Thursday, January 23, 2014

Demand side

Everything you need to know about economics Frederic Bastiat wrote in 1850:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

This is called opportunity cost in modern parlance.

It must hurt the high-IQ, low-common sense Paul Krugman to be debunked 160 years before his time:

This does mean that the [Fukushima] nuclear catastrophe could end up being expansionary, if not for Japan then at least for the world as a whole. If this sounds crazy, well, liquidity-trap economics is like that — remember, World War II ended the Great Depression.

Or was it Franklin Roosevelt’s New Deal? It’s either/or for demand-siders.

World War II didn’t end the depression. The New Deal didn’t end the depression. The end of the New Deal ended the depression. Richard Vedder writes:

The basic argument is that government spending employed a lot of people, and the economy grew. But logic tells us that this assumption puts the cart before the proverbial horse. Once again, governments can only spend if they can tax and borrow against productive work that’s already occurred. Instead, it would be more accurate to say that a resumption of work combined with a less economically interventionist Washington did the job.

From a stock-market perspective, there’s no evidence supporting the conventional claim. While the Dow Jones Industrial Average reached 155 in October of 1939, it never regained that level until 1945, when the war was ending.

On the labor front, unemployment sat at 18.8 percent in 1938, but by 1939 it had already fallen to 16.7 percent. Amity Shlaes observed in The Forgotten Man that FDR knew a “war on business and a war against Europe could not happen at the same time,” and as has been shown, New Deal legislation so harmful to employment and capital formation was effectively halted by 1938. In 1942, FDR ordered the liquidation of the Work Projects Administration. The WPA employed 2.4 million Americans in 1939, but by June of 1943 the number was down to 42,000.

What seems to have increased national output during the war was the simple fact that Americans were working a great deal more. In this sense we might say the war was superficially stimulative because patriotic Americans felt it was their duty to work. And work they did judging by the increase in hours worked across all manner of industries. While average hours worked in the food products industry was 40 in 1940, by 1944 it had reached 45. In tobacco the number rose from 36 to 42, and in rubber products 36 to 45. FDR asked for income limits, but Congress refused him.

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