Natural Disasters, It Turns Out, Are Bad
It seems that we may never rid ourselves of the broken-window fallacy. it's not only that disasters just have a silver lining: economists have long believed that natural disasters and wars are actually good for the economy! Until recently they have not made any attempt to empirically test their views. Now the good news. A recently published paper in Economic Inquiry by Cuaresma, Hlouskova, and Obersteiner brings the positive benefits of disasters into question. FULL ARTICLE
Comments (113)
This article should not be needed - as it is wild folly to think that fire, flood and earthquake (etc) are "good for the economy".
However, sadly the "broken window fallacy" persists (including in the economics departments of universities) so articles like this are needed.
Published: May 7, 2008 10:25 AM
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Regarding natural disasters, read these two
books about what's coming because of the
phenomenon of PRECESSION OF THE
EQUINOXES:
"Fingerprints of the Gods," by Graham Hancock
and
"Not by Fire but by Ice," by Robert Felix
Precession phenomena take out civilizations,
as it causes mass extinctions.
Whatever happened to the old saw?:
"Adversity is the mother of invention,"
which suggests that natural disasters and
wars DO PROMPT innovative rebuilding
of what had been lost. And, yet, such a
"benefit" is counter-intuitive.
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Published: May 7, 2008 10:34 AM
Good article, if not only for the small point that there is no such animal as a natural disaster. Didn't your science teacher drill in you that these are natural phenomena? Human settlements unwisely located in the paths of these natural phenomena and not built to withstand worst case scenarios will obviously be adversely affected when these natural phenomena occur. It is ironically, "if you build it, they will come." There is nothing disastrous about nature, man only makes it disastrous with his follies.
Published: May 7, 2008 10:40 AM
Wartime increases in production do produce an increase in "Welfare" - for the poor sods who have been sent into battle to do or die for "their" country.
(N.B. the term "their" is to be construed in the way in which a slave can speak of "his" master - but not in the way in which the master can speak of "his" slave: though both slave and master are speaking perfect English.)
I digress. The grunt on the field of battle is very poor if he lacks ammunition (and all other convenient warlike stores he may need,) and "wealthy" - in a military sense, of course - if he is well equipped, supplied, fed and watered. He is also more likely to be able to return home unharmed, as an economic asset to his country. Of course, as far as the other poor sods who he helps to die for their country, we may wish to describe it in some other way. Malfare?
Published: May 7, 2008 10:48 AM
Things like this are why I don't proscribe to Utilitarianism and the GDP measure in general.
Published: May 7, 2008 11:43 AM
This goes to show the folly of GDP measuring. These folks who believe in destruction, mayhem and death ONLY see the increase in output to rebuild things. They miss the decrease in stored capital it takes to rebuild.
The other measuring flim-flam is that government gives money to the disaster affected folks and uses a hidden inflation tax to stiff the millions of other folks. Of course the government sees this descreased money value as capital. Again it is an accounting issue.
Published: May 7, 2008 1:42 PM
While natural disasters may benefit specific industries, the net effect is usually an empowerment of the state. That would explain why this misconception still receives such wide acclaim.
Published: May 7, 2008 3:28 PM
"This goes to show the folly of GDP measuring. These folks who believe in destruction, mayhem and death ONLY see the increase in output to rebuild things. They miss the decrease in stored capital it takes to rebuild."
I've met some national income accountants, but, thank goodness, no-one who believes in destruction, mayhem and death. At least no-one who believes these things are good.
National income accountants attempt to measure current production of goods and services by GDP, and the fact that, say $10 billion of this current production is for rebuilding that which was destroyed does not matter for this purpose. But, when looking at what has happened to real wealth, national income accountants would subtract from the asset side of the national balance sheet when physical destruction takes place. If the destruction is estimated at $15 billion, the event would certainly be acknowledged by national income accountants to have reduced real wealth by that figure. Bad. Very bad.
Published: May 7, 2008 3:33 PM
Yep. Natural "phenomena" are neither good nor bad. They are indifferent to mankind. The appropriate question to ask is Natural Phenomena: Do they adversely affect the economies located within their destructive power?
And the answer depends on many things, a primary variable being of what industries dominate that particular economy. For example, if a particular economy is dominated by the construction and health care industry which is fueled largely by old or fixed income money that does not rely on the current state of affairs to retain its value and that region is hit by a hurricane, then how adversely affected would that economy really be?
The answer: very little. In fact the economy would see a short-lived jump in GDP once construction began and the residents were being treated and problems resolved, along with a decrease in unemployment. If long terms projects were made part of the recovery effort, then the GDP may increase over the long term.
Sound familiar?
Yes, you guessed it. Certain Parts of Florida.
Published: May 7, 2008 3:37 PM
Good point. The state does benefit itself by natural disasters. Given the theories followed by the Army Corp of Engineers they almost seem to be creating ever larger disasters. See the book Rising Tide by John Berry which is excellent. FEMA seems like a dangerous outfit to me.
Published: May 7, 2008 3:55 PM
I would like to believe that there is an office someplace that believes in correct accounting but I just don't see it or if it exists then it does a poor job of publicity.
I wonder if these are the same folks who predict a 133 billion dollar budget deficit next year? Or the same ones that predicted a Senior Citizen Drug Giveaway for 500 billion over 10 years?
Published: May 7, 2008 9:11 PM
Alex i hope your right says:
I would like to believe that there is an office someplace that believes in correct accounting but I just don't see it or if it exists then it does a poor job of publicity.
accounting is impossible for opportunity costs - should be self-evident. like "how happy would i be now if i'd married my first girlfriend?".
Published: May 8, 2008 12:38 AM
Governments like GDP because it gives them a guage on the current activity going on in their country.
Measures of wealth and assets are fine but they are not any good because they are static and do not produce any needed goods and services themselves.
Of course a country needs to also take account of the value of goods damaged by a natural disaster and it often is through the numbers you hear on the news. But sooner or later those numbers are forgotten because what actually matters here and now is what is happening HERE and NOW.
No accounting or economic measure is perfect and is just one plank of efforts by governments to measure the health of their country. GDP is used to see whether 'activity' has increased and it is well known that more 'activity' means more people are working and getting fed.
It is well known that GDP is seasonal and also that the acitivites that constitute it may or may not be continuing in the future or that they are unsavoury. A GDP figure for an oil producing nation would need to be caveated by acknowledgement of the number of years of oil left etc. In the same way a natural disaster such as Katrina would be noted as a blip in the economy of those areas...but it may be more.
Economic activity can often beget more activity until you get full-on perpetuitus activity. So the rebuilding in New Orleans may in fact leave the City with more jobs than before the Hurricane came.
The point is that lamenting the losses is only really an issue if it makes a maningful impact on our economic activity now and in the future. If there was not more wood and nails in the world because Katrina got rid of them all then we really would be in a 'loss' position.
Until what is lost in a disaster cannot be replaced within the forseeable future then counting it as a cost is a bit futile when in actual fact the economy might be humming along without a care in the world.
As it is I struggle to see how the 'broken windows' fallacy does not have at least a few holes in it.
Does this suggest that we should go around smashing things to increase GDP? No, because we can think of more productive ways to spend money such as by investment in science and technology and existing needed services. Destruction only forces us to rebuild what we already had.
Published: May 8, 2008 4:02 AM
Owen,
The broken window fallacy does not "Lament Losses" It is simply stating the fact that the losses and opportunity costs are not part of the equation when making statements about GDP growth related to disasters, and thus said analysis is incorrect. What specific holes are there in that? Where do the economists take these things into account in their formulations showing that there will be economic growth?
If I want to buy a TV and now I can't afford it because my basement got flooded and I had to have the carpet replaced, the carpet manufacturer will be happy but the TV manufacturer will not. I'm no better off than I was before, and I don't have a new TV... But I did contribute to the GDP because I bought carpet! Of course my point is an increase in GDP doesn't necessarily mean an increase in living standards as seems to be assumed with the fallacy. In fact, now that I've depleted my savings to buy carpet, My living standard was lowered because I have to build by savings up again if I want to buy that TV! Disaster = No new TV.
Published: May 8, 2008 10:26 AM
Problem is Erik,
GDP is not and never has been touted as the be-all and end-all of living standards. There is alot of work going on in mainstream economics in order to better accomodate other measures into what constitutes 'quality of life' than just GDP but as you probably know GDP is still the one used most often but political spin merchants and the rest.
Economics (mainstream ones) know that GDP measures ACTIVITY not wealth.
You have to then ask yourself as a citizen or consumer whether you would like activity or wealth?
