Wednesday, September 5, 2012

On the necessity of economic theory to explain economic causal connections

A response on Facebook:
 "So I saw your post liked by my friends wall yesterday and was disappointed to see people still not believing WWII or the New Deal got us out of the Depression.

It did get us out of the depression. That and the New Deal. I've argued this with neo-cons and Austrians many times before. From where do you think all
those new orders for business came from? The private sector? They were all for the war. And the men were drafted into the army which is just another way of giving them welfare, the jobs they left behind being taken by previous unemployed. And we have kept this war spending until the present, mostly to keep the economy humming.

Explain to me the unemployment going down when the war started, explain to me GDP going up, explain to me the jobs created by the war time build up AND the New Deal if neither helped."
My response:
There can be no causal explanation for singular events/facts without the use of a theory that explains that causal connection. In this case, a faulty theory is employed to incorrectly connect events such as "WWII" and "the New Deal" with an
assessment of economic progress. Only the employment of an economic theory could causally connect these events; the fault of the theory employed to connect them, rests in an acceptance of the theoretical proposition that involuntary/non-consensual interactions, where one party compels an interaction through violence, coercion or theft, benefits both parties. Economics is the study of how humans act under conditions of scarcity, to improve their satisfaction with their condition; a bomb may improve the condition of the factory owner who produces the bomb, it may improve the satisfaction of the workers of the bomb-factory and ancillary businesses supporting the factory, but it does not necessarily improve the satisfaction of the person being bombed; it does not improve the satisfaction of the property owners whose property is destroyed by the bomb, and there is little guarantee that those taxed to pay for the production of the bomb, are in any way benefitted by the bombs production. The fault of the theory employed to support the causal connection of "WWII" and "the New Deal", is that it embraces the Broken Window fallacy; a rock thrown through the window, may generate improve the satisfaction of the window-repairman, and the window-maker, but it is a reduction in the satisfaction of the window owner and is also a reduction in the possible satisfaction of any other number of persons the window-owner may have done business with, had she not had to pay for the repair of the window. Taken to its fullest implication, this faulty theory would imply that if a nuclear holocaust would occur, then there would be an increase in "GDP" because of the "war spending"


  1. So then are you asserting that the full value of our potential growth during those time periods is not really known because society could have spent our energy creating something new rather than destroying the old?

    But surely you admit that there was some gain by the actions actually taken- it just ended up being a gain for some at the cost of others... perhaps for some it was a wash.

    You have a very interesting site and some very interesting friends. I notice you call yourself a radical Liberal?? Would you expound on that?

    1. I would be able to concede this much, that any spending on "national defense" that is equal to (or less than) what each individual would have spent on *equivalent* "defense" services, if each individual were able to purchase "defense" services within a voluntary/consensual marketplace, absent any coercion/extortion for failure to "pay taxes", would effectually be negated in the economic sense. Say for instance, absent the threat of punishment, "Bob" would be willing, in a voluntary/consensual marketplace, to pay an insurance/security company $300 a month for "security" or "defense" purposes, and IF (and it is a very BIG "if") the "security" or "defense" services that Bob currently received via the coercive-threat/extortion of "taxation" were *materially-quivalent-in-quality-and-quantity* (nearly exactly the same), THEN the first $300 of each month that "Bob" pays in "taxation" to provide those "security" or defensive" services, would, in the economic sense, be negated (although, there may be some dissatisfaction remaining due to the coercive/non-voluntary/non-consensual nature of the transaction of "taxes").

    2. I would be most pleased to explain my self-identification as "radical liberal"; if one looks to the precise meaning of "radical", one will find that it comes from the Latin "radicalis" (or "radix") meaning, "root" or "orgin" (which is why "radicals" are so often perceived as "extremists", because they adhere to some "root" or core-principle that they adhere to ideologically) and furthermore, if one were to examine the precise/historical definition of "liberal", it comes also from the Latin "liberalis", meaning "liberty" or "free-man". I use "radical" to modify the common parlance of "liberal" which has very little to do with the meaning of "liberty" or "freedom" (indeed, many times in common parlance, just the opposite).

      I am committed philosophically to the ideology, that each/every individual should in an ethical sense, be at complete liberty/freedom to make choices as he/she would choose (to improve their own state/condition of subjective satisfaction) without/absent the institution of domination in the political arena; which is to say, no person should every be forced, coerced, or stolen from and that every interaction between individuals should be voluntary and consensual.

      I hope that explains my self-identification to your satisfaction. I thank you for your kind words and interest in my blog; it represents merely a place to "park" some of my thoughts. I am honored that it would be of value to you. :-)

  2. Bastiat was the first economist to my knowledge to expound on the "Broken Window Fallacy" of economic theory. The theoretical conclusions of some economists of the time, was that if a window was to break, then economic activity would be stimulated/spurred; because the owner of the window would likely buy glass and wood from businesses that supply such materials and the owner of the broken window would likely employ someone to remove the broken window and install the new window. Using this reasoning, it can be concluded that destruction-in-general or far more often, "war-spending" can stimulate an economy. Bastiat argues that such reasoning is fallacious because it concentrates the attention of the economist on what is "seen", as compared to what is "unseen"; what is "unseen" is what the owner of the window, would have spent her money on if her window had not been broken in the first place. The essential premise of this correction of the fallacy, is the premise that people act in order to obtain a greater state of satisfaction; or restated in the negative sense, all persons act in order to relieve some "felt uneasiness" (Mises). The purpose of action, to include economic actions, is to improve one's own state of satisfaction or to remove some dissatisfaction. Presumably, the owner of the window, would have had a greater state of satisfaction, if the window had not been broken, and any money spent to repair the window, will amount for the window-owner, that much less money available to spend on other improvements to her state of satisfaction.

    This premise, applied to "war-spending" would imply this: that any money (which represents some savings of value, that can be exchanged in a marketplace for goods/services) spent on war-materials (goods) or war-personal (services) that the individual would not have spent, upon their own accord, if they were not coerced/extorted/threatened-with-punishment (incarceration), represents a loss to that individual's ability to secure a greater personal satisfaction. Said another way, any amount of money, used in any way that the individual would not have used it, absent any coercive/extortionate means, represents a loss in the total net possible satisfaction for those individuals; and this is compounded by the destruction and dissatisfaction caused by those war-materials and war-personal. While measures such as "GDP" may show increases, these measures assume the premise of satisfaction, and therefore, under coercive/extortionate conditions, do not represent in actuality, true economic conditions. If this reasoning were incorrect, then if the "Federal Reserve Bank" were to double the supply of currency in circulation in a given year, then that should double-or-greater-than-double the amount of net satisfaction of all individuals; but in this case, I take it as elementary, that such a condition would only cause a currency-inflation, which would decrease the satisfaction of lenders and those holding currency, while creating an increase in satisfaction of debtors (who now can pay back loans, with currency worth far less than the value of the currency borrowed). Additionally, if the idea that "war-spending" stimulated an economy were to be taken to the limit of absurdity, we would expect that a war which destroyed 50% of all persons and 50% of all capital & consumer goods, would cause a massive stimulus to the world-economy. I take it that we would both disagree that such would be the case, and therefore, I reason we must reject the notion that "war-spending" stimulates economic activity.