Published by the Foundation for Economic Education December 24, 2010 | Subscribe via RSS
Contributing editor Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback. ... See All Posts by This Author
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In his September 28 New York Times blog post, Paul Krugman announced that "economics is not a morality play." That turn of phrase is his way of defending the idea that in unusual times, such as the sort of deep recession we are in, we can get strange relationships between economic cause and effect. The result is that actions which we might find highly distasteful can have positive effects. Thus we cannot afford to be overly concerned with morality if the goal is to get out of the recession.
Specifically, Krugman defends the claim that World War II got us out of the Great Depression, because "this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn't particularly wise." Even spending on something destructive like war, he argues, is what is needed to solve the problem, especially when the "political consensus for [domestic] spending on a sufficient scale" is not available. In Krugman's version of Orwell's Newspeak, destruction creates wealth, and war, though not ideal, is morally acceptable because it produces economic growth.
Thankfully, we can get behind his Newspeak to see the fallacy of his economics. To believe that spending"”any kind of spending"”is the cure for what ails us is to ignore the subjective nature of wealth and the microeconomic basis of economic growth in favor of an absolute reification of economic aggregates such as GDP and unemployment. Spending trillions of dollars fighting a war can certainly bring idle capital and labor into employment, driving up GDP and lowering unemployment. But this does not mean we are any wealthier than before.
Wealth increases when people are able to engage in exchanges they believe will be mutually beneficial. The production of new goods that consumers wish to purchase is the beginning of this process. When instead we borrow from future generations to spend on goods and services connected not to the desires of consumers, but rather to the desire of the politically powerful to rain death and destruction on other parts of the world, we are not allowing individuals the freedom to do the things they think will make themselves better off. And we are certainly not extending that freedom to those killed in the name of our economy-enhancing war. At a very basic level, the idea that any kind of spending is desirable overlooks the fact that spending on war (and, I would argue, public works as well) actively prevents people from enhancing their wealth through production and exchange linked to consumer demand.
Employing people to dig holes and fill them up again, or to build bombs that will blow up Iraqis, will certainly reduce unemployment and increase GDP, but it won't increase wealth. The problem of economics is the problem of coordinating producers and consumers. This coordination happens when we produce what consumers want using the least valuable resources possible. That is why it is wealth-enhancing to dig a canal using earth-movers with a few drivers rather than millions of people using spoons, even though the latter would generate more jobs.
Sending soldiers off to war is a waste of human and material resources, and is almost by definition wealth-destroying, no matter what it does to GDP or unemployment rates. The only way one can view economics amorally, as Krugman wishes to, is if one is only concerned with total GDP and not its composition. However, it is the composition of GDP, in the sense of how well what we've produced matches consumer wants, that ultimately matters for human well-being. It's easy to create jobs and generate spending, but those do not constitute economic growth, and they are not necessarily indicators of human betterment.
So yes, Professor Krugman, it does matter how we try to get ourselves out of depressions. The world is not upside down and vices aren't virtues. War isn't peace and destruction isn't creation. The real solution to digging out of a recession is to remove the barriers to the free exchange and production that actually comprise wealth creation. Borrowing trillions more from our grandchildren to spend on building the equivalent of pyramids or on blowing up innocents abroad only digs the hole deeper. And when one is reduced, as Krugman is, to saying we "needed Hitler and Hirohito" to get us out of that hole in the 1930s, one has abandoned morality to worship at the altar of economic aggregates.
No critic of free-market economics can ever again accuse us of being irrational and immoral when it is Paul Krugman who says destruction creates wealth, and war is an acceptable second-best path to economic growth. Don't let Krugman's Newspeak fool you: War and destruction are exactly what they appear to be. To argue as Krugman does is to abandon both economics and morality. Big Brother would be proud.
I agree wholeheartedly with your commentary. With Krugman, there is nothing about PEOPLE in his economic analysis. The economy is nothing but a circular entity in which people make goods so that they have something to do, and then they “spend” in order to clear the shelves so that producers can make more goods and repeat the process.
There is no connection between production and consumption with Krugman. Instead, he just sees this as a mechanistic creature in which the only thing that matters is the aggregation of numbers. This is not economics, not even close.
I agree wholeheartedly with your commentary. With Krugman, there is nothing about PEOPLE in his economic analysis. The economy is nothing but a circular entity in which people make goods so that they have something to do, and then they “spend” in order to clear the shelves so that producers can make more goods and repeat the process.
There is no connection between production and consumption with Krugman. Instead, he just sees this as a mechanistic creature in which the only thing that matters is the aggregation of numbers. This is not economics, not even close.
The accumulation of wealth is a long steady process. From capital accumulation society benefits because monetary resources are available for productive purposes. It is crazy to think that engaging in war is a productive process; it is anathema to the human condition and economically wasteful. That in turn is not an efficient use of scarce resources so in terms of economics, war should be the last thing any economist with a social conscience should think of.