The two are different. Weath is static but activity is dynamic. Food, entertainment, education, research, sports, communication, travel and cultural activities and many more are all considered by many people to be part of their QUALITY OF LIFE and these are captured more adequately by GDP than by any wealth measure.
You are attacking GDP when you don't fully understand the advantages it has, and as I said mainstream economists have, ever since GDP was invented as a measure, accepted the shortcomings of GDP in that it doesn't measure changes in wealth, nor does it measure what kinds of activities caused the given level of economic activity.
Besides, if by buying the carpet rather than the TV you would have spent more money from your savings (or borrowed) then all other people in the economy would have been incrementally better off for this happening. GDP does not deny this it is just indifferent as to the source of the economic stimulus.
But no-one is suggesting wilful damage because there are better uses for new money in the economy than your carpet - such as research, technology and education for just some.
Published: May 8, 2008 12:27 PM
Owen: "Economics (mainstream ones) know that GDP measures ACTIVITY not wealth."
What good is knowing how much "activity" if there is no value attached to the activity?
Let's say your kids bring home a report card from school, but, instead of being graded on how much they learned, they bring home a record of how much activity they participated in. I don't think you would take a look at the card and say, "Wow! You were really busy. Good job. What a great school!"
They could be exhausting themselves learning nothing. What good would that do?
Published: May 8, 2008 8:58 PM
Kevin:
I get what you are saying but...there is a very strong correlation between GDP per capita and material standard of living.
The problem with your analogy is that people within an economy are left to their own devices to make their own decisions subject to complying with the laws. Therefore it is assumed that the GDP on average represents activities which the people consented to do and in fact chose to do otherwise they would not have done it.
If the whole of a country's GDP was made up of pointless activities that had no meaning then too bad - it is what those people chose to do of their own free will. They were not forced to do those things.
Published: May 8, 2008 9:06 PM
Owen: "You have to then ask yourself as a citizen or consumer whether you would like activity or wealth?"
For the record, we want as much satisfaction (wealth) as possible for the smallest amount of work (activity).
So, if you had a real measure of wealth (good luck on that), we would want that to go up and GDP to go down.
Published: May 8, 2008 9:08 PM
Owen,
The point they are making is that GDP doesn't tell you where you are in relation to where you were.
Published: May 8, 2008 9:12 PM
the hong kong authorities don't even compile gdp figures, and we all know what a backward, third-world standard of living they sport.
Published: May 9, 2008 2:19 AM
Kevin and Newson:
Kiddies. Tell me how you do people in your mythical land consume "wealth" without creating GDP?
It is like the man clinging to the chest of gold as he and it sink to the bottom of the ocean. Wealth does not make people materially better - consumption does.
GDP measures consumption. Game. Set. Match.
Newson making no sense as usual. Who said that GDP was necessary to manage an economy? It is one of many tools used my mainstream economists to measure economic activity. You are the king of fallicious statements.
Published: May 9, 2008 3:29 AM
Which is why reporting GDP increases as a sign of economic growth after a disaster is idiotic...
Published: May 9, 2008 5:01 AM
Inquisitor:
No it is not idiotic. It is a fact. GDP measures economic activity which for unfortunate reasons is increased by the disaster in your example.
Next you are gonna say the sun goes around the earth. (rolling eyes)
Published: May 9, 2008 5:11 AM
Economic growth, NOT merely activity.
Published: May 9, 2008 5:28 AM
In case it isn't clear, the problem is reporting these increases in GDP as a sign that a disaster is "good for the economy"...
Published: May 9, 2008 5:31 AM
Inquisitor:
It is only idiots like you that think a tornado is good for the economy. People with a life simply note that it causes an observable increase in economic activity.
GDP measures economic ACTIVITY. You have obviously never studied "real economics" have you girl?
...drowning are ya?
Published: May 9, 2008 5:38 AM
From the article: "And it's not only that disasters just have a silver lining: economists have long believed that natural disasters and wars are actually good for the economy! Until recently they have not made any attempt to empirically test their views. However, in 2002 Mark Skidmore and Hideki Toya published a paper where they found a positive correlation between disasters and human capital, productivity, and GDP growth."
Also...
http://blog.mises.org/archives/004021.asp
http://blog.mises.org/archives/008021.asp
Me:
"Which is why reporting GDP increases as a sign of economic growth after a disaster is idiotic..."
Troll:
"It is only idiots like you that think a tornado is good for the economy"
I rest my case.
Published: May 9, 2008 5:54 AM
Owen,
I don't believe you ever answered my question regarding the opportunity cost. Specifically, how are they factored into the equations that economists use to determine the GDP growth following a disaster?
If you take my analogy where my basement gets flooded as an example, GDP increases. I'm not trying to say that GDP doesn't increase. I'm saying "who cares?" when you can't buy that new TV! If the opportunity costs were taken into account, statements like "economists have long believed that natural disasters and wars are actually good for the economy!" would never occur.
Published: May 9, 2008 8:48 AM
Sort of off-topic here, but...
It's been interesting to watch the threads in which you participate, Owen, as you typically begin by calmly and intelligently presenting your viewpoint. As soon as your viewpoint is challenged, however, you begin to behave like a cornered animal, hissing and spitting in an attempt to ward off your attacker, rather than continuing to engage in any meaningful intelligent discussion. It gets worse as the thread wears on, eventually devolving into name-calling on your part. Frankly, I'm surprised you persist, as I think we all keep expecting you to shriek, "You're all stupid, and I hate you!" and storm out of the room. But kudos to you for sticking to your guns.
Some of the Austrians have suggested that you should be banned from the board, but I think you provide a valuable service to the rest of us. Most of us visit this site in an effort to educate ourselves, so we read the articles and participate in discussion and debate. It would be incredibly dull and unproductive if we all just sat around nodding and agreeing with each other, so we welcome opposing viewpoints, and we generally respond to them with rational counterpoints. Engaging in such debate helps us better understand our own discipline, gives us insight into various forms of anti-capitalist bias, enhances our ability to defend our own viewpoint, and strengthens our convictions concerning the benefits of the free market and libertarian principles.
Calling people names, however, is simply unproductive in general, and completely counter-productive to your viewpoint, as it destroys any credibility you may have gained from your initial non-combative post(s). Far from convincing us of the validity of your opinion, you simply reinforce our resolve to defend our own opinion. In fact, your ranting serves only to solidify the rationality of Austrian principles.
So THANK YOU, Owen, for challenging us and giving us the impetus to further examine and strengthen our convictions. I know it can be frustrating to try and convince such a confident group that they are wrong about everything, but you persevere, and for that you should be commended.
I look forward to your next rant.
Published: May 9, 2008 8:56 AM
I second Ron's comment.
On to the subject at hand.
There are many people, including economists (people who should know better) that assert disasters have economic benefits. GDP growth is only beneficial if it adds to wealth. Activity without this purpose is called waste- a waste of time and labor, specifically. Disasters subtract from wealth. The economic activity that then occurs to replace that destroyed wealth only leaves you where you were before the disaster. The measured GDP has given a false signal of greater wealth. As Erik points out, the missing ingredient is the opportunity cost of that increased economic activity.
Published: May 9, 2008 9:25 AM
owen says:
"Who said that GDP was necessary to manage an economy? It is one of many tools used my mainstream economists to measure economic activity."
you've clearly not understand the point i made.
at best gdp is irrelevant - as others have mentioned, "activity" (digging and then filling holes) says nothing about wealth creation. also, gdp measures only final goods and services, ignoring the biggest part of the economy - the intermediate production processes.
at worst, and more often than not, gdp numbers are used as a pretext for keynesian spending initiatives, hobbling market mechanisms.
hence my point about hk's deliberate non-compilation of gdp. this dates back to the time of the late sir john cowperthwaite, financial secretary to the colony from 1961 onwards. his recommendation to poor countries interested in developing was to abolish the office of national statistics. without statistics, bureaucrats were unable to meddle and stymie market solutions. he refused to supply whitehall with anything more than the most rudimentary figures, and hong kong's stunning economic progress is a testimony to the wisdom of this man.
Published: May 9, 2008 11:17 AM
Dear Owen,
Would you agree to post your home address and agree to let us take your property? I promise to leave a few things behind. ,..for the good of the national GDP of course.
Yours in faith,
pupnik
Published: May 9, 2008 11:51 AM
he probably doesn't even have to pay taxes! i wouldn't discount this as a case of self-interest.
