Economics 101

When you withdraw cash from your bank, you decrease the value of money in the computers. When you burn the cash, you don't have the chance to put the numbers back into the computer.

Originally posted by rwingett
You'll learn more about economics by reading Wendell Berry than you will by talking to any professional economists.

I like Berry, but I’ve read more of his poetry than his essays. The only professional economists that I’ve gotten to talk to (as opposed to read) for a long time are telerion and Palynka (if discussions here count as talking). I did get to read Pal’s master’s thesis, which formed the basis for his dissertation, and subsequently a paper for NBER (which I also read). Although both are pretty much in the neoclassical stream, I think tel is more macro-oriented, and Pal more micro.

As you once poked fun of me for saying, I am more of a post-Keynesian institutionalist. But I haven’t done any real economics for a couple of decades, and then it was not of the level of tel and Pal.

I just think you're painting professional economists with too broad a brush: I think you’d appreciate Steve Keen, for example. And you might appreciate this: http://www.paecon.net/PAEReview/. You’d probably also like the neo-Marxian economist Richard Wolff. Do you imagine that the Mondragon Corporation doesn’t employ professional economists?

Originally posted by DeepThought
With a fiat currency burning cash isn't going to have much effect. The number of notes in circulation would be down, but I make most transactions electronically now, and I don't think I'm unusual in that. If someone did that it would just annoy the central bank who would simply make another print run, prosecute them and hand the cash to clearing banks ys of spending extra is never a problem for a government, this is what the military is for.

Well, yes. Cash (M0) represents about 48% of M1 (which adds in checkable accounts and travelers checks), and about 11% of M2 (which adds in money-market funds, savings accounts and CDs). But for the sake of the thought-experiment, one could imagine said billionaire withdrawing funds, and then destroying them.

EDIT: Eladar already said as much.

Originally posted by vistesd
I like Berry, but I’ve read more of his poetry than his essays. The only professional economists that I’ve gotten to talk to (as opposed to read) for a long time are telerion and Palynka (if discussions here count as talking). I did get to read Pal’s master’s thesis, which formed the basis for his dissertation, and subsequently a paper for NBER (which I a ...[text shortened]... d Wolff. Do you imagine that the Mondragon Corporation doesn’t employ professional economists?

Right now I'm reading a What Matters?: Economics for a Renewed Commonwealth, by Wendell Berry. That's why I tossed him out there.

I use "economics" as being synonymous with neoclassical orthodoxy, which is so globally entrenched right now that it hardly seems worthwhile pausing to exempt outliers like Richard Wolff (I've read Occupy the Economy: Challenging Capitalism). To study economics at a "reputable" institution is to be indoctrinated into the efficacy of neoclassical economics.

I don't doubt that Mondragon employs professional economists. They do have the misfortune of having to operate within a global economy modeled on neoclassical principals. That doesn't mean they have to like it.

Originally posted by rwingett
Right now I'm reading a [b]What Matters?: Economics for a Renewed Commonwealth, by Wendell Berry. That's why I tossed him out there.

I use "economics" as being synonymous with neoclassical orthodoxy, which is so globally entrenched right now that it hardly seems worthwhile pausing to exempt outliers like Richard Wolff (I've read Occupy the Econom ...[text shortened]... bal economy modeled on neoclassical principals. That doesn't mean they have to like it.

I'll have to take a look at that Berry book. I never had a chance to study the "heterodox" schools of economic thought in school, so I've done a bit more of that the last couple of years. The neoclassical orthodoxy, largely minus its more Keynesian wing, is, I think, more entrenched now than when I was in grad school.

Originally posted by wolfgang59
For arguments sake lets say the goods burnt are ford motor cars and that
there is no benefit to anyone from the heat!

a or b ???

a. simply reduces your wealth by a billion, and the money supply by the same amount.

b. Increases the GNP by a billion, ford cars sold, inventory must be replaced, workers paid. Your wealth is still reduced by the same amount. It would seem at first glance that this is better economically, until you recognize that a Billion $ of wealth is lost in both cases, and what you might have done with that money will never be done.

