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Sunday, February 24, 2013

Libertarians Support Pyramid Building

Yes, that title is facetious, but I will explain its meaning.

If a private billionaire built a pyramid that took 70% of the GDP of his nation (say, when the economy was at full employment), and thereby impoverished the rest of his community, then would a Rothbardian libertarian object to such a project? In fact, the natural rights ethics of Rothbard would require that nothing should be done coercively to prevent the billionaire from any such enterprise: after all, he is satisfying his subjective utility preferences, and if the government stepped in and stopped him, that would be an outrageous evil violation of economic freedom!

Yet Keynes is unfairly slandered for having allegedly seriously advocated pyramid building or ditch digging (although he never did such a thing).

Consider this important passage in the The General Theory of Employment, Interest, and Money where pyramids are mentioned. It has a very interesting meaning:
“If – for whatever reason – the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. ‘To dig holes in the ground,’ paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.” (Keynes 1964 [1936]: 219–220).
This is a much misunderstood passage. The meaning is not what libertarians allege. It is not even the government that is imagined building pyramids here, but a private sector millionaire.

In these rhetorical sentences, Keynes is noting that the private sector is perfectly capable of engaging in creating certain goods which per se are wasteful, but in a depression would increase employment and income, and via the money incomes spent by the newly employed people would stimulate further demand for other goods and services.

In a deep recession, millionaires might indeed employ people to build “mighty mansions” or pyramids “to shelter them after their death” (obviously Keynes is being rhetorical here) or erecting cathedrals or monasteries. Would this private sector spending – in a depression – reduce unemployment? Yes.

Would it indirectly increase demand for other goods and services as workers spent their income on consumption? Yes – of course assuming the construction was not some outrageous percentage of GDP, as in my example above (where its long-term effects would obviously draw factor inputs and labour away from industries producing consumption goods and capital goods, impoverishing the community).

In fact, in a deep depression even if the private sector millionaires employed people to dig holes in the ground, this would reduce unemployment and indirectly increase demand for other goods and services (“the real national dividend of useful goods and services”).

But the product of these activities per se – that is, the holes in the ground or privately constructed pyramids – would be wasteful. Keynes is not seriously advocating doing any such thing:
It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.” (Keynes 1964 [1936]: 219–220).
That is to say, it is utterly unreasonable and stupid to simply wait for the private sector to end a depression by pyramid building or really digging ditches (or have a government do these things), and the private sector too is perfectly capable of producing things that in and of themselves are inherently wasteful goods. Pyramids and ditch digging would be wasteful per se (even though indirectly they would increase employment and demand for other products).

In other words: it’s better to end a depression by having socially and economically useful government spending – public investment and public works – than just waiting for the private sector spending, some of which might actually be wasteful.

But, curiously, just imagine our Rothbardian libertarians: if in a depression (or at full employment) some billionaires in a nation did decide to build pyramids on a scale far greater that anything Keynes imagined (as Keynes probably thought of such an example as, at most, constituting a small stimulus of 1–2% of GDP), what would they say? Even if a billionaire wanted to construct pyramids that would take 70–80% of GDP, Rothbardians would in the end have no reason to coercively stop or prevent any such activity. In fact, it is likely they would strongly defend the right of the billionaires to build such huge and inherently wasteful structures.

They would in the end be defenders of wasteful pyramid building.

And we do not have to look far in the real world for examples of privately produced goods that, arguably, could be regarded as wasteful per se: private jet planes that do little except add to air pollution and congest airports; luxury sports cars or other vehicles that are highly fuel-inefficient and that contribute to traffic jams and urban pollution. But do libertarians doubt that the production of these things adds to employment and the income spent by workers who produce them drives demand for other goods?

And, no, I do not advocate banning such things, but one can certainly impose high taxes on some luxury goods that have serious negative externalities.


BIBLIOGRAPHY

Keynes, J. M. 1964 [1936]. The General Theory of Employment, Interest, and Money. Harvest/HBJ Book, New York and London.