Published: May 9, 2008 12:13 PM
I think many of you are missing the point of what GDP measures. It measures economic activity. If economic activity is higher that means there is more of it.
Why is this good? Well for a large part, consumer interations in the market are uncoerced so therefore the GDP figures will reflect the amount of uncoerced desires of the people.
When GDP rises this means people were able to undertake or 'consume' more uncoerced desires.
Wealth is no good to a modern economy because the material living standards are not made up of 'wealth' but by consumption.
Therefore GDP measures the amount of consumption as a proxy to living standards.
This is why GDP is often used as a (crude) was to compare living standards in a country.
And it is a valid one.
Published: May 10, 2008 12:02 AM
Owen: "Well for a large part, consumer interations in the market are uncoerced so therefore the GDP figures will reflect the amount of uncoerced desires of the people."
What is used to measure GDP? Not coerced dollars, by any chance? Really, there is so much coercion it is hard to tell which way is up. Can't buy this, can't buy that. Must buy this, must buy that. Can't buy this from that guy, you have to buy it from this guy. It's as if you're saying a rat put in a maze is uncoerced. It found the cheese, which is supposed to tell us something about the economy.
Published: May 10, 2008 1:14 AM
Actually, my example is wrong. You put the rat in the maze, prod it around with electrical shocks, then measure how much running it did. Forget the cheese, that isn't important. The running is what we care about. The more it runs, the happier it is.
Published: May 10, 2008 1:27 AM
GDP measures living standards via the proxy of economic activity or consumption. It is increadibly well correlated with material living standards which is why many countries want to increase their GDP percapita.
Growth in GDP = Growth in living standards
A disaster would initially cause a loss in GDP because the value of goods and services traded would decline as frankly many would have been destroyed.
A subesquent increase in GDP CONFIRMS that the value of consuption in the country has increased and therefore so have living standards.
Those who complain that re-erecting destroyed houses is not good for the country have never heard of the 'multiplier effect'.
Published: May 10, 2008 1:27 AM
Owen,
Again, what is your reasoning when you say that an increase in economic activity or consumption (which is it, by the way?) necessarily means an increase in material living standards?
I assume you mean consumption...but how does mere consumption tell you the quatity and quality of goods available?
Also, who said that re-erecting houses is bad for the country? I doubt that anyone here thinks that. On the other hand, destroying houses so that you can re-erect them and raise GDP is idiotic, wouldn't you agree?
Published: May 10, 2008 1:47 AM
owen says:
"Growth in GDP = Growth in living standards
this is only true to the extent that government intervention doesn't destroy the balance between consumption (2/3 gdp) and production (excluded from gdp).
in most developed countries, less onerous intervention has compromised this balance less than in underdeveloped nations, and so consumption is going to grow in link-step with production (which in turn guarantees future consumption).
when moths eat your clothes, you don't get any richer by going out and re-filling the wardrobe. your closet is fuller, your wallet lighter.
Published: May 10, 2008 2:59 AM
Production is included in GDP. If you don't know why or how this is then you need to go to an economics 101 text book not troll on this forum.
Consumption is by the choice of the people in the economy so there is a prima facie assumption that even given the constrains from government invervention, those goods produced and consumed represent that MOST DESIRED goods and services for each person that bought them. Therefore questions about the quality or quantity of the goods are not relevant.
If there is no consumption there is not only no living standard, but there is no living. Increases in GDP per capita represent increases in the VALUE of each persons share of a country's economic activity.
"when moths eat your clothes, you don't get any richer by going out and re-filling the wardrobe. your closet is fuller, your wallet lighter."
If your new purchases end up increasing GDP the multiplier effect means that on average the rest of the country is better off for your misfortune - sorry.
Published: May 10, 2008 3:34 AM
"Those who complain that re-erecting destroyed houses is not good for the country have never heard of the 'multiplier effect'."
The same "multiplier" effect which Friedman found to be pitifully low? That one? Of course, this isn't in "econ 101".
As for GDP measuring "production":
http://www.mises.org/story/2878
It seems Owen is one of those idiots who think tornadoes increase wealth! By your "logic", we ought to bulldoze the country every few years to stimulate wealth production.
Published: May 10, 2008 4:41 AM
Friedman's conclusions on the multiplier are in his Theory of the Consumption Function, for those interested.
Published: May 10, 2008 4:43 AM
to owen:
you're right, sadly my macroeconomics 101 was full of keynesian nonsense like multipliers. gdp definitions vary slightly, but this is a fair one:
"The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports."
note: final goods and services, not intermediate! the largest part of the economy is left out of the equation. so naturally consumption assumes a role out of all proportion to its overall contribution.
Published: May 10, 2008 4:54 AM
It was never asserted by anyone that natural disasters increase wealth but that they increase economic activity, therefore living standards.
It is by living standards that people are materially enriched in their lives - not by wealth.
If peoples consumption of VALUABLE goods increases their living standards increase.
MOST people find this a good thing hence the focus on GDP.
If the multiplier effect didn't work then unespected increases in the money supply would not stimluate the economy into increased production of goods and services.
But sadly for Inquisitor unexpected increases in they money supply do increase production and consumption in the short term.
Seems that GDP is a uselful measure after all.
I think even Inquisitor will be able to advise newson that he/she has just greatly embarrassed themself by revealing a less than elementary knowledge of the economics he/she rails against. I am quite sure newson that you in fact did fail your macroeconomics classes with poor displays like that (just for your knowledge intermediate production is included).
Published: May 10, 2008 5:17 AM
But wealth is by definition the sum of economic goods (including services) in an economy, so if economic activity increases something, what is it exactly? Wealth is the sum of valuable goods in an economy - see Menger. You're the one embarassing yourself here.
As for the multiplier, how about you refute Friedman's arguments then? He demonstrated that the consumption multiplier is at best 1, not 4 - 5. He's not referring to the banking multiplier, and neither are you, so stop equivocating.
Published: May 10, 2008 5:26 AM
Inquisitor:
Actually you are embarrasing yourself only. People cannot eat wealth. When they eat or are entertained or watch TV they consume. GDP measures this consumption. Wealth is of no material use to most people if it is not CONSUMED.
People are more concerned with the VALUE of things consumed because this relates much more closely to living standards to any static measure of wealth.
Multipliers are empirically proven by others. This report (one among thousands) quotes multiple studies that estimate multipliers at between 1.5 and 2.
http://www.nukewatch.org/facts/nwd/DumasReport033103.pdf
...so what do we do now? The evidence points both ways.
Even a multiplier of 1 means that the extra dollar that rebuilt the house gets respent in the economy once during the year on something valued by someone.
Published: May 10, 2008 5:51 AM
"Actually you are embarrasing yourself only. People cannot eat wealth. When they eat or are entertained or watch TV they consume. GDP measures this consumption. Wealth is of no material use to most people if it is not CONSUMED."
Sure they can eat wealth - if that wealth consists of food. You're shifting your position now. Wealth is the sum of economic goods in one's command, of all sorts.
"People are more concerned with the VALUE of things consumed because this relates much more closely to living standards to any static measure of wealth."
An increase in goods one can consume is an increase in wealth. Speaking of value etc. makes no difference to what I'm saying.
"Multipliers are empirically proven by others. This report (one among thousands) quotes multiple studies that estimate multipliers at between 1.5 and 2."
Okay, and I can likewise say had that wealth not been burnt up on repairing the damages caused by a storm, it'd have been spent on other things seen as more valuable, again generating a multiplier effect, and in addition the savings in the bank that now have to be consumed would've lowered interest rates, stimulating investment. Instead, now money must be spent to repair destroyed wealth.
"...so what do we do now? The evidence points both ways."
"We" do nothing.
Published: May 10, 2008 6:38 AM
O.K. Guys.
Wealth represents the ability to consume broadly defined.
If you destroy wealth/capital you reduce the ability to consume.
If the capital is replaced you must either liquidate some of your wealth and/or increase your labor efforts, both of which reduce your ability to consume.
The multiplier effect of disasters is bogus as explained in the broken window fallacy. Disasters simply re-channel the so called "multiplier effect" and make it easier to witness, but the existing channel is shut down and wealth is reduced in the process.
Published: May 10, 2008 9:38 AM
Owen,
All of your points are attempting to redirect the argument to "GDP increasing = higher living standards" But that does not address the ultimate question: Are we better off because of a disaster or war?
The reason I bring this up is because the articles linked here make statements indicating that we ARE better off because of a disaster or war.
The broken windows fallacy on the other hand is arguing that had the disaster or war NOT occurred then we would be better off. It is comparative. Which way would we be better off? With a disaster or war? Or without?