It is a bit like Bastiate's broken window fallacy. The money spent on fixing the window benefits the glazer and glass maker, but the money is no longer available for the shopkeeper to buy shoes or a dress for his wife. Destruction of money or goods can never be an economic good.

After all things considered, there is no benefit to either option. Since you are part of the overall economy, and in both cases a billion $ of wealth is destroyed, the economy remains the same in both cases.

Originally posted by normbenign
a. simply reduces your wealth by a billion, and the money supply by the same amount.

b. Increases the GNP by a billion, ford cars sold, inventory must be replaced, workers paid. Your wealth is still reduced by the same amount. It would seem at first glance that this is better economically, until you recognize that a Billion $ of wealth is lost in both d in both cases a billion $ of wealth is destroyed, the economy remains the same in both cases.

Destruction of money or goods can never be an economic good.

Generally agreed, but the rest of your analysis implies a static economy with no spending multiplier. I think that is just wrong. And the implicit assumption in the broken window fallacy (at least as you have stated it) is that the glazer does not spend any of his earning’s in the shopkeeper’s shop, or anywhere else in such a way that some of it might return to the shopkeeper. Of course, there is nothing about a dynamic economy that guarantees that this or that person’s loss is returned. But the earnings of the glazer will be spent in the economy according to his marginal propensity to consume, and on and on—generating the multiplier effect.

The size of the multiplier from various sources is an empirical question.

If the marginal propensity to consume is 0.8, then the simple spending multiplier is 1/(1-mpc), or 1/(0.2) or 5. This would mean that each dollar of spending generates $5.00 of additional income.

The mpc is inversely income-sensitive: people with higher incomes tend to have a lower mpc, and vice versa. It is also dependent on economic conditions, uncertainty, etc., as well as whether an increase in income is temporary or (expected to be) more or less permanent. It is also dependent on the underlying consumption function applied.

The paper cited below estimates the average mpc for the U.S. in three sample periods to have been 0.73 from 1929-1941, 0.86 from 1946 to 1985, and 0.99 from 1986 to 2004.

— http://capone.mtsu.edu/jee/2011/5_MS110_pp39to46.pdf

Originally posted by vistesd
[b] Destruction of money or goods can never be an economic good.

Generally agreed, but the rest of your analysis implies a static economy with no spending multiplier. I think that is just wrong. And the implicit assumption in the broken window fallacy (at least as you have stated it) is that the glazer does not spend any of his earning’s in the shop ...[text shortened]... multiplier effect.

The size of the multiplier from various sources is an empirical question.[/b]

I didn't mean to make a complete analysis in a dynamic economy. This is Econ101.

The spending multiplier is a distraction as it would apply to the earnings of the glazer, or the earnings of the shopkeeper. I tried to make the briefest case of Bastiate's story, as it related to the question.

I've seen several economic articles by Keynesians like Krugman which imply property destruction is an economic good, as in the cases of Katrina, and Sandy. The argument is that they produce work for laborers. This is simply displacement, and it doesn't make up for the actual losses sustained in those tragic storms.

In short, in Bastiate's story, the broken window created a different opportunity, but did not create additional economic well being overall. The difference was who had the money to spend creating multiplier effects. Overall, there was an economic loss.

This would apply to the OP as well. A billion $ in currency, or a billion in Ford cars is destroyed. That can't in the end be good for the total economy, which includes the billionaire who does the destruction. If he is left out of the picture, then b. is better for the cash does generate a multiplier effect, but recognizing him as part of the economy, had he not burned the cash or the cars, he'd have used that wealth to produce similar effects anyway.

Originally posted by normbenign
I didn't mean to make a complete analysis in a dynamic economy. This is Econ101.

The spending multiplier is a distraction as it would apply to the earnings of the glazer, or the earnings of the shopkeeper. I tried to make the briefest case of Bastiate's story, as it related to the question.

I've seen several economic articles by Keynesians like urned the cash or the cars, he'd have used that wealth to produce similar effects anyway.

