Wednesday, June 01, 2011


Current economic news suggests that the federal government's three year effort to stimulate the economy has not had the desired effect. Government borrowing and spendng in particular have not seemed to have had the desired effects. Economists, policy analysts, academics and captains of industry may engage in nuanced debates as to why this is so, discoursing on whether the economy is consumer driven or production driven, whether expenditures on public benefits are "investments" or not, or whether there are more arcane requirements for government policy to lead to economic growth. The ultimate answers may indeed be arcane, but the pertinent explanations are just as likely to be within the observation of the average person.

Several readily verifiable observations will serve as bases from which to proceed. First, we note that when the stock market dropped by 500 points, commentators remarked that "500 billion dallars has gone out of the economy." If it went, where did it go? Similarly, economic distress has resulted from collapse of the tech bubble and the housing bubble and some identifiable condition should accompany the start of such events.

Second, the Second World War is acknowledged to have had some role in ending the Great Depression, despite the fact that the monies expended on munitions and military operations should not provide an economic benefit by themselves. If they did North Korea would be one of the Asian Tigers. Something else must be at work.

Third, consumer goods, such as VCRs rapidly lose their value when something else comes along. The value of a VCR is not intrinsic to the particular unit, but varies with the perception of what it is worth, and its desirablilty compared to other alternatives.

What these three observations suggest is that value, as teh etymology of the word suggests, is an opinion. When stocks drop in price it is because there has been a change in teh opinon of what they are worth. When billions are expended on military hardware during peacetime, this creates a drag on economic growth; the resources could probably be put to better uses. However when a society is engaged in an existential struggle against powerful enemies, thank, airplanes, ships, soldiers and military bases are highly desirable, i.e. they are valued and their production creates value in the economy. When a technology comes along to replace video cassette recorders, the opinion of what VCRs are worth changes. When the opinion of housing prices turns unfavorable, the value of it drops, and wealth stored there decllines, not as a matter of monetary balance but quite literally as a matter of opinion.

In order for spending to stimulate the economy, the spending must be on things that people value at the time. It must be on things that people actually want, not things that politicians or activists want them to want.

So what sort of things do people value? If one examines the econoic history of the United States, he will observe that economic prosperity accompanied the emergence and growth of several discrete technologies. Th efirst was steam powwer, that among other things enabled the development of railroads and steamships. Then came the telegraph, and later the telephone. This was followed by the development of aviation, the widespread availablity of the automobile, radio communications, then television. Then came the personal computer, the internet and ubiquitous cell phones. These were the things that people valued that led to paroxysms of prosperity. If one looks closely at each of these technologies, a common characteristic emerges: they are all methods that enhance the ability of people to interact with each other. This should not come as a surprise: the affluence of the Roman empire derived not from plunder but from trade.

It would be expected that the advent of social networking would be the next phase in this economic process, but it becomes apparent that technologies that enhance human interaction is necessary but not sufficient for prosperity. Economic growth, like all sophisticated human activity requires people to make assessments about their goals and how best to use resources to achieve them; simply, it requires some measure of predictability. The recent expenditures on "stimulus" were futile because they were expenditures on things that people did not necessarily value, and they were made in an environment permeated by uncertainty. The uncertainty arose primarily for the capriciousness of regulatory authorities insinuating themselves into the transactions that previously only required willing parties.

The prescription for effective stimulus spending is rather straightforward: spend money on things that people actually value and stay out of their way when they do business with each other.

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