You seem to be a war monger! ( :
Published: May 10, 2008 10:25 AM
Owen's problem is that he clearly doesn't understand the concept named "wealth".
Published: May 10, 2008 11:20 AM
Inquisitor:
Eating weath consists of consumption which is captured by GDP so you just proved my argument not yours.
An increase in consumption is strongly linked to living standards. Wealth less so. Wealth is useless unless it is CONSUMED. and GDP captured this consumption.
You would be right that if there was no disaster there would be different preferences of consumption BUT when a disaster increases GDP (which is the focus of this thread) then the greater economy bebefits through the multiplier effect. They can purchase 1.5 - 2 times the amount of desired goods they would have previously.
Unfortunately for you interest rates are controlled by reserve banks and in times of turmoil or disaster they are more likely to lower than raise interest rates so you are wrong there too. Man you are an expert in getting things wrong.
"We" do nothing? Stalemate, I love it! Almost like you are waving the white flag.
Mark and Yancy
Yes if you destroy wealth you destroy the ability to consume, hence GDP. But how then do you explain increases in GDP following disasters?
You also seem to think that (real) economists like disaster or war. They don't. They simply acknowlede the fact that following natural disasters in developed countries GDP can often be raised as reconstruction efforts involve greater investment. The upshot of this is that because of the multiplier effect, the money spent on reconstruction is then spent on regular consumer and giving a kick-start to the economy.
You are also overestimating when and where GDP is raised following a disaster or war. In lebanon it is unlikely GDP will be raised because so much capital and wealtjh was lost, so too anywhere in Africa and in Europe soon after WW2.
However if you look at Japan 20 years after WW2 it had greatly increased it's GDP partly as a result of reconstruction fuelling a general increase in economic activity.
I think you have no idea of the complexity of the economy and the effects that stimulus and activity can project into the future for many years. It all comes down to an injection of money capital into the economy - in Europe, Korea and Japan it came from the USA, in American natural disasters it is more likely to come from fiscal stimulus packages, insurance payouts and lowered federal interest rates.
Published: May 10, 2008 8:16 PM
to owen:
gpd excludes intermediate goods!
to sort out your confusion, refer to reisman's article on gdp (http://blog.mises.org/archives/007771.asp). he calls intermediate expenditure productive expenditure. here's a teaser:
"Productive expenditure is expenditure for the purpose of making subsequent sales. It is the expenditures made by business firms in buying capital goods of all descriptions and in paying wages. Capital goods include machinery, materials, components, supplies, lighting, heating, and advertising. In contrast to productive expenditure, consumption expenditure is expenditure not for the purpose of making subsequent sales, but for any other purpose. In the terminology of contemporary economics, consumption expenditure is described as final expenditure."
sean corrigan has a dig at gdp in this article (http://rnsa-bs.livejournal.com/76430.html).
a snippet:
"Here, at last, we come to the half-truth hidden in the familiar cliche, for the data with which we are so familiar are compiled, a la Maynard, in such a fashion that consumption is indeed 60 per cent of the aggregate — if only because the supposedly gross product in fact nets out the literally trillions of dollars of intermediate goods and services which are essential to the continued satisfaction of human needs and in whose delivery the majority of the population earn their own daily bread."
you'll find the bureau of economic analysis (bea) does include intermediate goods in its calculation of "gross output", and that's why it dwarfs gdp.
happy homework, and go easy on the keynes - it's alice in wonderland stuff!
Published: May 10, 2008 11:40 PM
newson:
I hate to break it to you but the price of a final good includes the cost of all intermediate goods used in it's production.
This reisman sounds like he has never even read a macroeconomics book to say crazy stuff like that.
Published: May 11, 2008 12:13 AM
to owen:
right, so reisman's crazy, corrigan's crazy, i'm crazy - have you got anything intelligent to say about the bea? (your beloved government, remember).
Published: May 11, 2008 12:26 AM
newson:
"The price of a final good includes the cost of all intermediate goods used in it's production.
Because firms must sell goods at a profit to stay in business, the final goods price must necessarily include all the costs of bringing that good to market."
Wow you are are still trying to assert something that a 15 year old high school student would be able to prove wrong.
Published: May 11, 2008 12:38 AM
to owen:
clearly you've not read, or not absorbed what reisman (whose book you can download from mises.org) says. i'll give you another taste, because hope does spring eternal:
"The truth is that the great bulk of spending and income payments in the economic system is concealed under net investment! Net investment is analogous to an iceberg, nine-tenths of whose volume is concealed beneath the surface. Only in the case of net investment, what is concealed can easily be much more than nine-tenths."
Published: May 11, 2008 2:11 AM
newson:
That statement is wrong. GDP covers every every purchase made in the economy using money be it primary intermediary or by the final consumer.
Explain how it doesn't - I have already explained how it does.
Published: May 11, 2008 3:23 AM
"Eating weath consists of consumption which is captured by GDP so you just proved my argument not yours."
Owen, what does this have to do with anything? You're jumping around pointlessly. The above response was to "you cannot eat wealth", which is nonsense. You can, if it's good.
"An increase in consumption is strongly linked to living standards. Wealth less so. Wealth is useless unless it is CONSUMED. and GDP captured this consumption."
But wealth is the sum of economic goods in one's command. So this is nonsense.
"You would be right that if there was no disaster there would be different preferences of consumption BUT when a disaster increases GDP (which is the focus of this thread) then the greater economy bebefits through the multiplier effect. They can purchase 1.5 - 2 times the amount of desired goods they would have previously."
Also nonsense. The statement is of a comparative nature. No real "growth" has occured.
"Unfortunately for you interest rates are controlled by reserve banks and in times of turmoil or disaster they are more likely to lower than raise interest rates so you are wrong there too. Man you are an expert in getting things wrong."
I am speaking purely in terms of real factors, not the artificial actions of state agents which might in fact worsen things further. Please stick to the topic at hand.
""We" do nothing? Stalemate, I love it! Almost like you are waving the white flag."
No, it means I do not associate with cretins.
Published: May 11, 2008 8:13 AM
"Also nonsense. The statement is of a comparative nature. No real "growth" has occured."
-should be: "that wouldn't have otherwise, if not in greater quantities."
Published: May 11, 2008 8:43 AM
"That statement is wrong. GDP covers every every purchase made in the economy using money be it primary intermediary or by the final consumer."
"ACCORDING TO contemporary economics, the value of a "final product," i.e., a consumer good, such as a loaf of bread, counts not only itself but also the value of all the various "intermediate products," i.e., the capital goods, that have directly or indirectly contributed to its production, such as flour and wheat. Contemporary economics further holds that because the value of the final product already counts the value of the intermediate products, it is a positive error to attempt to count the value of the so-called intermediate products separately from and in addition to the value of the final product. Such a procedure, it claims, constitutes "the error of double counting.""
"Intermediate goods, which are used up in producing final goods and
services, such as the sugar in a candy bar or the energy used to
produce steel, are also not counted separately as part of GDP. They
are not counted separately because to do so would be to count them
twice, as the value of the final goods already includes the value of
the intermediate goods."
"In opposition to this view, I will argue in what follows that the value of final products completely and utterly excludes the value of intermediate products, i.e., that it does not count their value at all, with the result that if GNP/GDP is to consist exclusively of the value of final products, as is held almost universally, then the value of intermediate products is not counted even once. And if that in fact turns out to be the case--as I will show indeed that it does--then GNP/GDP as presently conceived and calculated is not in fact a concept of gross product, but rather is almost entirely a concept of net product. In other words, I will show that what is today called gross national product or gross domestic product is in fact essentially net national product (NNP) or net domestic product (NDP)."
If you have a complaint, take it to Reisman or the various authors of economics textbooks he cites who disagree with you.
Published: May 11, 2008 9:14 AM
For anyone who's wondering, the above is from Reisman's article "The value of "final products" counts only itself: today's gross product is net product" - the blog won't let me link it. Just google it. Skousen's "Beyond GDP: A Breakthrough in National Income Accounting " is also worth reading.
Published: May 11, 2008 9:20 AM
*if it's good = if it's food
Published: May 11, 2008 9:30 AM
Inquisitor:
Eating wealth becoms consumption which is measured by GDP.
Your one-line answers didn't actually succeed in saying much at all lest of all in opposition to mine. You have a problem with communication.
Then you resort to name-calling after it is quite obvious you have had you @#* handed to you on the multiplier issue. Sad.
The point you are sadly missing is that the monetary stimulus from the disaster has increased GDP. Monetary stimulus' do that - funny huh?
