Hey guys. I just had a debate with my father about diverting resources. I made the claim that when the government buys screws to build a bridge, that purchase diverts those resources from the private sector. He didn’t understand this concept, so I elaborated a little further. I said that on the assembly line, those screws have a destination in the private sector. When the government buys them, the screws move to the public sector. He said that the resources haven’t “moved” because the screw factory can just hire more workers, expand capacity, and make more screws. He said that this is good. I said that the factory expanding production will cause prices for screws to rise, and the private sector will get hit with that, since expansion means hiring new workers, buying more metal, etc. He grumbled and said, preplexed, “But they’re making more profit! I don’t agree with you.”
You are only dealing with seen versus unseen effects. Yes the factory making screws will be able to raise its prices and maybe expand. What about the factry using the screws that competes with the government for the screws? What about the tax payers? They have a small loss of savings that must get diverted to the production of the screws for the bridge away from other uses.
You are also missing the critical point that government does not have market forces acting on it in the same manner as an entrepreneur. There are a myriad of reasons for this with the most obvious being that it does not compete for capital because it can steal it from tax payers and that it can not fail because consumers are not given an alternatitive to using their product, the bridge. Because there is no market process afecting government, there is no way to tell if the government is using the screws on the most demanded uses by consumers. Consumers may want the resources spent on the bridge to go to build the automobiles that use the bridge or instead to build a bridge in a different place.
Your father’s mistake is the common one of looking at only a small part of the picture. Yes, the screw makers get richer, [the same way war profiteerers do at wartime]. But everyone else gets poorer. This is because there is only so much to go around. If the metals are diverted to making govt screws, there is less left to make everything else. If the screw company uses more metals to make the screws missing from the private sector, then there will be less metal to make other things, like cars and refrigerators. Scarcity makes the price of things go up. The govt gobbling up resources makes them scarcer for everyone else.
I understand the concepts of seen vs. unseen, how the government is shielded from market processes, etc, as I am a died in the wool A-C. However when talking to my father I can’t immediately jump in to these topics, because he gets very emotional when I use terms such as “stealing”. He loses all sense of logic at that point and I can not have a productive discussion.
Then he should run for president, print or tax additional $trillions to buy not only screws but as much as possible of everything else made in the economy, and toss it out into the ocean. This way all businesses will be making “more profit”, and everyone would be employed, fat, and happy. Try suggesting that.
This is your first mistake. The screws have no necessary destination. However, they will go to the highest bidder. When the government buys screws, the price of screws for all other uses rises.
Your Dad is right and that is precisely the point of Austrian economics in how government distorts investment. As government buys more screws, the price of screws rises and investment in screw production increases even as private sector use of screws in production of other goods diminishes. This is the discoordination of production with consumption that Austrians talk about. When government stops buying so many screws, a collapse in the screw industry will ensue as screw factories are left grossly overstaffed. Demand for screws has already adjusted downward probably through use of nails or other cheaper substitutes for screws.
You have it exactly backwards. Expanding production causes prices to fall. However, in this case, you should be pointing out that the prior rise in prices due to increased government purchase of screws is what caused screw production to expand.
You’re not being technically accurate. Your Dad is justified in being frustrated with you because your details are obviously inconsistent.