I agree that in that single-exchange period there is (can be) no multiplier effect. Static analysis was the “101” of micro analysis, focusing on supply/demand in a single market period; followed by the same “snapshot analysis” over several periods. But I’m pretty sure we covered multipliers pretty early in macro analysis. I’m not saying that the kind of analysis that you’re doing here is invalid—you make good points—just that I think it is unduly limited if you stop there.

I’ve read enough of the Austrians (likely not as much as you have) to know their distrust of aggregate analysis, based, in part, on their methodological individualism. (I have fundamental disagreements with the Austrian school, while agreeing with them on a few things.) I have a book by Roger Garrison called Austrian Macroeconomics (2010) that I have not yet read, but I will quote from the Introduction: “Austrian macroeconomic theory is not a theory of real income determination. Ultimately it is a theory of coordination—of how the production process is co-ordinated with the tastes of individuals (their time and liquidity preferences), and how monetary disturbances effect this co-ordination. Because of its focus on the co-ordination problem, there is no sharp distinction between Austrian macroeconomics and Austrian microeconomics.” [italics in original.] The kind of (pretty standard) macro analysis that I am applying here is likely not acceptable to most (any?) Austrian-school economist; I think they are wrong.

I’m not saying that such an analysis of coordination among economic agents is invalid. I am saying that I think that such things as aggregate demand are also worth analysis. There are winners and losers as a result of economic decisions such as Bastiat discusses. But the OP asks which decision is better for the economy (not whether either of them is good for the economy--we are all agreed on that). Even with the billionaire’s loss of his money (or the goods purchased therefrom), if there is a sufficient positive multiplier effect (which past data on average marginal propensities to consume indicate there is), then b. is the better choice in terms of its effect on the economy as a whole. The billionaire’s destruction of his property under b. will (as I have noted) diminish the multiplier effect; I don't see how it can offset it.

Just as a side note, the change in the money supply under a. is (although it can be treated as a “shock” ) is essentially endogenous—i.e., it is not the result of any government policy or any event outside the closed economy. I’m not sure that such a shock would cause any “malinvestment” (as the Austrians understand it), just as I doubt that is as big a problem as Austrian analysis seems to assume. But, to the extent that there is such malinvestment, that makes a. an even worse option.

Hey, Norm, if I sounded (or sound) snarky, put it down to my writing badly—I don’t mean to be.

Originally posted by vistesd
I agree that in that single-exchange period there is (can be) no multiplier effect. Static analysis was the “101” of micro analysis, focusing on supply/demand in a single market period; followed by the same “snapshot analysis” over several periods. But I’m pretty sure we covered multipliers pretty early in macro analysis. I’m not saying that the kind of ...[text shortened]...
Hey, Norm, if I sounded (or sound) snarky, put it down to my writing badly—I don’t mean to be.

Actually, I enjoy your educated and thoughtful comments, without the seeming disparaging remarks from someone who obviously has far more credentials in Econ than I do.

My reading on economics is almost all Austrian school, 20th century on. Von Mises is my most completely read author, some Rothbard, and Hazlet, all Austrian school, but I've read Adam Smith, David Ricardo, and other classical school guys. I think they all contribute to overall economic thinking.

For the majority of people, including the younger students I met going to college in my forties, economics glazes peoples eyes over, terminology like macro and micro, and others have many viewing economics as a voodoo cult.

The guy that makes economics work for me, doesn't identify with any school, but for a while chaired the Econ department at George Mason U, Walter Williams. The other work that although scholarly makes Austrian economics understandable is Mises, Human Action. When viewed through that prism, economics is simplified to what makes people do what they do. Most of our decisions, even those not related to money and goods, are still economic, having to do with relieving uneasiness, or just making us feel good.

I can see your reasoning, but it presumes we can foresee how this multiplier effect over time will work. I believe Bastiat rightly saw that we could not do so. In either scenario, the multiplier would be at work, with either the shopkeeper or the repairmen first spending the money, and subsequently others doing so.

At first glance I saw option b. as better, due to the money being put into circulation by the purchase of goods (Ford Cars). That would resonate through the economy and produce the multiplier. But that scenario ignores that the billionaire would have also used the billion $ for other than kindling, and produced the same effect minus the destruction of either goods or money.