Problem was with all your cutting and pasting in your final comment you missed out the amazing magical argument where intermediate goods are actually left out. So your post is meaningless. If anything you confirmed the assertion that GDP does include intermediary goods. Thanks.
Published: May 11, 2008 6:54 PM
"Eating wealth becoms consumption which is measured by GDP."
Which contradicts your prior contention.
"Your one-line answers didn't actually succeed in saying much at all lest of all in opposition to mine. You have a problem with communication."
You have a problem in comprehension. Remedy it.
"Then you resort to name-calling after it is quite obvious you have had you @#* handed to you on the multiplier issue. Sad."
Where? When? In your imagination? Sad.
"The point you are sadly missing is that the monetary stimulus from the disaster has increased GDP. Monetary stimulus' do that - funny huh?"
What "monetary stimulus" is it you're speaking of? You are full of nonsense. The fallacy is to say a disaster is "good" for the economy because it increases wealth. It doesn't, not relative to the economic activity that must now be forgone to cope with the disaster.
"Problem was with all your cutting and pasting in your final comment you missed out the amazing magical argument where intermediate goods are actually left out. So your post is meaningless. If anything you confirmed the assertion that GDP does include intermediary goods. Thanks."
But it doesn't. Read Reisman's article. He disproves the assertion that it does therein. If you think he's wrong, email him.
Published: May 11, 2008 7:22 PM
Specifically, you contradict this contention here:
"Actually you are embarrasing yourself only. People cannot eat wealth. When they eat or are entertained or watch TV they consume. GDP measures this consumption. Wealth is of no material use to most people if it is not CONSUMED."
Published: May 11, 2008 7:26 PM
Wealth = economic goods in one's command. That is all. They can be consumed, saved away etc. etc. If wealth diminishes, one has fewer goods at their disposal to consume, and conversely if it increases. This is the sense in which the term is used within Austrian economics. Hence to speak of wealth that cannot be eaten, as if it's some abstract ethereal quantity is to speak nonsense.
Published: May 11, 2008 7:36 PM
Specifically what your infantile brain cannot comprehend Inquisitor is that once wealth is consumed it BECOMES consumption and the consumption is what it measured.
If wealth is consumed it is no longer wealth it is consumption.
Did you finish K12?
Published: May 11, 2008 8:00 PM
"Specifically what your infantile brain cannot comprehend Inquisitor is that once wealth is consumed it BECOMES consumption and the consumption is what it measured."
If wealth is consumed it is no longer wealth it is consumption."
And as I said, increased wealth means increased economic goods under one's control, hence increased consumption possibilities, both present and future. Why individuals should not care about this or why consumption matters independently of the stock of goods that make it possible is beyond me. You said people cannot eat wealth - but if what is wealth at one point is consumed at another, clearly they can. Your contrast was pointless.
"Did you finish K12?"
Did you learn how to count past 3?
Published: May 11, 2008 8:10 PM
Wealth is no good unless it is consumed. GDP measures this consumption.
Wealth measures something which is not related to living standard. GDP does so it is a superior measure.
Published: May 11, 2008 10:08 PM
What Inquisitor and newson don't understand is the simple concept that GDP measures consumption NOW and that consumption is the best proxy for standard of living.
Wealth represents POTENTIAL standard of living and is therefore necessarily a future oriented measure and is valid in it's own right but this does not take away from GDP which measures a different thing - namely actual standard of living as opposed to potential.
People often want to know both - how we are NOW and how we could be in the future.
Seems that all those needless attacks on GDP have come to nothing then...
BTW i read that article on intermediate goods and it wass a hoot, best laugh I have had in ages. It is complete crap and totally wrong - I can't believe it got published. I noticed it wasn't published in a major economics journal but just a side one. If his critique actually held any water is would have been published in a much more prestigeous journal.
Ha ha - good laugh though!
Published: May 12, 2008 3:52 AM
Owen, repeat it ad nauseam, ad perpetuum. I bore of you. I am not the one contrasting wealth with GDP. You did it. I mentioned disasters cannot increase wealth - and they can't, relative to a situation where the disaster had not occured. You then objected "but can one eat wealth?" They can, but so what? You did not refute my premise on its own grounds - rather, you threw in a red herring.
"BTW i read that article on intermediate goods and it wass a hoot, best laugh I have had in ages. It is complete crap and totally wrong - I can't believe it got published. I noticed it wasn't published in a major economics journal but just a side one. If his critique actually held any water is would have been published in a much more prestigeous journal."
Then email him and refute it, if you dare. Refute it here, now. Demonstrate what is wrong with it, or the joke is on you, clown. Argumentum ad verecundiam will not save your trollish arse at this stage.
Published: May 12, 2008 8:00 AM
OK People. Let's get off this shouting and name-calling rant and get back to business. No one is learning anything from this.
Published: May 12, 2008 9:22 AM
to owen:
here's gerry jackson (brookesnews.com) illustrating the pitfalls of gdp:
"But what matters is not GDP but total spending — especially spending between the stages of production. It looks like the Bureau of Economic Analysis is in sympathy with this approach. Taking 2000 as an example, GDP came in at about $13 trillion while the bureau’s figure for total economic output in terms of dollars came in at nearly $23 trillion, with business-to-business spending making up the difference. (My own estimate put total spending for 2000 at about $28 trillion). The BEA's approach is in keeping with the Austrian view that what matters for the economy is total spending."
your claim that gdp includes all intermediate steps seems to be wrong to the tune of $10 trillion for 2000. any thoughts?
Published: May 12, 2008 10:24 AM
to owen, from the us bureau of economics:
"Gross Output," an annual measure of total spending at all stages. GO is defined as Intermediate Input plus GDP.
Intermediate Input represents the sale of all products in the natural resource, manufacturing, and wholesale markets. GDP represents the final retail market."
note that this gross output series only started in 2001, and that textbooks are written to a keynesian script, in large measure.
Published: May 12, 2008 10:52 AM
to owen:
actually, to cut you a bit of slack, reisman himself acknowledges that textbooks almost universally accept that the cost of the final good and service includes intermediate costs.
not that the textbook treatment makes it correct, as skousen points out here:
"Most students of economics are unaware of the fact that GDP was created by Simon Kuznets during World War II to quantify final aggregate demand according to the new economics of Keynes. As such, GDP ignores all intermediate spending in the economy, based on the tenuous argument that earlier stages of production constitute double counting.
Published: May 13, 2008 12:54 AM
to owen:
another point made by skousen is that the retail input into leading indicator indices is minimal. the indices are essentially compiled from production numbers of various types, not retail.
in japan, there is no retail component of the leading indicators index. so gpd is again tacitly acknowledged as an inaccurate compass of the overall economy.
Published: May 13, 2008 11:11 AM
Inquisitor:
What you fail to understand is that GDP can increase following a natural disaster.
As I did in the other thread I explained that when two or more intermediate goods are combined into the value of a final good such as a car, only the car has utility and use-value to society and not the component parts. Where a good only has use-value as a part of another final good then it has no use-value on its own so measuring the value of this part on its own is useless. It in fact has no value when considering it's use-value.
GDP measures consumption which is by definition only goods or services that have a final use-value to the economy.
next, newson:
The $10 trillion is double-counting which is not a tenuous argument but is in fact understood and conceptually agreed with by 99% of all economics and business leaders.
GDP is necessarily an estimate. They do not go out and actually physically observe every sale to prove it happened. Production figures are a good proxy for final sales as are credit card and EFTPO card spending data, as are firm inventory levels. There are hundreds of measures that are triangulated to estimate GDP.
Published: May 16, 2008 12:57 AM
Inquisitor:
Increases in GDp following a natural disaster do not necessarily cause an increase in wealth, I never stated they necessarily do.
What I did say is that wealth as a measure has benefits and LIMITATIONS. One of these limitations being that you cannot eat wealth. Wealth becomes consumption when it is consumed.
Material living standards are related to what we consume not what we have. Therefore GDP is a valid and often superior measure of living standards.
What would you rather have on a deserted island - a bag of gold or a bag of food?
One represents less wealth but more opportunity for consumption and therefore a better lifestyle (you won't die of starvation). This is why the flurry of activity following a natural disaster can often temporarily raise living standards, because there is more money and good and services flowing around rather than people like inquisitor sitting on bags of gold professing their fabulous 'wealth'.
