“I think ultimately the point is to increase demand.”
The point is to satisfy demand, not necessarily to increase it. If people have everything they want, why should they keep producing more things just to “increase demand”?
“Demand for consumer goods should not artificially increase. However, an increase in demand for capital-goods is generally healthy.”
Artificial increases in capital demand distort time preference as much as artificial increases in consumer demand.
"I don’t mean to be pedantic about the notion of “full employment”, whether of labor or economic goods in general). It is therefore theoretically conceivable for government to employ these resources.
This represents a temporary net increase in output."
That’s exactly my point though. That “government can employ these resources” is not tantamount to an increase in real output. I clearly said and did not dispute the notion that government spending can temporarily employ certain resources. But that doesn’t equal an increase in real output. Sure, it is an increase in activity, but since when are we concerned with activity per se?
Even by the Keynesian and government’s own standard of measuring some statistical “activity”, it is not so certain that the government can even always achieve that. The spending is likely to cause more confusion and cautious behavior among entrepreneurs and investors.
“I constantly hear economists say we need government spending to increase demand”
And why do we need to increase demand?
What happens when the government spends and “consumes”? Real goods are taken from the private sector and given to the government. That reduces the total amount of real goods in the economy, making everyone poorer. The government consumed goods it did not produce. The increase in demand is a result of there being less goods in the economy. If an increase in “demand” is always good, then why not just bomb everything back to the stone age?
"Demand for consumer goods should not artificially increase. However, an increase in demand for capital-goods is generally healthy. "
Are you saying that an artificial increase in demand for producers goods is good?
Doesnt’ Say’s Law say (hehe) that it actually works the other way around, with supply creating demand?
DD5,
That’s exactly my point though. That “government can employ these resources” is not tantamount to an increase in real output. I clearly said and did not dispute the notion that government spending can temporarily employ certain resources. But that doesn’t equal an increase in real output. Sure, it is an increase in activity, but since when are we concerned with activity per se?
It is an increase in real output. If government employs unused resources to build a highway, output has necessarily increased. Over a long period of time this may show to lead to a net loss, but only because the increase in output didn’t reflect an actual increase in demand for whatever was outputted, and as such the activity amounts to little more than consumption of capital. Nevertheless, for a brief period of time, or a short period time directly after the expenditure program, output did increase. This is, in fact, why output indictators tend to flare up after government spending, only to fall again.
All the same, public spending in Venezuela (an extreme example, to better illustrate the argument) leads to an increase in temporary output, even if the long-run effect is capital consumption. Nevertheless, public expenditure increases output over what it would have been otherwise, given that the private sector has been virtually flattened by the government. Of course, I reiterate, over the long-run only the private sector can stimulate long-run output.
Are you saying that an artificial increase in demand for producers goods is good?
Guess. Talking about pedantry.
Doesnt’ Say’s Law say (hehe) that it actually works the other way around, with supply creating demand?
This is more or less what I am referring to, although I am assuming that we are talking about a relatively advanced economy where generating supply usually requires an increase in demand for capital-goods.
The point is to satisfy demand, not necessarily to increase it. If people have everything they want, why should they keep producing more things just to “increase demand”?
What I mean is that satisfaction of these demands usually leads to an increase in demand for capital-goods. I am not referring as much to the limitless desire for wealth, as much as I talking about increasing demand for goods necessary to attempt to meet this limitless desire for wealth.
Artificial increases in capital demand distort time preference as much as artificial increases in consumer demand.
I agree. I was more referring to the mainstream attempt to prioritize consumption, or suggest that spending of any kind is useful.
"It is an increase in real output. If government employs unused resources to build a highway, output has necessarily increased. "
No it has not, not unless you take GDP or some equivalent statistic too literally, which I know you personally don’t.
What is the value of this road? You cannot say because it has no price on the free market. Only costs.
Now, let me make an assumption that I think you will have a hard time to disagree with. If we could hypothetically test profitability of the road or any government subsidized project, we would discover that costs exceed revenue. In my Austrian book, loss means fall in real output and not a rise. There is no way for you to make the “rise output” (even temporarily) argument, without resorting to some monetary statistical illusion that completely disregards the most basic premises of value theory.
