Are Ray-Guns “Idle Resources”?

16 August 2011 at 10:12 pm 9 comments

| Peter Klein |

Several people have called to my attention this extraordinary interview in which Paul Krugman states his belief that a military buildup to fight a mythical alien invasion would pull the economy out of recession. I guess it would be more entertaining than paying people to dig holes in the ground and paying other people to dig them up. Were Krugman’s remarks tongue-in-cheek? Unlikely, as he seems to believe in a sort of old-school, 1950s-era, hydraulic Keynesianism, and hasn’t otherwise demonstrated a sense of humor.

Of course, as Bob Higgs has tirelessly demonstrated, World War II didn’t end the Great Depression, but that doesn’t stop this canard being trotted out every time someone wants to justify deficit spending. Notes Mary Theroux: “the Great Depression ended in 1946, when 10 million individuals were returned to the ranks of the unemployed, and federal spending plunged 40% in the aftermath of FDR’s death and the abandonment of the New Deal.” But the more fundamental point is that spending for spending’s sake does not increase economic well-being. To see why, we must challenge the core Keynesian concept of “idle resources,” the idea that, when the economy is away from “full employment,” the usual laws of microeconomics — resources are scarce, decision-makers face tradeoffs at the margin, costs are opportunity costs — don’t apply. As Brad Delong recently put it in one of his characteristically classy missives: during a recession, “[t]he full-employment world of Bastiat is very very far away.” Of course, Bastiat’s brilliant demonstration of hidden costs and the fallacy of spending one’s way into prosperity has nothing to do with “full employment,” a concept that isn’t even coherent, given that efficiency in resource employment makes sense only with regard to the subjective production plan of the entrepreneur (cf. Penrose, 1959Kirzner, 1966).

W. H. Hutt’s powerful and underappreciated critique of Keynes, The Theory of Idle Resources (1939) — available for free download at Mises.org — attacks this core Keynesian concept. As Hutt explains, all resources have alternative uses, and even “idleness” is a use, in the sense that the resource owner prefers to hold the resource for a future, as-yet-unavailable or unimagined use — a real option, if you like. Dragooning such resources into some random use, outside the price mechanism, serves no productive purpose. Even outside the mythical world of “full employment,” there are no free lunches.

So put those ray-guns back into storage, boys. We may need them later.

Entry filed under: - Klein -, Myths and Realities, Public Policy / Political Economy. Tags: .

AOM 2011 Entrepreneurial Studies and Applied Economics at the AOM 2011

9 Comments Add your own

  • 1. The Peak Oil Poet  |  17 August 2011 at 12:54 am

    this story is about a bloke
    who thought he’d save us all
    an economic genius
    with vision and with gall

    http://thepeakoilpoet.blogspot.com/2011/08/ode-to-paul-krugman.html

  • 2. Michael E. Marotta  |  17 August 2011 at 9:22 am

    “… a military buildup to fight a mythical alien invasion … dig holes in the ground and [fill] them up.” Well, I guess NASA would be the first. Was the space program not supposed to create new wealths via new inventions? Perhaps the Cold War qualifies as an example, as the USSR was an ‘alien’ society with high-tech weaponry to be met and defeated. That did not work out well, either, in the infamous “long run.”

    The lack of imagination is disappointing. With a billion-year (now trillion-year) spree to choose from, science fiction offers a multidimensional array of improbably and impossible things to pursue. Why defend against alien invaders when we can be the alien invaders, complete with warp drive, phasers, and photon torpedoes. … of course, that would bring us into contact with the consummate capitalsits, the Ferengi. Care to wager a bar of latinum on the outcome?

  • 3. Randy  |  17 August 2011 at 1:53 pm

    1. Careful, this thread will attract the orgtheory Star Trek geeks.

    2. there were some interesting, useful technology spillovers from NASA, even some pedestrian heat exchangers that showed up in electric utilities and grain dryers…

  • 4. Thomas  |  17 August 2011 at 3:13 pm

    In case anyone is a curious as I was about that Twilight Zone episode, I managed to find it on Vimeo … only it wasn’t the Twilight Zone but the Outer Limits.

    http://vimeo.com/24605305

  • 5. FC  |  18 August 2011 at 10:22 am

    One of these millenia, we’ll realize that SDI and its Soviet equivalent gave us a couple decades head start in anti-alien R&D.