Published: May 16, 2008 1:15 AM
Newson, Good points on the GDP. In addition, GDP includes state spending which is consumption, not production, while excluding the entire sector of the economy that deals with the resale of used goods such as used homes and cars, a far more valuable service than anything the state provides. But Kuznets, who was also a socialist, had to include state spending in the GDP or the statistics would prove Keynes wrong. But most people don't want to see GDP grow because state spending has increased. That actually makes us poorer. And it gives the false impression that we can spend our way to prosperity. It's a typical case of socialists framing the argument in such a way that they automatically win. If you use their GDP statistics, then you have to concede that Keynesian econ works most of the time. However, if you stripped state spending from GDP and added in all that Kuznets left out, Keynesian econ would be seen as the utter failure it is. WWII provides a perfect example. During the war, GDP rose dramatically, but the private sector shrank while state spending soared. Does any serious person really believe that war makes us wealthier?
Published: May 16, 2008 8:26 AM
So I could sell my house back and forth between myself and my friend a thousand times and the country's living standards would be better off by $300million?
Pull the other one!! ha ha
As for the state sector purchases not increasing prosperity (living standards measures in GDP) in the economy....so all those people that produced the goods for the state were not paid?
You will find that they were, and that they in turn went out and spend this money on what they wanted. The end result was an economy 50% larger than when the war started which did not shrink from then on.
Terrible result for American prosperity, Terrible.
Here we have the rest of the free world lamenting the late entry by the Americans into the War and the amount of money they made from the whole thing while the other countries were decimated.
And you (probably the only person in the world to do so) go and say the American economy didn't benefit.
I have not stopped laughing yet!
Published: May 16, 2008 8:42 AM
owen says:
"Here we have the rest of the free world lamenting the late entry by the Americans into the War and the amount of money they made from the whole thing while the other countries were decimated.
And you (probably the only person in the world to do so) go and say the American economy didn't benefit.
by inference, the us' iraq adventure should be paying off big time. not that this has shown up in the us dollar chart, post 2003.
Published: May 16, 2008 11:02 AM
Sorry newson, not by inference. Well, maybe in your mind though.
In the real world however, the Iraq escapade has significant differences to WW2:
- Before WW2 America did not have much industrial infrastructure, but afterwards this was heavily built up. In 2003 the USA was already a highly industrialised nation.
- Before WW2 the US Economy was in deep recession and had ooodles of excess capacity. Prior to the Iraq was the USA had jsut finished 50 years of almost constant growth and employment in the US Economy was not far below capacity.
These factors combine to mean that a government-fuelled monetary expansion in 1935 had far different outcomes than one conducted in 2003.
Try again.
Published: May 16, 2008 11:09 AM
owen says:
"when two or more intermediate goods are combined into the value of a final good such as a car, only the car has utility and use-value to society and not the component parts. Where a good only has use-value as a part of another final good then it has no use-value on its own so measuring the value of this part on its own is useless. It in fact has no value when considering it's use-value."
let me put it differently to you. imagine you're studying medicine and have completed half your degree. is the fact that you have dedicated several years towards your final objective totally irrelevant? of course not, the time ,effort and money spent is real, in spite of the "product" having no current utility.
where do final products come from, if not from incomplete ones? inventories/unfinished goods don't
ever disappear as a step from the industrial process, so it's pointless saying they are counted when they are transformed into final goods. unfinished goods may never be transformed into final goods, in many cases. after the asian financial meltdown in the nineties, buildings remained half-finished and eventually rotted, incomplete industrial plants likewise. this waste was real, as must be recorded if sense is to be made of the macroeconomic picture.
to me, say's law is probably the most intuitively simple law of economics. you have to go to university not to understand it.
Published: May 16, 2008 11:23 AM
Education is a final good.
Building construction is a final good.
Both are included in GDP.
Published: May 16, 2008 11:32 AM
owen says:
"Before WW2 America did not have much industrial infrastructure, but afterwards this was heavily built up.
this makes no sense. how did america mobilize such formidable forces in order to beat the nazis, and at the same time, help stalin with arms? do you think bombers, artillery, submarines can just be willed into existence?
america was the world's leading industrial nation post ww1. the excess capacity of the depression was due to the wealth-destroying policies promulgated by hoover, and especially roosevelt.
fixing of many prices and wages (in nominal terms) in climate of rising real value of money (deflation) means both goods and people were priced out of the market (empty factories and dole queues). anyone who was on a fixed income during the depression did very nicely.
america as the victor of ww2 enjoyed the fruits of bretton-woods. it was able to inflate domestically and have foreigners absorb dollars, without feeling the immediate pain of rising domestic prices. magic! that envious position is drawing to an end, though the chinese and asian central banks still insist on funding the american dream, through their warehousing of t-bonds.
Published: May 16, 2008 11:42 AM
GDP is all about usability. To the extent that something is useful to society it should be included in GDP when it becomes useable.
If you believe half a medical education is useful then great - so do mainstream economists who include all education in GDP.
If a building is half-finished then how can it be used productively in the economy. If someone does want to use it as it is it becomes a final good and it thus counted.
You are arguing against a huge weight of convincing argument from 99% of economists...bu keep going, it is fun.
Published: May 16, 2008 11:47 AM
owen says:
"Education is a final good.
Building construction is a final good.
Both are included in GDP
half-finished degrees? half-constructed buildings?
what about fields of immature wheat? unfinished, but valueless?
Published: May 16, 2008 11:48 AM
Newson:
I think you better bone up on your history. The US was not tiny before WW2 but due to the recession and other factors was operating at well below capacity.
There was huge economic mismanagement before the war.
It was precisely the production of all those weapons that stimulated the economy.
The production continued after the war with the $US loaned to Europe being spent back in the USA (you cannot spend $US in Europe except in oil).
Published: May 16, 2008 11:52 AM
Yes, unfinished anything is valueless until someone comes along and...........buys it! And if they bought it for consumption it is includedi n GDP, if they bought it to further develop it for sale it is not.
This is easy. Can I have some more?
Published: May 16, 2008 11:54 AM
owen says:
"If a building is half-finished then how can it be used productively in the economy.
it can't, but it still exists! and it still represents resources that have been committed. how can you argue that the money wasted should not be recorded in national accounts? wastage is a real phenomenon. i don't need to appeal to 99% arguments to know this. waste happens!
Published: May 16, 2008 11:58 AM
owen #1 says:
"Before WW2 America did not have much industrial infrastructure, but afterwards this was heavily built up."
owen #2 says:
"The US was not tiny before WW2 but due to the recession and other factors was operating at well below capacity."
will the real owen please stand up.
Published: May 16, 2008 12:07 PM
owen says:
"There was huge economic mismanagement before the war."
which owen are you? the owen that was so enamored of redistributive programmes, first massively introduced by roosevelt? who precisely was behind this mismanagement?
Published: May 16, 2008 12:12 PM
If you want a measurement system that rewards pointless wasted production that cannot even be sold then be my guest. For the rest of the free world there is GDP which only counts products once they become USEFUL.
You will find that those two statements regarding pre-WW2 USA were not contradictory. But to you they might because you seem to know little about the subject. The USA was already a large economy and already one of the biggest, if not THE biggest in the world, even though it was in the recession.
But this does not mean that it had the vast industrial infrastructure that exists in todays economy. WW2 weapons production was a big shot in the arm towards getting where it is today. The economy grew more in 20 years than in had in the previous 50, in large part because of the industrialisation that had flow-on effects for later peacetime goods.
Published: May 16, 2008 12:16 PM
Minimal redistribution has as much to do with big government as libertarianism.
Published: May 16, 2008 12:19 PM
owen says:
"...weapons production was a big shot in the arm towards getting where it is today. The economy grew more in 20 years than in had in the previous 50, in large part because of the industrialisation that had flow-on effects for later peacetime goods."
in fact that is the argument apologists use to rationalize both mao and stalin's reign of terror - it was bad, but at least they industrialized their nations. doesn't fly.
Published: May 16, 2008 9:46 PM
owen says:
"There was huge economic mismanagement before the war."
you're being evasive. who exactly was responsible for the mismanagement? think about it - hoover and roosevelt - redistributionists both. how does this square with your logic?
Published: May 16, 2008 9:52 PM
surely this, by owen, should win some prize from mises.org:
"Minimal redistribution has as much to do with big government as libertarianism."
Published: May 16, 2008 11:43 PM
newson:
The argument was never put forward by anyone that wars were good. But that does not preclude them increasing GDP.
Accoring to the Austrian School of Economics: "In their view, the key cause of the Depression was the expansion of the money supply in the 1920s that lead to an unsustainable credit driven boom. In their view, the Federal Reserve, which was created in 1913, shoulders much of the blame."
