Suppose there were 2 people in an economy. And they traded. The second lost a lot. The other did not. A central bank bought the asset that the second had to make him whole. The Treasury then spent the amount of the loss on better environmental things for government buildings. The money to pay for this would come from the first person in current taxes. What would happen? The total spending would not change as the second would have spent the money he was taxed or invested it with someone who would. The incentives of the second would decrease to zero so that there was no effort to improve any more. The situation would not be much different for 10 traders. The incentives would be ruined for the winners. The spending of the winners on voluntarily exchanged things would be replaced by political wasteful spending by the government. The economy would not grow. Jobs would not be created. Why is this not a reasonable model of what's happening now and what happened during the 30's when FDR tried similar government works?

T.K. Marks writes:

A creative academic sort might counter with a disingenuous application of Ramsey Theory, positing that unduly reducing the number of elements in the set strips it of the properties from which the desired outcome will emerge. According to such an approach, reducing the system to only 2 or 10 traders (i.e., dynamics easy to understand) would inherently alter the palliative effect of intervention models. Models which can only work on vast systems of millions of traders (i.e., dynamics extremely difficult to understand).

If somebody can sit before some House subcommittee on something-or- another and manage to keep a straight-face, the above can actually be pulled off. As a matter of fact, variants of it happen all day long in Washington.

"…Ramsey theory, named after the British mathematician and philosopher Frank P. Ramsey, is a branch of mathematics that studies the conditions under which order must appear. Problems in Ramsey theory typically ask a question of the form: "how many elements of some structure must there be to guarantee that a particular property will hold…"

Phil McDonnell writes: 

Rocky [see post below] makes some good points but at some point finesses the concept of (some?) politically wasteful spending into all government spending is wasteful. Personally I would posit that some government spending is always wasteful but not all is. On the other hand most government spending is uneconomic. I say this based on the fact that if the activity was economic then the private sector would probably have already done. it.





Speak your mind

1 Comment so far

  1. Andrei Kotlov on June 14, 2012 11:49 am

    When government redirects resources in the economy—takes from one and gives to another (or takes from group A and gives to group B where A and B may overlap substantially)—it does so by the power of its guns. The question is, can such an activity, in principle, improve allocation of resources? The answer must be, yes; why not? However! If such a reallocation is beneficial for production, then it could also be achieved via voluntary exchanges, to mutual benefit. In other words, if somebody in the government knows how to allocate somebody else’s resources more efficiently, then he should quit the government and join the free market [as an adviser or seller of an instrument], to capitalize on his prescience.

    To Phil McDonnell:
    I fully agree with the sentiment, but: what is wasteful, and what is economic? It is in vain to argue that what government does cannot be economic [profitable?] or that the free market would have done it better (though both are true in practice most of the time). A more precise statement would be: if a government economic activity can improve resource allocation, then this improvement can be achieved voluntarily, without government’s coercive redistribution.

    For example, one might plausibly argue that without government’s intervention, the roads would fall in the state of disrepair. If true, this would only mean that the free market would have allocated resources more efficiently, preferring (for example) investing in the internet to paving highways.


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