The hypothetical loss proves that even the temporary rise in output was nothing but an illusion that must have destroyed real output, and not maintain it, or even raise it temporarily.
The referral to “temporary solution” of government spending makes sense only to the extent that one is referring to the government’s own statistics. Because even the government’s own statistics, sooner or later, begin to reveal the truth, as is happening now.
DD5,
First, let me respond to the end of your post, as it may clear up some confusion,
The referral to “temporary solution” of government spending makes sense only to the extent that one is referring to the government’s own statistics.
I never referred to government spending as a solution. I never supported government spending. I never said that government could positively stimulate output. I said that, technically speaking, if the government produces something then in that specific instance in time output has increased. I also stressed that this could lead (and probably would lead) to an overall loss in capital (or capital consumption) over a longer instance in time.
There is no way for you to make the “rise output” (even temporarily) argument, without resorting to some monetary statistical illusion that completely disregards the most basic premises of value theory.
I am talking about a temporary output in real economic goods. If there are Y amount of unused resources, and government allocates Z amount of those Y resources to the automobile industry, thereby causing an increase in automobile production then real output has necessarily increased. This output may have no real value, as nobody wants cars, and as such this represents malinvestment of some sort. Like I said, this is capital consumption. But, for a brief period in time actual output did in fact increase (an increase in the number of cars, in this specific example, without a decrease in other production at that instance in time).
Student and I are explaining a technicality. We are not defending the viability of government spending (he may generally defend it, but I don’t think he is in this instance… at least, that’s not his point).
“I never referred to government spending as a solution”
I know you haven’t. No confusion there.
"I said that, technically speaking, if the government produces something then in that specific instance in time output has increased. "
Again, only if output is measured according to some objective value theory, i.e., labor activity, monetary units in circulation, etc…
And my point is, who cares about that? Unless you are stickily talking about temporary benefits to politicians or temporary illusive statistical data. But you explicitly clarified that you meant real output. I have a serious problem with that.
Here it is again:
"I am talking about a temporary output in real economic goods. "
What is “real” to you? The physical road and physical labor? I don’t dispute those are real. But since when do we in economics, and especially Austrian economics, refer to physical and objective properties when talking about real output? Real output means wealth, otherwise, what is phony output? No real wealth was created, temporary or otherwise. Net wealth was destroyed since costs exceeded the output value. You agreed with that yourself.
You then go on to say so yourself:
“This output may have no real value, as nobody wants cars, …”
So again, the rise in output is nothing but a rise in physical activity. They can bake mud pies for all we care… right? But since all that activity cost us precious scarce resources, it’s hard to see how mud pies can constitute real output, i.e, real wealth.
So there is no rise in temporary real output
"Student and I are explaining a technicality. "
I can accept that, but the “real” must be dropped from the rise in output.
“If there are Y amount of unused resources, and government allocates Z amount of those Y resources to the automobile industry, thereby causing an increase in automobile production then real output has necessarily increased.”
So if the government hires all the unemployed as car breakers, that increases real output? Work can be counter-productive.
DD5,
Again, only if output is measured according to some objective value theory, i.e., labor activity, monetary units in circulation, etc…
I think I referred to output as an increase in the amount of economic goods. I did suggest that these goods may have no economic value to anybody (which is why I continue to refer to this notion of sustainability, or lack of).
And my point is, who cares about that? Unless you are stickily talking about temporary benefits to politicians or temporary illusive statistical data.
It’s an explanation of why that data is illusionary.
So if the government hires all the unemployed as car breakers, that increases real output? Work can be counter-productive.
Err, ok… nobody said otherwise.
No, but I’ve always meant to. Going to now. Thanks.
“Does government spending (let’s say not through additional borrowing but simple taxing) affect demand”
Yes. For example, if you have $50 in your wallet that you plan on saving, and I mug you and then spend it on some Chia Pets, then I have increased the demand for Chia Pets.
“Yes. For example, if you have $50 in your wallet that you plan on saving, and I mug you and then spend it on some Chia Pets, then I have increased the demand for Chia Pets.”
Why, the Chia Pet would not have been sold if not for the thief? Supply creates its own demand. Not pieces of paper. The Chia pet would have been sold, although maybe at a slightly lower average price.