is that the only increase in buyers is the very people they are hiring. The effect will be overproduction, leading to lower prices. The farmers will not perceive a profitable advantage.

    Jeremy R. Hammond: I have not argued that there can’t be idle labor or idle money. Obviously, there can be.

    Obviously.

    Jeremy R. Hammond: I have merely pointed out that in your example, the farmers could hire some or all of those jobless people to work on their farms.

    They could, but there is no incentive.

    Jeremy R. Hammond: Yes, it is pretty obvious that paying those people to build a new castle tower, or paying them to dig up holes and fill them in a gain, for that matter, “boost economic activity”.

    Yes, you said so above, then said it didn’t constitute “economic growth”, which you defined as an increase in the standard of living, which you didn’t define. However, it is quite obvious that if previously poor people have money to spend, it has increased their standard of living.

    You have continued to ignore the effect of the additional spending on the economy. Nor have you defined “standard of living”.

    Jeremy R. Hammond: When the Fed held interest rates artificially low, it boosted economic activity in the housing sector, but it didn’t create economic growth. It created an illusion of growth.

    Sure, that argument can be made, but it’s rather difficult to have any discussion when you redefine well-established terminology, and when you can’t admit to something as simple as economic growth when money is pumped into the system.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      The problem is that the only increase in buyers is the very people they are hiring. The effect will be overproduction, leading to lower prices. The farmers will not perceive a profitable advantage.

      Man, this is a stupid hypothetical. How nice to create a hypothetical situation where you define away every point I make and manipulate it to try to prove your silly arguments. But, okay, I’ll bite. There is no reason why the farmers couldn’t and wouldn’t recognize that the hungry people have a demand for food and hire them to expand production in order to meet that demand. If the 80 people who are employed already working in the fields produce exactly enough food to feed those 80 people, which seems to be your assumption, then hiring 20 more people could just as well result in food production to meet exactly the demand to feed 100 people. There would thus be no overproduction. Even if there were overproduction, the grain or whatever could be stored for the winter, or for a future drought, or to export (oh, I forgot, you unrealistically defined away that possibility). And unless you define away the possibility that these farmers are compassionate human beings and define them as sociopaths or something, even if there is no profit motive, it would cost them nothing to hire those people even if they were only paid out of their own productivity, so that they wouldn’t starve to death.

      Yes, you said so above, then said it didn’t constitute “economic growth”, which you defined as an increase in the standard of living, which you didn’t define. However, it is quite obvious that if previously poor people have money to spend, it has increased their standard of living. You have continued to ignore the effect of the additional spending on the economy. Nor have you defined “standard of living”.

      An “increase in the standard of living” is self-explanatory. I have not ignored the effect of the spending of the people who were paid to dig up holes and fill them in again. On the contrary, it is you who is ignoring the fact that the money to pay them must have been taken from the productive private sector, and thus that it must hinder growth. You see the spending of these guys who dug holes and filled them in, but you don’t see the spending that didn’t occur from the people who were taxed to pay their wages. You don’t see how the market would have directed scarce resources to the most productive ends, but your government bureaucrats chose to direct those resources to completely wasteful, non-productive ends. Broken window fallacy.

      Sure, that argument can be made, but it’s rather difficult to have any discussion when you redefine well-established terminology, and when you can’t admit to something as simple as economic growth when money is pumped into the system.

      Creating money out of thin air does not grow the economy. Wealth does not come from a printing press.

  • Zachriel

    Jeremy R. Hammond: Man, this is a stupid hypothetical. How nice to create a hypothetical situation where you define away every point I make and manipulate it to try to prove your silly arguments.

    You made statements that were universal that should apply to this simple case of idle workers and idle money.

    Jeremy R. Hammond: If the 80 people who are employed already working in the fields produce exactly enough food to feed those 80 people, which seems to be your assumption, then hiring 20 more people could just as well result in food production to meet exactly the demand to feed 100 people.

    That’s right. So in your analysis (absent multipliers), there is no additional profit as the money they spend on workers is the very same money the workers pay for food. Plus, there are additional costs to the farmers, as well as increased risk having spent what they might need in the event of a bad crop.