But as we all saw at the onset of the Afghan and Iraqi wars, numerous US corporations connected with military hardware manufacturing experienced substantial growth in share prices.
Boeing Common Stock Nov 2001 $32 to $107 in Oct 2007. Halliburton July 2002 $7.41 to $53 in May 2008. Lockheed Martin 2000 $18 to $116 in 2008.
Obviously there were many people who saw their wealth increase due to the activities of the Military Industrial Complex but it came at the expense of increasing the US deficit by $3 trillion to fund those wars.
That is not economic growth or wealth creation, it is living beyond the US’s means. That ultimately ends in bankruptcy.
Somewhere along the way, the American tax payer will have to foot the bill and that's when the "?dead weight loss' will be realised. When will those guys learn?
The accumulation of wealth is a long steady process. From capital accumulation society benefits because monetary resources are available for productive purposes. It is crazy to think that engaging in war is a productive process; it is anathema to the human condition and economically wasteful. That in turn is not an efficient use of scarce resources so in terms of economics, war should be the last thing any economist with a social conscience should think of.
But as we all saw at the onset of the Afghan and Iraqi wars, numerous US corporations connected with military hardware manufacturing experienced substantial growth in share prices.
Boeing Common Stock Nov 2001 $32 to $107 in Oct 2007. Halliburton July 2002 $7.41 to $53 in May 2008. Lockheed Martin 2000 $18 to $116 in 2008.
Obviously there were many people who saw their wealth increase due to the activities of the Military Industrial Complex but it came at the expense of increasing the US deficit by $3 trillion to fund those wars.
That is not economic growth or wealth creation, it is living beyond the US’s means. That ultimately ends in bankruptcy.
Somewhere along the way, the American tax payer will have to foot the bill and that's when the "?dead weight loss' will be realised. When will those guys learn?
The prosperity that emerged in the late 40′s and 50′s many US citizens bought government debt during the war and endured forced rationing of consumer goods. Almost 4 years of deferring gratification means a huge accumulation of relative wealth for us. I suspect that the World Wealth, if there is such a statistic, was somewhat diminished since many were less better off than before.
The prosperity that emerged in the late 40′s and 50′s many US citizens bought government debt during the war and endured forced rationing of consumer goods. Almost 4 years of deferring gratification means a huge accumulation of relative wealth for us. I suspect that the World Wealth, if there is such a statistic, was somewhat diminished since many were less better off than before.
Bastiat’s Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) The Parable of the Broken Window: Bastiat argues that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him (specifically the burning of Paris):
Bastiat’s Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) The Parable of the Broken Window: Bastiat argues that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him (specifically the burning of Paris):
Were Krugman correct in his view that WW2 got the USA out of the Great Depression (GD), there would be the countervailing example that the Iraq and Afghan wars did not prevent the 2007-10 recession.
Part of his problem is that the Roosevelt spending did not get the USA out of the GD, things seemed better after 1941 and possitively good after 1946. Ergo, the revival MUST have been due to WW2, hence ‘war’ is a ‘GOOD’ thing.
Can I suggest that the straitjackets put on the economy by Hoover and Roosevelt had been partially, at least, relaxed during WW2 (the War Effort comes FIRST!). And as others (Murray Rotherbard?) have said, the poor investments made prior to 1929 because of the distortion due to inflation had been largely liquidated in the intervening 16 years to 1946.
Mr Krugman (he doessn’t deserve the title ‘Professor’) must surely know better?
Were Krugman correct in his view that WW2 got the USA out of the Great Depression (GD), there would be the countervailing example that the Iraq and Afghan wars did not prevent the 2007-10 recession.
Part of his problem is that the Roosevelt spending did not get the USA out of the GD, things seemed better after 1941 and possitively good after 1946. Ergo, the revival MUST have been due to WW2, hence ‘war’ is a ‘GOOD’ thing.
Can I suggest that the straitjackets put on the economy by Hoover and Roosevelt had been partially, at least, relaxed during WW2 (the War Effort comes FIRST!). And as others (Murray Rotherbard?) have said, the poor investments made prior to 1929 because of the distortion due to inflation had been largely liquidated in the intervening 16 years to 1946.
Mr Krugman (he doessn’t deserve the title ‘Professor’) must surely know better?
Thank you for the debunking of Krugman. It's very interesting to note that Krugman believes that "Economics is not a morality play”. And yet Economics is at the center of virtually all moral debate.
Krugman"”champion of the Statists"”views the economy as one big collective. The individual does not exist according to Krugman's inverted moral view. It's perfectly OK to take from one to give to another if it benefits the collective. In fact, he has advocated recently for 90% tax on the wealthy.
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