13 comments:

  1. Thank you Lord Keynes,for your clarification of the inner believes and tacit knowledge of the Austrian Theology!I must admit i sometimes have suspected that their branch even include a secret support for Pyramid Building!It fit so well together with their other idionsyncratic archaic keystones, like worship of gold,outdated 1500 century mysticist philosophers from Salamanca and other oddities in their kitbag to adress the challange of a modern economy.
    Well,how many times have we not run in to their accusations that John Maynard Keynes,the brittish liberal,should be from all from a admirer of both Hitler and Stalin,a advocate of wreckless money printing,pyramid builder and maybee worst of all, a "Monetarist"!
    Well, now the truth turn out to be that the Pyamidbuilders are to be found by in the Rothbardist circles!Thank you LK!

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    1. Well I have to agree A that I got the same thing out of Rothbard... Unrestricted pyramid building for the rich!

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  2. Assuming that the billionaire had got his fortune legitimately and not by the use of force then pyramid building would just be another form of consumption spending no different than if he spent his money on mansion, yachts and sports teams like real-world billionaire do.

    Remember than in the free-market model he could only have got to control 80% of GDP thru trading goods and services with other in the economy - so (assuming they did not make consistently bad trades with him) the others in the community are better off with him controlling 80% of GDP than they would other-wise be.

    If he had got his 80% by exploitation and use of force to own control resources - then different story.

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    1. (1) "Assuming that the billionaire had got his fortune legitimately etc..

      Not if its construction required 70% pf GDP

      (2) No, the billionaire does not "control" 80% of GDP: he has the money to buy 70% (or in your example 80%) of output. Different thing.

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  3. Incidentally it is hard to imagine a model of a free-market that would allow one individual owning that share of GDP - but I guess as a thought experiment it is can be done.

    Suppose an individual has invented a business process that is so revolutionary that real GDP has increased 500%. This allows him to make a 70% profit margin (before competitors catch-up). Even with that big a margin everyone else is also better off than without his invention.

    Are you saying that in your world in would be morally wrong for him to spend his profits on building a pyramid if he chose to ?




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    1. (1) again, we are not talking about him "owing" 70% of GDP, but having the money to buy 70% of real output.

      (2) "Suppose an individual has invented a business process that is so revolutionary that real GDP has increased 500%. ....
      Are you saying that in your world in would be morally wrong for him to spend his profits on building a pyramid if he chose to ?"


      In this hypothetical you imagine, even if real GDP has increased 500%, then building a pyramid that takes 70% of this new real output will still likely impoverish the community. By definition, real per capita GDP will fall as real output is diverted to the pyramid.

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    2. if GDP has increased 500% then the 30% left to rest of the community is still greater than total GDP from before so no-oone is impoverished.

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  4. Am I the only one who doesn't see why pyramids should be considered "wasteful"? Egypt, Mexico, and Peru still get lots of tourism out of them -- and the record shows that they impressed foreigners considerably (albeit to the ultimate detriment of those cultures, which may undermine my argument). I know that I hope to see the Sphinx, the Great Pyramid, and the other ancient monuments in Egypt before I die.

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    1. But these are famous ancient buildings, not modern ones built for some rich person.

      There'd surely be much less interest in the latter case.

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    2. Absolutely nothing wrong with tourism dollars, but unless firms have the funds for such ventures Las Vegas comes to mind, governments don't have the need to impress anyone and don't need to engage or encourage such monument building.

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    3. OK, fair enough. Seems to me that most monuments gain fame pretty quickly, though (the Statue of Liberty... Hearst Castle... Mitterand's Grande Arche at La Defense... I.M. Pei's glass pyramid at the Louvre...). And there are plenty of reasons people avoid Las Vegas. It's probably more of an empirical question than a theoretical one. I do appreciate that the point in Keynes is rhetorical.

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    4. I doubt whether the tourism dollars (even if tourism did result) would offset the reduction in per capita GDP entailed by the construction of the imaginary pyramid.

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  5. LK, this reminds me that all the Keynesians who attempt to use Keynesian thinking to "control" income inequality are kidding themselves.

    After all, it is reasonable to believe that during a depression, spending by the very rich on luxury goods and yachts could have an expansionary impact on employment. Indeed, the cities of Venice, Barcelona, and Milan have grown from the spending of the very rich.

    The opposition to income inequality is purely philosophical and based in feelings of social justice, but has little to do with issues of generating employment and good incomes for all, as some progressives would like to believe.

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