    Jeremy R. Hammond: An “increase in the standard of living” is self-explanatory.

    Several times we have asked for a valid measure. Now you seem to be admitting you can’t provide one.

    Jeremy R. Hammond: On the contrary, it is you who is ignoring the fact that the money to pay them must have been taken from the productive private sector, and thus that it must hinder growth.

    Again, the king pulls the money out of the treasury, money which has been idled for some time. We can have the discussion concerning taxing and spending, but not if you simply ignore the fact that an injection of new spending will increase economic activity, and that this will be multiplied in the economy (assuming idle workers).

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      That’s right. So in your analysis (absent multipliers), there is no additional profit as the money they spend on workers is the very same money the workers pay for food. Plus, there are additional costs to the farmers, as well as increased risk having spent what they might need in the event of a bad crop.

      But by this logic, when the farmers had 70 people who were employed and they hired on those other 10 to bring that up to 80, there was no profit motive for them to do so. So, by your logic, 80 people wouldn’t be employed in the first place. Look, no matter how you look at it, your hypothetical example is ridiulous. I’m weary of discussing absurdities. Let’s talk about reality and Krugman’s logic.

      By Krugman’s logic, if Apple planned for its goods to become obsolete after a short time (which the case could be made is exactly what it does), this would help the economy right now since people would need to spend to replace those products that became obsolete, as planned. I’ve already addressed the fallacy of that logic. You are welcome to address my addressing, sticking to the real world.

      By Krugman’s logic, and your own, and Will’s, if the government was to pay half the unemployed to go around digging up holes and the other half to go around filling them in, that would create economic growth. I’ve already addressed the fallacy of that logic. You are welcome to address my addressing, sticking to the real world.

  • Zachriel

    Jeremy R. Hammond: But by this logic, when the farmers had 70 people who were employed and they hired on those other 10 to bring that up to 80, there was no profit motive for them to do so.

    Unless there’s a market for the additional production, then there is no profit motive.

    Jeremy R. Hammond: By Krugman’s logic, if Apple planned for its goods to become obsolete after a short time (which the case could be made is exactly what it does), this would help the economy right now since people would need to spend to replace those products that became obsolete, as planned.

    The problem with your original claim about planned obsolescence is that planned obsolescence is procyclical. But as you can’t even follow a simple example, it’s doubtful whether you can follow the more complex situation.

    Jeremy R. Hammond: By Krugman’s logic, and your own, and Will’s, if the government was to pay half the unemployed to go around digging up holes and the other half to go around filling them in, that would create economic growth.

    Not necessarily. Only if there is idle labor and idle money. And it would make more sense to produce something that would encourage long term growth.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      If you’d like to talk about the real world, let me know, because I have no interest in a futile discussion about your stupid hypothetical fantasy in which common sense and logic doesn’t apply.

      I repeat: By Krugman’s logic, if Apple planned for its goods to become obsolete after a short time (which the case could be made is exactly what it does), this would help the economy right now [i.e., during a recession] since people would need to spend to replace those products that became obsolete, as planned.

      I repeat: By Krugman’s logic, and your own, and Will’s, if the government was to pay half the unemployed to go around digging up holes and the other half to go around filling them in, that would create economic growth.

      When I say that, I am speaking of the current reality, not some hypothetical situation.

  • Zachriel

    Jeremy R. Hammond: if Apple planned for its goods to become obsolete after a short time (which the case could be made is exactly what it does), this would help the economy right now [i.e., during a recession] since people would need to spend to replace those products that became obsolete, as planned.

    The Wall Street Journal research note indicated that if iPhone sales were as high as expected, it would lead to a 1/4 to 1/2% increase in annualized GDP in the fourth quarter.

    Because obsolescence is typically procyclical, it means your original contention that Keynesians believe that rapid obsolescence is a good thing is false.

    Jeremy R. Hammond: I repeat: By Krugman’s logic, and your own, and Will’s, if the government was to pay half the unemployed to go around digging up holes and the other half to go around filling them in, that would create economic growth.

