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“Added to the Economy”

I keep seeing this commercial for natural gas where they say that natural gas “added…..dollars to the economy.”  There is a profound confusion underlying this notion of adding to the economy and it demonstrates how the current central bank economic paradigm distorts our understanding of economics and even our morality. 

You observe a firm.  It has costs of $1000 and revenue of $1200.  How much did it “add to the economy?”  The correct answer is $200.  The cost of $1000 represents the value of the goods that they used up to create whatever their output is.  The benefit to society generated by this firm is the excess of the value of what they create over what they use up, or in other words their profit.    But nobody who says “added to the economy” is ever talking about the amount of profit a firm generates.  On the contrary, whenever you see a politician or a pundit speak of profits it is always with scorn.  After all, profits are the elixir of the greedy corporations.  It shouldn’t be about how much you profit from something, it should be about how much you add to the economy.  That’s how much your endeavor benefits other people…right?

So usually when people talk of “adding to the economy” they are talking about the $1000 of costs (sometimes they are talking about revenue, I don’t know what the natural gas people mean but both are incorrect).  They act like the money spent on inputs is created out of thin air the moment it is spent on something that gets used up.  Come to think of it, this is the same way they talk about consumption isn’t it?  You add to the economy by using things up.  This is one of the oldest fallacies in economics.  Any clear thinking microeconomist will see through it and point out that in fact, if someone doesn’t spend money on one thing, that money won’t just disappear, it will be spent on something else and the resources which could have been used in producing that thing will be used for something else.

So who is right?  Well, in a natural economy the latter theory would be completely correct.  The problem is that we don’t have such an economy.  In fact, when people spend money it actually is (to some extent) created out of thin air.  It is created by borrowing.  The key to preventing an economic meltdown is to maintain a high enough level of money and consequently of debt.  In this environment it is more important to prevent the monetary contraction than to efficiently allocate resources.  This means that anything that causes people to borrow more money and spend it on something is beneficial.  Buying up resources and using them to produce something of lower value is good because it increases the money supply and drives up the prices of those resources.  It’s actually better if they are not employed too efficiently because if they do it will drive the price of whatever they are producing down.

This is how the government can take a firm that has $1000 in costs and produces $800 worth of output, give it a $300 subsidy and then claim that the firm is adding $1100 to the economy when in fact it is wasting $200 worth of goods.  They are not talking about adding goods to the economy, they are talking about adding money.  This has driven us to the point where we worship waste and disdain profit.  This has even led Lou Dobbs–no progressive–to remark recently that the disaster in Japan would actually benefit the global economy because they would have to buy a bunch of stuff to rebuild.  You don’t have to think very hard to realize stuff they use to rebuild is stuff we could have been using to produce something else, which means we have less goods because of it.  But think of all the money that they will create by borrowing to buy that stuff….

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