So you have your answer straight from the horses mouth. It was monetary expansion.
Other causes were:
1) retaliatory trade tarriffs effectively closing up international trade;
2) huge debt levels that were unsustainable
3) asset bubbles
So in general you are showng up your poor knowledge of economic theory and history.
Published: May 17, 2008 8:35 AM
newson:
The argument was never put forward by anyone that wars were good. But that does not preclude them increasing GDP.
Accoring to the Austrian School of Economics: "In their view, the key cause of the Depression was the expansion of the money supply in the 1920s that lead to an unsustainable credit driven boom. In their view, the Federal Reserve, which was created in 1913, shoulders much of the blame."
So you have your answer straight from the horses mouth. It was monetary expansion.
Other causes were:
1) retaliatory trade tarriffs effectively closing up international trade;
2) huge debt levels that were unsustainable
3) asset bubbles
So in general you are showng up your poor knowledge of economic theory and history.
Published: May 17, 2008 8:35 AM
"no one ever argue war is good"? I wonder what U.S. Libertarians think what would be in place of the U.S.A. if the War of Independence hadn't been fought?
But I s'pose it does depend on what end of the natural disaster your on as whether natural disaster is beneficial. The storms that appeared at the same time as the Mongols were going to invade Japan was good for the Japanese economy and bad for the Mongols. Construction companies who do repairs after a tornado strikes find them beneficial and, besides, should feel construction companies feel bad about getting work thanks to tornadoes (it's as if any one can make tornadoes)? And what of a natural disaster that would wipe out bad sections of humanity leaving the good behind? Take the story of Noah's Flood - if the non-Libertarian parts of the world suddenly died from a natural disaster and all the Libertarian didn't - wouldn't it be a boon for human existence what with everyone who is left over not using force&fraud and use a Capitalistic economy to live happily ever after?
Published: May 17, 2008 9:56 AM
to owen:
you've pretty well summed up the austrian view of the depression, and you'll find me in agreement.
you now acknowledge war to be a negative for the economy at large, despite boosting gdp. so here also we agree. but this was not your position, as is clear from this:
"WW2 weapons production was a big shot in the arm towards getting where it is today. The economy grew more in 20 years than in had in the previous 50, in large part because of the industrialisation that had flow-on effects for later peacetime goods."
the austrian argument would be that military industrialization stunted whatever other peacetime economic development would have otherwise occurred. roosevelt's death was probably the only good thing for the us economy during ww2. subsequently the more zealous new-dealers were sidelined, and inflation saw that real money wages finally came down to where the market demanded, ending the unemployment crisis (notwithstanding dramatic cuts in public spending on the war's end).
now about my beef with you over gdp - i bounced the thing off stefan karlsson, and he concurred with your view. thought you'd like to take a look at his comments. here's the link -https://www.blogger.com/comment.g?blogID=14390234&postID=541886920192650136
so there you go - i've got more homework to do on national accounts. and did i not mention how much i loathed macroeconomics at university, all those years ago?
Published: May 17, 2008 11:52 PM
TLWP Sam and Newson:
No-one in this thread (least of all me) has argued either way on the merits of wars or natural disasters, rather the discussion was on the economic impacts that FOLLOW them.
Newson:
GDP is not a fabulous measure at all and is only crude at best. It doesn't measure WHAT is produced, nor does it measure wealth as Inquisitor stated. Most damningly it is based on a notion that living standards and happiness are only affected by material goods and services which is hardly true. Finally ist doesn't measure wealth or income inequality which can impact who actually receives this GDP.
But the assertion that many natural disasters and wars have not increased GDP is proved false by history. Furthermore, dispite it's shortcomings, Increases GDP-per capita is strongly correlated to increases in living standards. Just have a look at East Asia.
I prefer the war never happened too. If it didn't, then those resources could have been used for other means. You must remember however the WW2 followed the most restrictive world tariff situation ever known and if the war had not happened when it did, then countries like the USA would have likely continued to suffer. There was almost a dam bursting and the the USA made it's GDP explosion based on EXPORTS that were previously not possible. So in many ways you can argue both ways that the war did infact open markets and demand for industrialisation.
The Pre-WW2 political and economic management of countries would be considered nieve at best based on what we know now based on hard experience. The USA is currently doing all it can to prevent the pending recession by printing money and the coming inflationary pressure and drop in the exchange rate will soon bring things to a head anyway most people feel. In short the market should be left alone to find it's own feet without interventionism monetary or no.
The only interventionism I support is that which defends and secures people's rights. Remember though that rights are subjective and at the moment that conception of rights is what is accepted by the government of the day.
I also loathe much of mainstream economics. But do not begrudge either it nor Austrian economics nor any other construct of social activity of valid additions to our store of knowledge which are logical and empirically true.
Published: May 18, 2008 12:44 AM
to owen:
the tariff wars were started by the smoot-hawley act 1930. other countries then responded to the us in kind.
surely it would have been easier just to rescind this tariff rather than go to war? trade impairment can only heighten nationalist sentiments. pearl harbour and the japanese push south to java was motivated by roosevelt's blockade. deprived of fuel supplies, the javanese fields must have seemed irresistible to the japanese.
the economic rejuvenation of the us was primarily a factor of the internal log-jams being removed during the course of the war, and not the war itself. (the more extreme of the new-deal programmes being wound down, and inflation curing the mispricing of fixed nominal wages).
the soviets' war-industrialization did nothing to stem their long, slow slide into poverty (helped along by the the draining afghan war).
the former axis countries moving to a more open economic model than national socialism naturally saw their imports rise. the marshall plan was a red-herring, and austrians regard it as an exercise in wealth destruction, whose negative effects were more than offset by the wealth generated by the comparative liberalizations of the german and japanese domestic markets.
Published: May 18, 2008 2:51 AM
newson:
The Tariff wars were a result of political and economic leaders naivety and lack of knowledge about the outcomes. The prevailing economic wisdom being that domestic production needed to be protected from foreign imports. It was no 100% wrong because the dramatic growth of Japan, Germany and the East Asian tigers after WW2 followed this strategy successfully. However it can only work if you have high tariffs on selected strategic industries and your trading partners do not tariff your exports. it just so happens that the USA and Europe had a strong interest in supporting these emerging economies by gifting them unequal tariff regimes in order to foster growth.
In the 1970's most of the unequal tariffs to east asia were taken away and now they operate on a more equal footing.
So you cannot say that tarrifs do not work in principle but it requires the support of your trading partners to not start a tariff war.
Germany and Japan. Mmmm - two of the strongest growing economies after WW2?
First of all, they enjoyed massive interest free loans and donations from western powers and also unequal tariff regimes that protected their industries until they became strong. This was not done out of love but as a bullwark against communism. the same goes for East asian tigers (Singapore, Hong Kong, taiwan and South Korea).
Could it be also that in fact they were the most heavily bombed and especially their infrastructure (the first thing targeted by an enemy) were certainly completely destroyed by 1945.
This sort of reinforces the line of thinking that disasters preceed high GDP growth does it not?
Published: May 18, 2008 4:41 AM
newson: "now about my beef with you over gdp - i bounced the thing off stefan karlsson, and he concurred with your view."
I think there is a bit of arguing past each other with regard to Karlsson and Reisman on GDP. Reisman's real argument is that what we call GDP is not "gross domestic production" but "net domestic production." Reisman is correct if you follow standard accounting principles. GDP clearly is not gross domestic production. Kuznets never intended it to be. He intended it to be value added production, which by definition is net production, not gross production. Why he chose to be deceitful in naming the stats I don't understand, although most socialists have a hard time telling the truth about anything.
Because of its name, people as misled into thinking that GDP measures the output of a country in the same way that sales measure the output of a company. That's why you get ignorant socialists comparing the sales of a large corporation with the GDP of nations. It's a stupid comparison because the two are calculated very differently.
By focusing on value added exclusively, the "GDP" for consumer goods industries naturally appears much larger than the "GDP" of producers good industries. Consumers goods make up about 70% of GDP figures, which justifies Keynesian econ. And it's a mathematical illusion created by the value added methodology.
Most people don't understand the highly stylized calculations involved in the GDP, nor the misleading name, so they assume that GDP measures the output/sales of the nation. It doesn't. About 10 years ago the BEA added the GO, gross ouput, figures, which are the sum of all sales in the US by industry. The GO is honest in that it is truely a gross figure while the GDP is not. And it corresponds to what people think the GDP is, but in reality is not.
