Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

[Samises29]

He is explaining how he thinks governments CAN CREATE WEALTH:

"the government, by way of the fed, is the largest controlling bank with regard to the currency
from there, it’s basic lending theory. and the multiplier effect, and retention requirements, etc.
banks can create wealth by, without minting money, lending stores of money to people who will be able to use those within the economy
if that money is converted to hard corporate resources before the market can react to the injection, the government has created wealth.
101.
but that’s bad austrianism.
george mason U hates that shit.
because they live in the land of the ideal, and not the real.
my entire reading of the book was basically finding basic, stupid shit like this that would be a guide to the average lay libertarian’s economic misconceptions.

[Samises29]

He is critiquing Bob Murphy

[Caley_McKibbin]

It’s the hoarding fallacy. People save a.k.a “hoard”. Inflation devalues the hoard. Keynesians love that.

[Samises29]

Again, thank you, but can I have more detail?

[Snowflake]

More people would read the post if it were formatted better.

[Gipper]

What is wealth?

[Smiling_Dave]

@Sam29

"the government, by way of the fed, is the largest controlling bank with regard to the currency
True. And this is relevant how?
from there, it’s basic lending theory.
Not sure what this means.
and the multiplier effect,
which has been debunked, among other places, right here
and retention requirements, etc.
Not sure what this means either. How about if he presents his case, as opposed to dropping phrases and tossing et ceteras.
banks can create wealth by, without minting money, lending stores of money
Yes they don’t mint money. They lend “money” that doesn’t exist. It’s called fractional reserve banking. Why is lending mnoney that doesn’t exist creating wealth?
to people who will be able to use those within the economy
OK I get it. Young Steve Jobs needs money to buy components to put together his new Apple computer company. But he is broke. So he goes to the bank, who writes him a check to give the electronice supply company. He buys what he needs, makes Apple computers, pays off the bank, and wealth has been created. Jones, owner of the supply company, spends his check on whatever he wants. This spending money is an increase in the money supply, by definition inflation, and will make prices go up for everyone.

If Steve Jobs had a good idea, he could have gotten the loan from existing money from someone. No need to cause inflation to get him his money. Also let us remember that not all bank loans go to the Steve Jobs of this world. Lots of them go to the Bernie Madoffs and the [bankrupt] Fannie and Freddie. So they don’t create wealth, they destroy it. Need we look further than the nasdaq and housing bubbles?

if that money is converted to hard corporate resources before the market can react to the injection, the government has created wealth.
That’s like saying if a thief breaks into your house and the money he leaves you by accidently dropping his wallet is worth more than what he stole from you, he has created wealth. [See above].
101.
but that’s bad austrianism.
george mason U hates that shit.
because they live in the land of the ideal, and not the real.
Your friend is projecting. He is living in fantasy land. AE explains logically and simply why he is wrong.
my entire reading of the book was basically finding basic, stupid shit like this that would be a guide to the average lay libertarian’s economic misconceptions.
Translation: I have been so brainwashed I didn’t understand the book. But at least I could do some unfounded trash talking about it.

[Samises29]

Thanks so much smilin dave, thats a big help. But could you perhaps expound a little on the first Steve Jobs illustration?

[Smiling_Dave]

Let’s begin at the beginning. What is wealth? Wealth is not more paper money, obviously, for otherwise Zimbabwe would be the wealthiest nation ever. Wealth is useful things that you own. This is true both of an individual and a nation.

Your friend says the govt can create wealth. The govt does not own factories, so it cannot create wealth that way. All it can do is print paper money.

But your friend claims that printing more paper money can be a catalyst to create true wealth. Now, true wealth is created on farms and factories. And often a farm or factory could produce even more things [=wealth] if it could improve its machinery. The farmer who has a tractor can grow more than one who has only his bare hands. The factory with more modern machinery etc.

But how will the farmer get that new tractor? What if he cannot pay for it? So your firend has the answer. The govt will print more money, give it to a bank who will presumably lend it to the farmer, and he will buy his new tractor. With his new tractor, he will be able, over the years, to produce so much more that he will be able to pay back his debts with interest to the bank and still have a profit. He is wealthier, the bank is wealthier, the nation has more food to feed it, all praise to the govt printing press.

But the question arises, why couldn’t the farmer get a loan of pre-existing money? Why did the banks have to loan him newly printed money? Has all the money that existed so far been burnt up as cigarrette paper? The only possible answer is that he was considered too big a risk by those who have money to make it worth their while to lend it to him. The odds are, they figure, that this guy will not run his farm well, tractor or no tractor. They would rather lend their money to someone who is a better investment, in their considered opinion. But the newly printed money, which the Fed got for free [by printing it], well what are they going to do with that? They have already lent to the good investments. May as well lend this new stuff to the risky farmer. After all, we got the money for free [or at very low interest], there is no one else to lend it to, and the govt will probably bail us out if the guy won’t pay.

That is one problem with printing money. It goes to riskier ventures. This is exactly what happened with the nasdaq and housing bubbles.

But even should the farmer succeed, somebody is getting robbed by this whole transaction. There is a law of supply and demand. It applies to everything. It states that the greater the supply of something, the lower will be the price of that thing. Everybody knows this. When there is a bumper crop of wheat, the price of wheat will be cheaper.