    Handwaving is not an argument.

    In the situation of idle workers and idle money, spending can increase economic activity and growth (per the usual definitions). It can also prevent structural damage to the economy, such as starving people (or in the modern U.S., deterioration of job skills and employability).

    A simple example is a king who has a treasure, and many people out of work. He hires the unemployed to build a new castle tower. Those laborers now have money to spend in the markets. This causes rising economic demand (per the usual definition) for goods, which causes an increase in production of those goods to meet that economic demand (again per the usual definition).

    We could discuss what happens if the government borrows the money, but we should resolve this simple example first.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      I told you, I’m only interested in discussing reality. And here’s the reality:

      I repeat: By Krugman’s logic, if Apple planned for its goods to become obsolete after a short time (which the case could be made is exactly what it does), this would help the economy right now [i.e., during a recession] since people would need to spend to replace those products that became obsolete, as planned.

      I repeat: By Krugman’s logic, and your own, and Will’s, if the government was to pay half the unemployed to go around digging up holes and the other half to go around filling them in, that would create economic growth.

  • Zachriel

    You’ve never addressed the simple example of the king. Instead, you have refused to use standard economic terminology, and not replaced those definitions with your own unambiguous definitions. In particular, you have conflated desire with economic demand. You said you wanted to define demand as an increase in living standards. You never provided a metric for living standards, but clearly the living standard of the unemployed are increased when put to paid work.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      If you want to discuss reality, I’d be more than happy to.

  • Tony

    Wow. This is a simple issue of Austrian, long term, concomitant, commensurate economic results and Keynesian reflexive, specious, short sighted results.

    So, to the Keynesian Cadre (Will and Zachrial):

    Do NOT approach an Austrian and suggest that a KING has ‘savings’ to spend. A KING is a Monarch, which by definition is on the extreme left of the political spectrum. So BY DEFINITION, the KING is using his monarchical wealth to employ people. lol. Please…

    The Keynesian Cadre on this board should have stated that a given ENTREPRENEUR decided to ‘invest’ his capital in an adjoining structure or annexation to his ‘castle’.

    BUT, what investment would that be? The entrepreneur would KNOW that it is NO investment, and it is simply money spent for pleasure. (Nobody said that the adjoining structure would be used for any sort of output).

    So, let’s remove the ENTREPRENEUR from the example, and say, a WEALTHY CAPITALIST, or SAVER wants to build an adjoining structure to his castle.

    So, this wealthy capitalist or ‘saver’ does what for the economy? He creates short lived economic activity. What happens when the addition to his castle is completed? Where is the work now? Not only are the 20 workers unemployed again, the commensurate industries that artificially grew to the ‘economic activity’ no longer have the same demand must now adjust, maybe to the point of reducing the work force. It is possible to have MORE unemployment now.

    Must some other capitalist find the desire to capriciously convert savings into pleasure simply out of the need to raise employment numbers? And even if they that would erode their capital. If this cycle repeats itself perpetually, it equates to a commodity driven economy which results in stagnation.

    Economic growth comes entrepreneurship i.e. recognizing market profitability, human needs, and satisfying them with production and investment/capital.

    The example given by the Keynesian cadre is spurious an unintelligent.

    Hunger is an INSATIABLE, PERPETUAL need. So there would be BOUND to be an ENTREPRENEUR that would find a way to employ these 20 workers. Worst case, no profit or losses and breaking even. That worse case would be somewhat of a ‘charitable’ cause, granted, but can the KING, a MONARCH, the LEFTIST of all politics, be the one to be trusted on this issue? Or an entrepreneur in the free market?

    That is the point Jeremy is really trying to hammer home. The Lordy Cadre doesn’t see it, because, according to Lordy Keynes, and I paraphrase, ‘this fiscal policy works best under socialist systems’, per the German edition of General Theory.

    In the end, the Keynesian Cadre is arguing socialism, and Jeremy is arguing free market. Call it what it is, guys. No more idioms or euphemisms.

    • http://www.jeremyrhammond.com Jeremy R. Hammond

      Thanks, Tony. Appreciated!