Wednesday, August 24, 2011

On Keynes and Coalmines

Paul Krugman reminds us of this thought experiment from Keynes:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
It seems to me not very much of a stretch beyond current technology to imagine a fully automated digging machine that would find the bottles in the dirt (via figuring out where the soft dirt is from the machine effort feedback combined with processing sonar images say - those glass bottles with mostly air in must show up once you get close).  The machine could then crack them open and shoot the banknotes back up a pneumatic tube to the surface.

Given that, Keynes' scheme might not result in very much employment any more.


Greg said...

Indeed. Which is why Krugman proposed, tongue in cheek, a "Wag the Dalek" scheme instead.

And why he more seriously proposes massive maintenance and renovation of dilapidated infrastructure.

Stuki said...

That's soooo 1990s Silicon Valley.

The new new, bankster era way, is simply to have your former employee head up Treasury, and convince him that the world will collapse unless all the bottles are buried shallowly right there in your own yard.

Won't create much employment either; but like any wanton meddling by the government, this exercise's only real effect would similarly be to increase return on corruption anyway. Aside from perhaps letting misguided macro economists of various eras, pretend to be saying something oh-so clever, that is.

Burk said...

.. and your point is?

Keynes' point was that employment can be generated at will in order to have all the social and economic goods that come from people being uniformly employed, as we were in the state of nature before the advent of money and economics, after all.

When the entrepreneurial spirit flags, the state can take over the employment function to any extent desired, whether to make useful things for our future, or just to make work. Our choice.

Gary said...

Cute counter argument! So we could dispense with all the fake jobbery if we could just find a way to give cash to idle workers directly. Perhaps a drop from helicopters is the correct approach!

Proconsul said...

Eh. Just as well. But for the robot, the mining lobby would have simply gotten the Treasury to bury those bottles in China.

Seth said...


"Perhaps a drop from helicopters is the correct approach!"

Turns out Bernanke's helicopters only land at homes with helipads ;)

Seriously, though, Keynes point is that we make a social choice to have people unemployed. We can fund them to do any old thing at all. On the other hand, there will be incentive consequences to any such choice. We'd like to employ people doing things that are both socially constructive and not effectively a reward for sloth. Hence the New Deal CCC or WPA would focus on low-wage manual labor creating public works.

These things aren't happening right now because rich people are paying Fox people to tell middle class people to blame poor people -- in order to continue shifting the tax burden onto those least able to bear it and maximize the volume of the geyser of 'economic rent' money rushing upwards.

The Arthurian said...

Gary, don't give cash to idle workers, but use it to pay off their debt for them. Eliminate the problem.

Stuart, I like your last line, but I would apply it instead to the concept of expanding the Federal debt and deficits. It was the right policy for the 1930s. A lot of people today are fighting the last Depression.

kjmclark said...

Mostly, what Burk and Seth said. It's better to pay the workers to do useful work, since they maintain valuable skills that way.

Stuart, unless you've seen such an automated digging machine, it would employ a good number of engineers, software developers, accountants, etc. to create those machines. You might not end up employing human miners, but you would further mining technology and create an exportable class of equipment. The same machines could probably be used for any kind of mining. Still a useful result.

Yesterday Mark Thoma put up a post looking at the VoxEU article on the industrial revolution as actually an energy revolution. Checking other energy articles at VoxEU, I found this one on oil price shocks, published today. According to their analysis, oil price shocks are generally not a serious problem for GDP growth. It's only a few countries, in particular the US and Japan, that have serious growth problems during oil price shocks.

The industrial revolution article was more interesting - a prominent economic historian concluding that if not for the fossil fuels, the industrial revolution mostly wouldn't have happened - but this one is a curious counterpoint.

Mike Aucott said...

It seems to me there's a major disconnect between creation of employment and creation of wealth. There's a silliness to thought experiments like Keynes'. How could this type of activity create real wealth?

In theory, we could stop using any fossil fuel at all and then most if not all of us would have to work like mad, doing jobs like pulling weeds, just to survive. We'd be creating jobs but not adding wealth, and our infrastructure would crumble.

Doesn't much, if not all, of the wealth we humans have built up over the last couple hundred years ultimately come from the exploitation of fossil fuel energy? It seems to me the only way we can create more wealth without more such energy is by increasing the efficiency of energy use and/or by finding ways to tap into other energy sources, like the atom (e.g.fusion).

Without more E2 or new sources of energy, the various economic machinations that are being discussed seem to me to be ultimately capable of no more than rearranging the distribution of what wealth remains.

Burk said...

"How could this type of activity create real wealth?"

An excellent question. The answer is that demand calls forth productive effort, investment, etc. that is economic activity which results in wealth. We are in a demand hole, partly due to the collapse of finance (credit) not sufficiently repaired/replaced by the government. Thus economic activity is down, and with it wealth creation.

Another part of the demand hole is due to income being grossly maldistrubuted, concentrated among the wealthy who typically save more than the poor, and who are saving especially avidly right now. Saving doesn't create increased production or wealth.. it is wealth in static form (often in the form of government bonds).

Keynes showed that economic activity would suffer from these causes, and could suffer for extended periods. Unemployment is not naturally corrected by the laissez-faire system, nor certainly is income maldistribution. So the government, among its many roles in a modern economic system, can take a productive role in remediating both unemployment and its partner low aggregate demand, by diverting some income to those highly likely to spend it.. the unemployed. This is particularly easy to do in a fiat-currency world such as the one we live in, if only we have the intellectual fortitude to do so.

We serve both the unemployed as well as the economy as a whole and its ongoing creation of wealth, even if the work the government sponsors is itself utterly unproductive. The classic case is world war II, an orgy of utterly unproductive activity that, by its very activity, created great wealth and productivity and positioned the US for decades of productive, high-wealth existence. Remember that the ultimate wealth of the economy lies in the skills and productivity of its workers.

Mike Aucott said...

Your point is well taken Burk, and well articulated. It does seem clear that something that stimulates economic activity, e.g. the competition of war, will lead to innovation that will lead to better ways of doing things (most of which I think would fall into the broad categories of E2 and ways of accessing more energy and minerals) which will create wealth. But the case of WW II does not prove your point, and may undermine it. A track of worldwide fossil fuel use (e.g. the wikipedia entry on "fossil fuel") shows that WW II marked an inflection point in the growth of both petroleum and natural gas. The dramatic economic expansion that started with the war was fueled by a dramatic increase in use of fossil fuel. In my view, stimulating the economy with "make work" programs won't go far in the absence of new energy sources or dramatic improvements in E2.