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Tough guy economics

By Daniel M. Ryan
web posted March 5, 2007

There's got to be a way out of the economic mess we're in – and I know what that mess is, and how to get out of it. There's lots of things you can learn through self-exertion; how to get our economy out of the mess it's currently in is one of those things.

Conceptually, the answer is easy; it's found in Friedrich Nietzsche. "What does not kill me, makes me stronger." If you work out, you know how the principle fits hand-in-glove with strength training. Through exertion, you tear up your muscles a little; this brings with it the pain. It also, though, encourages the muscles to grow back a little more, so you wind up with more mass in them. This is the gain; barring temporary plateaus, it's the process by which you become stronger.

The trick to getting our economy out of its flab is simple, once you see that the economy is really like a body. This is the organic theory of the economy. The money supply is like the blood; that should help you catch on.

More to the point, though, the muscles of the body economic are its capital goods. Once you see this, then the secret is open.

How do you build up your muscles? Simple: you tear them up a little and wait for the body to naturally build them up. So, how should a capital shortage be remedied? Same way. Tear ‘em up and let the economic incentives caused by tearing ‘em up make them stronger.

By "stronger," I mean more technically advanced – more productive. Just tear out a few of our body economic's flabby capital goods and replace ‘em with lean, tight, new machines, ones that can shoot out goods at a higher, faster, more efficient rate than what was possible with the old creakers.

Of course, like many fitness plans, the description of them is simple, while the implementation of them is hard.  The average Joe isn't going to like having his old reliables torn up so as to encourage him to put new and better equipment in. In fact, if recent history is any guide, he's not going to like it one bit. This suggests that the voluntary means isn't going to accomplish its goal.

Thus, we need the government to do it. Old Joe might need a bit of a kick in the kiester to do his duty to the economy, and that's where the kick comes from in our political set-up -  the government. Of course, I should warn you that you, or for that matter I, might very well be the "Joe" in the scenario. But we're men; we can take it, and even thrive on it. In fact, it's almost a surety that we will. Anyone who sees the sense of the plan will. This should make it a matter more of voluntary compliance than of straight coercion. Besides, the democratic means of implementation should keep the tug-and-stretch in bounds.

The rationale behind it is so simple, it's obvious. If a factory is set up with 1980-era capital goods, then its equipment is clearly not up to the same specs that a new-built one would be. This is true, unless for some odd reason there has been no technical progress in the field. That reason would have to be pretty odd, given that technical progress is normal.

That oddity, though, would be washed away by the select destruction of old capital goods. Since demand for new ones would have to arise, or else Old Joe will starve to death, there will be encouragement for any stagnant field to begin catching up to the stream of things. Progress in efficiency of capital goods will follow.

Of course, there has to be a reasonable limit on the tear-and-grow process. Just as it's impossible to keep tearing at your muscles without a certain rest time for growth to occur, it's also impossible to destroy old capital goods all at once. It isn't just a question of the money, it's also a question of the time. Even if the new parts are on the shelf of the suppliers of them, it will still take some time for assembly and start-up. So, we'd have to determine a rate of tear-and-grow, which would have to be specific to each industry.

There does arise the question of how Old Joe is going to find the wherewithal to make the replacement, as demand means nothing without money. If Joe doesn't have enough of a surplus, he's going to have to dig into another pocket, which of course implies the loan market. So, you can expect the demand for loans to ratchet up a bit. This demand would result in somewhat of a rise in interest rates, of course, but the added productivity should make up for it, assuming (of course) that productivity is the other half of the interest rate equation. If you've taken economics, you should know that productivity does influence the loan market. If you don't know, it would be well worth your while to look it up.

Another question that arises concerns the blood supply of the economy – money. Some naifs may think that increasing the money supply would make this plan work even better, but I'm sorry to say that this particular add-on is a no-go. If a dollar bill is like a corpuscle, then the oxygen it can carry is like the value of that dollar. Inflating the money supply means that each dollar carries less value, so inflating would lead to more money-corpuscles but with each carrying less value-oxygen. So, inflating doesn't do the trick. If any surplus needs to be tapped into to make this plan go, it's not going to come from inflation.

There might very well be the need for a surplus to tap into, particularly at the early stages. That, of course, means Fat Frank. Fat Frank is a fellow who goes through life doing less than his best, and as a result, he's somewhat coddled. This coddling makes him ornery. It also makes him a natural free rider. He's going to benefit from the added productivity, just as he benefits from the productivity increases we enjoy now. Of course, I'm not trying to single anyone out here; we all have a little of Fat Frank inside of us. We all do, even me.

If Fat Frank expects to benefit, though, he's going to have to pony up a little more. This is where the tax system comes in. Fat Frank can easily give up some of his fat for the greater good of tomorrow, just as you and I can. The most obvious means by which Fat Frank can be tapped is in the area of idle savings. Old Joe is going to be needing some savings, so Fat Frank is going to have to be drained a little of his. The government can efficiently conduct the needed re-distribution of savings.

Of course, if Fat Frank doesn't quite have the savings to contribute, then there are other means by which he can pitch in. No one is so overworked that they can't pitch in a little more, and Fat Frank can moderate his consumption a little. It should even out in the near term, and everyone will benefit for tomorrow. Even Fat Frank will, once he sees that it's for his own good.

Productivity: that's what we need for a well-muscled economy. Even if things go a little awry at the consumption end, we can make it up through exports. Let Fatty the Foreigner glut on our production; he'll pay a good price for it.

So, to sum up: the economy is like a body. Economic flab sets in when the capital goods are below top specs. When an economy is flabby, the production possibilities are sub-optimal. Optimality can be reached through the same process that muscle optimality is reached in exercise: guided tear-and-grow. This will involves some sacrifices, as well as specified rearrangements of the economy through the force of the government. These sacrifices will, though, be for everyone's own good, with the possible exception of Fatty the Foreigner but he's out of our area of responsibility. This plan will result in greater measured wealth for all in the future, and the statistics are sure to show it.

[ For more details, see this supplementary reading.] ESR

Daniel M. Ryan is a regular columnist for LewRockwell.com, and has an undamaged mail address here.


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