My personal concern with GDP is including government spending and excluding sales of used items. The latter is far more important to the wealth and well-being of the people than the former. By including state spending in GDP figures, GDP fools people into thinking that state spending makes them wealthier when it does just the opposite.
Germany, Japan and the US boosted GDP's dramatically during WWII through state spending on military equipment. Germans, especially, were so ignorant in the 1930's that they thought Hitler was a miracle worker for turning the German economy around. He did for a very short period by expanding state spending. But did military spending make any country wealthier? Some ignorant economists claim it did. But if that's the case, then why don't we just have the US government buy up all surplus production in the US and destroy it? That's all that war does in economic terms.
We shouldn't be having this conversion. It's idiotic to claim that warfare enriches people by increasing production. Almost all of that production gets destroyed in the war. None of what isn't destroyed can be used to produce other goods, and when the war ends, all of that production is totally worthless. If war could enrich people, then we could accomplish the same thing and save lives by continuing to produce all of that military equipment for ever and just sinking it to the bottom of the ocean. Destruction would be the path to prosperity.
But GDP figures make that ridiculous scenario seem reasonable, because it includes state spending as part of GDP. The state can boost GDP by producing huge amounts of military hardware, but only for a very short time. To pay for that production, the state can not take all of the income of people through taxes or the people would starve. It can't borrow all of the money the people have or they would still starve. At some point the state must simply print money, but it can do that for only so long before hyperinflation sets in, which is why states impose price controls. But the combination of wide open printing presses and price controls impoverish a nation. Germany, the USSR, China and Zimbabwe have proven that.
GDP is the wrong measure of national output because the name is a lie that misleads people and it contains state spending, which impoverished people even though the GDP claims to be a measure of income. Had GDP left out state spending, as it should, the American people would be able to see very clearly how much WWII impoverished them. Instead, GDP has convinced many weak-minded people that war enriches a nation.
And we wonder why so few people oppose war.
Published: May 18, 2008 1:31 PM
To illustrate the silliness of the GDP method further, consider what the GDP of Exxon might look like. Follwoing GDP's "valued added methodology, you would have to substract the cost of drilling rigs and oil purchased from states from total sales. That would leave employee salaries for the most part, which would make Exxon's GDP about half the size of its revenue. For what purpose could anyone use such calculations, other than simply to make Exxon look smaller?
Published: May 18, 2008 3:20 PM
But fundamentalist...that is not silly at all. The GDP for the crude oil belongs to the countries where it is sourced from and you will actually find that annual cash investment in drilling rigs is included in GDP.
GDP would then fairly attribute to it the portion of the price of it's sales that belong to it's activities of drilling, exploration, distribution and sales and that which belongs to others such as Crude oil reserves. Where Exxon purchases intermediate inputs from another company such as an oil tanker then this must be subtracted from Exxon's GDP and added to the GDP of that other company.
Unfortunately Middle Eastern countries have a bank of black gold beneath their feet an everytime they get more oil it increases their GDP with little effort.
Only if you wanted to calculate the total GROSS outputs of all these players assuming they were one country, then you could use simple GDP and the sales value of Exxon would suffice.
GDP itself is not net output, but gross output as the name suggests. Because the value of all intermediate inputs into final goods are included in the final selling price. Just like when you are told by your gas station that they are increasing their prices because of higher crude oil prices. This is precisely because the value of crude oil used to manufacture that gas is included in it's final selling price. If it was not included then why do they have to increase their prices?
If they didn't increase their prices they would go out of business.
Published: May 18, 2008 4:37 PM
to fundamentalist:
national accounts i find particularly complicated, probably because it's illogical to compare company accounting with national accounting (the trade balance comes to mind). here's a couple of articles by corrigan about the very same topic:
http://brookesnews.com/071604corrigan.html
http://brookesnews.com/072304businesscycle.html
karlsson takes a benign view of government services being included, which i don't fully agree with, or not the way he puts it.
https://www.blogger.com/comment.g?blogID=14390234&postID=541886920192650136
if we're including government services, the exclusion of pre-owned goods transactions from gdp worries me too. karlsson's example suffers from contrivance. sales of secondhand goods obviously confers value, but the example of repeatedly selling and repurchasing the same object, thereby boosting the gross output seems belaboured. where's the subjective value in that round-robin?
Published: May 18, 2008 10:12 PM
owen says:
"Germany and Japan. Mmmm - two of the strongest growing economies after WW2?
First of all, they enjoyed massive interest free loans and donations from western powers and also unequal tariff regimes that protected their industries until they became strong."
well here i'd disagree with you. the tariffs that many of the asian tigers did put up (i'm thinking of south korea in particular, but malaysia also has a national champion mentality) act as a brake on their economic development, but these negatives are offset by other positives - relatively secure property rights, high savings rates, less intrusive government and lowish taxation.
the least protected economies turn out to have racked up the best performance. here's a gerry jackson comparison of hong kong and singapore-
http://www.brookesnews.com/071203hongkong.html
south america, with the exception of chile, erected a tariff wall around its infant industries in the seventies and suffered from economic regression for a good two decades.
Published: May 18, 2008 10:22 PM
Owen: "GDP itself is not net output, but gross output as the name suggests. Because the value of all intermediate inputs into final goods are included in the final selling price."
"Gross" and "net" are accounting terms, so you must use the accounting definition. GDP doesn't. Gross revenue is the total sales, absolutely nothing subtracted from it. Net is the gross sales with various things subtracted. Figures can be "net" of interest, taxes, depreciation, or other things, in other words, "net" means the "gross" with something subtracted. GDP subtracts the costs of inputs at each step so that it avoids "double counting". By definition, GDP is gross sales minus inputs at each stage of production. GDP is the value added portion of gross output, by definition the gross sales of every industry minus inputs except labor.
Published: May 19, 2008 8:14 AM
newson: "karlsson takes a benign view of government services being included, which i don't fully agree with, or not the way he puts it."
I don’t think including state spending is benign at all. It gives people the impression that state spending is as good as private spending when it comes to increasing our wealth. So it wouldn’t matter is the state did all of the spending and the private sector did none. Currently, the feds take in about 20% of GDP. State and local governments take in about another 20%. For GDP, it wouldn’t matter if the state eliminated private property and did all of the spending. After all, the USSR and China had GDP figures.
If you’re a socialist, that doesn’t matter. But for capitalists, GDP is useless. We have to compile our own figures, as Karlsson does with the IO tables. One could argue that the services provided by the courts, police and military should be included since they are part of the state’s real purpose of providing security for property and national defense. That’s a philosophical argument and would cut the state’s contribution by at least half since everything else in the budget is nothing but redistribution.
I don’t agree with Karlsson’s example about the used car. Sellers of used items provide a service just as much as any other service, such as accounting. Without the services of dealers in used items, the transaction costs of finding and negotiating the sale of used items would be much higher. If state spending should be included in GDP, then so should the services of sellers of used items.
In part one of the series you linked, Karlsson seems to approve of Reisman’s take on the GDP:
Karlsson: “Here, at last, we come to the half-truth hidden in the familiar cliché, for the data with which we are so familiar are compiled, à la Maynard, in such a fashion that consumption is indeed 60 per cent of the aggregate — if only because the supposedly gross product in fact nets out the literally trillions of dollars of intermediate goods and services which are essential to the continued satisfaction of human needs and in whose delivery the majority of the population earn their own daily bread.
“But being 60 per cent of this artificial and inconsistent construct is not the same as being 60 per cent of all significant economic activity: the model is not the market and the map is not the territory.” Part one.
Published: May 19, 2008 9:32 AM
to fundamentalist:
actually the two brookesnews links were by sean corrigan. i agree that counting the government spending in some construct is a great risk. whatever the merits or demerits of gdp, i think it's great that reisman and co. have shone a spotlight on it.
as you say, this is a debate that should never be. destruction intuitively can't be wealth creating, and it's only the gdp trick that confuses.
even the concept of gdp as a value-added index confuses - i mean "value" is not profit in the accounting sense is it? i mean the gross output as i interpret it is purely sales revenue, a simple accounting term.
Published: May 19, 2008 10:21 AM
newson: ""value" is not profit in the accounting sense is it?"
I'm not an expert in accounting, though my daughter is. I haven't seen the term in accounting and I don't understand what "value added" is good for. I don't know any area of econ or accounting that uses it except in GDP and the Value Added Tax in Europe. It's pretty much worthless. But people use GDP as if it were the sum of all output, not all "value added" output. That's the real problem.
Published: May 19, 2008 11:00 AM