I was just reading the What if AGW is wrong? thread, and was considering the following point:
I’ve thought along similar lines whenever I hear people complaining “Oh, we’re spending billions on x, all that money going to waste…”
Surely the economy is a closed system, at least if you are looking at it globally. It’s not as if we’re packing up cases full of dollars and gold ingots and blasting them off into space. If you’re spending billions of dollars on something, whether it’s manufacturing new and nastier bombs, or researching and exploiting alternative energy sources, that money doesn’t “disappear”. It is used, ultimately, to pay other people to work. Those people pay tax, and ultimately use the money to buy stuff. It all gets recycled.
OK, you could argue that some of the money gets spent overseas. True, but that’s a pretty parochial way of looking at it. And even projects which are undertaken solely in one country, by companies and employees housed in that country, get criticised as being a “waste of money”.
Can somebody explain this to me? Obviously the idea of money is an artificial one. Money = crystallised effort, originally, so you could say that doing such-and-such is a big waste of effort. Well, maybe, but I still don’t really get it.
Yes, it’s more like resources can be wasted. On a fiat money system you can’t really say that money per se is wasted, although if we were still on a gold standard or somesuch you might be able to make that argument if people or the government were hording or losing gold.
OK, but the resources, when it comes down to it, are people. If the government, or Megacorp, or whoever, is spending eleventy billion dollars on some hare-brained project, then it is providing jobs and income for more people, who are part of the economy.
I kind of understand the logic of “We’ve just employed all these people for years and all we have to show for it is a big white elephant,” but surely spending vast amounts of money on stuff we don’t really need is what good capitalist economies are all about?
The wastage is in all the goods and services that the people who had the money could have benfitted from by spending it, but didn’t. If you had £100, you could spend it on things you enjoy or benefit from, or you could waste it on, say, employing someone to do something pointless like dig a hole and then refill it. You might say “but the person digging the hole benefits, by receiving the £100”. But between you and the digger you could by now have had the original £100 plus £100 worth of good things. Instead you just have £100 and a worthless refilled hole.
However, in today’s world, the hole-digger would bring in a team of hole-digging consultants, who would then insist that he took out hole insurance, spade cover etc., and recommend that he use a special proprietary shovel which just happened to be manufactured by associates of theirs, and so on.
A lot of my £100 would end up being spent on goods and services, and generally improving the economy. It seems to me that the concept of a “useful end product” is often not relevant, at least not economically speaking.
Well, yes, but if the £100 were spent on, instead, making clothes for poor people or something like that, you’d still have the money spent on goods and services, improving the economy, and poor people would also have clothes.
The concept of a “useful end product” is still important, because that’s what makes the economy grow and actual wealth increase. Without it, if all you have is a bunch of people digging and filling in holes for each other, the money keeps circulating, but there’s nothing created. It’s like the fictional town where everyone makes a living taking in each other’s washing.
My economics is rusty, but there is the concept of a “multiplier”. The benefits of govt spending is greater than the actual money spent. Different types of projects have different multipliers. Generally military spending results in a smaller multiplier than investing in domestic infrastructure.
For AGW, money spent on conservation would still be beneficial even if it is not “true”. Money spent creating a giant carbon sink would be wasted if AGW is not a real problem. That is, they both have a positive multiplier, but the former would be greater than the latter.
You can’t really waste money. Yes, on the individual micro scale, it’s very possible. But, on the global macro scale, not so much really. Usram accruately describes what is happening when a government funds projects that seem not so worthwhile. This is called “opportunity costs.” On the macro level, we’re taught that while the use of resources is suboptimal or inefficient, it still makes the economy go around. I theorized in school that if you “waste” enough resources, then the country doing so ends up hamstringing their technological advancement, thus affecting their efficiencies of scale, and their overall economic advantage. I offered examples ranging from Rome, Spain, France and England, then Russia and the other communist countries. My professor seemed to agree with me, but was more concerned with my simplistic outlook, because as the wiki article correctly points out, it is very difficult to measure opportunity costs because of sunk costs and unintended consequences.
The answer to the OP’s question depends on whether or not we include in the equation what is actually produced.
It’s perhaps simpler to see if we think about human energy rather than money. If I go do pushups all day, I may expend the same amount of energy as if I went out and dug up and planted the garden. But if I work in the garden, I end up with food at the end of the game, and if I do pushups, I don’t.
It is in this sense that money can be wasted, in that at the end of the maze, there’s no cheese …
Isn’t this just the Broken Window Fallacy? Wealth can be created and it can also be destroyed. Of course it’s possible to waste money. That there are some ancillary benifits to wasting money just means the money isn’t wasted efficiently enough.
Many economists don’t really believe in the Broken Window Fallacy. What they’re really against is inefficient use of resources, or lost opportunity costs. Eventually, a government will waste money to the point of inflation, but at that point, you’re not really wasting money, but rather, destroying your economy. One can be inefficient (or “wasteful,” if you will) in a free market economy, but if the government steps in and starts breaking windows for no apparent reason, then that’s a different type of economy all together.
To use a corporate example, if my company (I work for an IT company that puts out a lot of software, which gets used by a ton of other companies and resellers) gets sued, and we end up spending millions of dollars on lawsuits, settlements, attorney fees, etc., we end up taking our money out of R&D. That means that our releases come out later, which means that everything slows down (less selling, less innovation, less money moving through the economy). However, the attorneys are now have more money and they can spend it, but at this point, the money is in individual hands and is less likely to be invested, if at all efficiently, no to mention the transition period and pains the economy has to go through as money starts flowing from other sources.
The point of my example is that large corporations with established and large scale business plans, can put more money into effect more quickly and efficiently because there are less decision makers compared to many individual investors.
When I was working the firm, our litigation group had a huge win, like $20M. We got $6M for our fee (plus expenses). Actual bonus pay out to the firm was less than $800k, and that’s everyone who deserved a bonus, with a huge split going to the litigation group. The law firm ended up saving the money as cash reserves. While it is true that we did use a bank to hold the cash, and that the bank will use the money to make loans, but the effect of loans are much slower at that individual level. The bank needs to take time to assess loan worthiness, people have to take time to make decisions, and many times, the decisions they make may be less efficient. People might not even spend and just hold.
If my corporation were to hold on to that $6M and not pay it out in lawsuits (as per my example), we already have a plan for that money. We would hire more developers and business analysts and engineers, as well as make other capital investments. All these moves have a much more direct and immediate impact into the economy than diverting the money to different banks, a much more end around process.
If a couple of dozen executives get rich at Phizor, it’s probably because they just developed a new drug that will benefit society as a whole. If a couple dozen partners at Jones Day law firm get rich, what have they produced? Nothing really. They just took a percent of some money some company had to pay someone.
That’s the problem, IMHO, with people treating corporations like they are people. Who do you really punish when you sue a large company? Maybe the executives who made the decisions get fired or arrested. The company still has to spend a fortune in defending itself and that money could be better used to develop new products and paying employees.
Well, the idea is that the damage done to someone from a stupid decision be compensated, and overall this must have some economic value, if only in preventing future stupid decisions. Obviously, it doesn’t exactly work to perfection (my wife’s a doctor, so my affinity for lawyers is, um, limited) but I do see the need for checks and balances in the abstract. And most crazy awards get knocked down on appeal.
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