And the same applies to money. When there is more money in existence, its “price”, meaning its purchasing power, goes down. Imagine if everyone on Earth was given a trillion trillion dollars. Would gasoline still cost 3 dollars a gallon? Of course not. Because more people will buy cars and will want more gasoline. But there is only so much gasoline to go round. A bidding war begins, increasing the price of gasoline. The same is true of everything that is for sale, to a greater or lesser extent. This is called [price] inflation, and it’s a direct consequence of money printing. So that maybe the banks profit, maybe the farmer profits, but everyone else who didn’t get free money loses, because the purchasing power of whatever money they do have, and that they will get in the future, has sunk.

This is not a theoretical thing. It has happened over and over again. One of the posters here wrote a long list of countries that have experienced this to an extreme degree, called hyperinflation.

I replaced Steve Jobs with the farmer, but the idea is the same.

[John_James]

As Gipper and Smiling Dave point out, this Keynesian needs to define his terms. He needs to explain what he means by “wealth” and all those other generic jargon phrases he uses. (Money vs. Wealth, for example)

But on the whole, it looks like he is saying nothing more than “the government can create wealth by acting as a bank, housing the savings of the economy and lending it out to borrowers at interest.” First and foremost, the government doesn’t do this. So that ends the discussion right there. (If you’d like resources helping to explain what the government does do, I could post them). But if he wants to make a simple argument of principle and claim the government could create wealth if it did do that, then we have to go a bit further.

We have to realize that the essence of government is force. Everything the government does is under the threat of physical coercion. You cannot create wealth through force. Wealth is created through the accumulation of capital, the division of labor, and free trade (i.e. voluntary exchange)…which cannot occur through the use of force. With force you can only take what has already been created. And as we observe, this is exactly what government does. Notice, if the government could create wealth, it wouldn’t need to tax the private sector. So we recognize, if the government actually created wealth, it would cease to be government. Or more accurately: for the government to create wealth, it would have to abolish its use of force…which would make it no longer a government.

So it is quite literally so: governments cannot create wealth. I would recommend this book to your friend for a very simple, easy to understand explanation of how an economy grows.

[AdrianHealey]

Hi Sam,

if you can’t refute on your accord these very easy to refute statements, I would advise you to look into some basic economics - ‘economics for real people’ by Callahan, ‘The Austrian School’ by De Soto, ‘The Concise Encyclopedia to economics’, ‘Austrian Economics: An Introduction’ - before trying to argue on the internet.

[scineram]

It is true. A new bridge or motorway can help economic growth.

[Smiling_Dave]

Scineram,

Then why wasn’t it built by the private sector?

[Southern]

It is true. A new bridge or motorway can help economic growth.

Yes. But that not really what is being discussed here is it… No.

Would building that bridge or road actually make us wealthier? The only way to know is through free exchange.

Would building that bridge lead to more or less economic growth than otherwise? You also have no way of knowing. By its construction it consumed resources that can not now be used for other projects. Those projects may very well have been more profitable.

[KAZVorpal]

"the government, by way of the fed, is the largest controlling bank with regard to the currency

from there, it’s basic lending theory. and the multiplier effect, and retention requirements, etc.

banks can create wealth by, without minting money, lending stores of
money to people who will be able to use those within the economy

if that money is converted to hard corporate resources before the
market can react to the injection, the government has created wealth.

The fallacy here is in not comparing what would have happened without the government’s coercion.

For example, banks don’t create wealth through investing solely because the Fed controls them. They would do it even without the Fed, and in fact would do it better, creating more wealth.

When the government takes something over, monopolizing all good that could come of it, and then takes credit for any good that DOES come of it, even when that’s less good than before, that’s a sort of fraud.

It’s certainly not actually the creation of wealth.

The net result of the government regulating banks, and monopolizing them through the Fed, is LESS wealth created. So the government is not creating wealth.

[MaikU]

Is it safe to say, that govs mostly are redistributing and/or destroying wealth?

[BrianAnderson]

It is true. A new bridge or motorway can help economic growth.

Only true if it’s done in the free market. When the government uses production as a means of increasing employment, nothing comes of it because it isn’t supposed to be built in the first place. There are all sorts of fake jobs to be created as a way of redistributing wealth.

“I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much.” - Warren Buffett

[cobracarg]

I believe the great Henry Hazlitt in his book “Economics in One Lesson” uses this exact example about the bridge being built by government versus by the entrepreneur.

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence. This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $i,ooo,ooo. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer.

Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these non-existent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

• Henry Hazlitt, Economics In One Lesson: Public Works Means Taxes, Page 21-23

[resist272727]

Retention requirements? Is he talking about reserve requirements? Doesn’t that inhibit money supply growth? Because that’s basically what he’s talking about, expansion of the money supply to create wealth.

To me this kind of sounds like saying government can cut taxes to create wealth. Yeah . . . but they put the taxes there, didn’t they?

[Samises29]

AdrianHealey,

I am a new student of the Austrian School. I am reading a lot and learning and asking you guys on here these questions is very helpful because there are a lot of well read Austrians. I am doing this to learn. Thank you for the book references. I will say despite being only a novice in Austrian theory, I have done pretty well schooling dumb statists thus far. I just have lots of learning to do.

Thanks a lot, yall I appreciate your help and insights.