  • 6. srp  |  19 August 2011 at 7:34 pm

    I’m more than sympathetic to Peter’s point of view, but the “idle resources” idea is not simply a fallacy. At its most credible, it simply states that there are multiple “equilibria” (or if you prefer, “patterns of activity”) that involve different levels of trade in the market. In a world with specialization, it may not pay for me to engage in market production if my potential trading partners are not doing so at the same time. So we can have patterns where everybody is sitting around wishing everybody else were producing so they could too–a classic coordination problem.

    Now, there’s a huge gap between accepting this as a logically consistent story and 1) thinking that government spending is a good way of solving the coordination problem and 2) believing that the coordination problem is really what’s causing the present doldrums. That’s a gap I’m not ready to cross, but you can’t just blank out the theoretical contention.

  • 7. Peter Klein  |  20 August 2011 at 3:26 pm

    Well, sure, we can come up with all kinds of hypothetical scenarios in which potential gains from trade are unrealized — traders that don’t know of each other’s existence, coordination games or prisoner’s dilemmas in which Nash equilibria aren’t Pareto optimal, and so on. Of course, if we rely on revealed preference, then all we know is that actors either trade or they don’t, and we can’t say for sure what trades they would have made if this other person had done this and a third person had done that and so on. But the point was simply that we can’t infer from the fact that a resource is not currently in use that social welfare would be higher if it were commanded into use, which is the standard Keynesian assumption.

  • 8. srp  |  21 August 2011 at 8:56 pm

    “But the point was simply that we can’t infer from the fact that a resource is not currently in use that social welfare would be higher if it were commanded into use, which is the standard Keynesian assumption.”

    I agree. But the OP seemed to be asserting that the idea of idle resources, or a potential-actual GDP gap, was a basic logical fallacy. It isn’t.

    One has to look at evidence and one has to realize that not every downturn is exactly the same to make sense of the Keynesian claim in any given circumstances. I’ve yet to see a Keynesian admit that any downturn is ever caused by anything but insufficient aggregate demand; if it were not against Obama’s political interests, I think they’d claim that the Japanese tsunami was the result of insufficient aggregate demand.

    But a lot of RBCers and some Austrians seem unwilling to recognize any evidence of these coordination problems. When I see CEOs saying they’re holding back on investment and hiring because of the uncertain jobs picture and today’s high unemployment, or I see long lines of people showing up to massively oversubscribe publicized job opportunities, those are evidence–not conclusive evidence, but evidence–that Keynesian-style coordination problems are responsible for part of the current unemployment and sluggish growth.

    That said, the Reinhart-Rogoff data, the huge structural shocks in housing, the creative destruction the Internet is visiting on all sorts of service businesses, and the surge of anti-enterprise regulation persuade me that the demand-coordination problem is a short-term and smaller issue layered on top of bigger and more fundamental structural conditions. Greater public consciousness of the government’s precarious balance sheet also makes Ricardian equivalence more of a factor. An unprincipled interventionist government looking to juice the economy short-term would probably do better by selectively abrogating private debt contracts than by another round of fiscal “stimulus.”

  • 9. Peter Klein  |  21 August 2011 at 9:07 pm

    “But the OP seemed to be asserting that the idea of idle resources, or a potential-actual GDP gap, was a basic logical fallacy. It isn’t.”

    Depends what you mean by “basic logical fallacy.” If it means “can I construct a formal model in which….” then I agree, there’s nothing logically inconsistent about Keynesian-style coordination failure. But I am not sure the concept is operationally meaningful. The OP was suggesting that, from a subjectivist point of view, we can’t define potential GDP, because “maximal” or “efficient” employment of a resource makes sense only from the point of view of the actor. That’s all.

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