Samuel Cohen, the inventor of the neutron bomb, has died. Nikita Khrushchev considered it the ultimate capitalist weapon, because it did away with surplus workers and left capital and goods standing for full utilization.But what would Bastiat or Ropke or anyone else musing on The Broken Window think of the neutron bomb? It seems to me that this weapon changes substantially the way we think about the economics of war. One of the paradoxes of the economics of war is that as long as the capital stock isn't too severely damaged, war can actually result in a boom in the flow of wealth even as it reduces the stock of wealth. Bastiat took his contemporaries to task for only paying attention to the flow of wealth and ignoring the stock of wealth. But many others after him have noted the impact of war and destruction on output: it can, within limits, be good for output and also employment. The reasons are quite clear - destruction of existing capital leads to an increase in investment demand, and as long as the capital stock isn't so badly brutalized that it can't produce the goods, output will necessarily increase. If the capital is left standing (outside of the immediate blast radius, that is), this investment demand may not materialize. Cohen considered the neutron bomb to be a "moral" weapon because its damage was restricted to the battle field - it would not cause widespread radiological damage in civilian areas.
"...destruction of existing capital leads to an increase in investment demand..."
ReplyDeleteCash for clunkers.
"...destruction of existing capital leads to an increase in investment demand..."
ReplyDeleteBut really I don't get it. You're assuming underused resources? So no opportunity cost to replacing destroyed capital?
The neutron bomb doesn't change anything, except the specific mix of capital (human capital) that gets destroyed. The remaining capital becomes more valuable via supply and demand and so a special interest may be served, but the whole society becomes poorer. Just as Bastiat indicated.
Bingo on cash for clunkers. The problem with that formulation was that it probably just concentrated decusion that would have been made in 2009, 2010, and 2011 into a shorter window. It's not entirely obvious to me how much that really helps.
ReplyDeleteBut really I don't get it. You're assuming underused resources? So no opportunity cost to replacing destroyed capital?
Explain to me why I'm suggesting there's no opportunity cost to replace destroyed capital. There almost certainly would be an opportunity cost, but I don't think it would all be displacement. Do you have a reason for thinking it would be?
That's an excellent point on human capital - I agree.
And I would agree - the whole society becomes poorer. I believe I noted that in the post too.
*decisions
ReplyDelete"..but I don't think it would all be displacement."
ReplyDeleteDoesn't that mean that at least some fraction of the investment that would go to replacing destroyed capital is opportunity cost-free? I.e. it wasn't going to be used for anything else? Maybe that's true, I don't know. It just runs counter to my intuition. But, like Bastiat was getting at, if you have to replace a broken pane of glass, you're just poorer by an amount equal to the benefit you would have captured if you hadn't had to replace the pane of glass. You could have had a window (that was never broken) AND a new pair of shoes, but instead you have to replace the broken window and not get the shoes. Sure, the glazier likes that arrangement, but the cobbler and the guy who owns the window both lose.
"And I would agree - the whole society becomes poorer. I believe I noted that in the post too."
Well, if you did it's not very explicit. I guess that's what you meant about the reduction of the stock of wealth, but my impression was that you were coming down on the side with those who think war and the cash for clunkers program can be good for the wealth of society.
"The remaining capital becomes more valuable via supply and demand..."
ReplyDeleteI was sloppy in what I said there. I should have said the remaining HUMAN capital becomes more valuable, in the case of a neutron bomb detonation. The non-human capital actually becomes less valuable - which is another 'unseen' (to use Bastiat's word) cost to society.
I'm a little confused by the line of argument. All I'm arguing is that output will increase. I would say that yes, this necessarily implies that idle resources will be brought into the production process, but I'm not sure it follows that that means there won't be opportunity costs. Insofar as idleness is welfare enhancing, then forgoing that idleness is an opportunity cost and as far as I know its a complete (ie - no portion opportunity cost free).
ReplyDeleteWhat's somewhat confusing here is that idleness is a non-market activity. So yes - if we consider the utility of all activity - market and non-market - this should perfectly crowd out other welfare-producing activity. But it should increase market activity.
Well, if you did it's not very explicit. I guess that's what you meant about the reduction of the stock of wealth
How much more explicit could I be? What other definition is there for "becoming more poor than you were previously" than "reducing the stock of wealth"? I was just about as clear as one could be!
my impression was that you were coming down on the side with those who think war and the cash for clunkers program can be good for the wealth of society.
Hmmmm... no. I'm not sure how I gave that impression. I would say that if there were some exogenous shock like a war I would potentially expect a positive shock to economic activity after the fact. That does not mean I would impose such a shock as policy. That would completely miss Bastiat's point. I did a search on "cash for clunkers" on my blog and didn't come up with anything, so it seems I haven't written about it before. But I still think this post implies the opposite: that I would oppose cash for clunkers (although expect it to potentially increase output).
Now - one could make the case that we need a cleaner fleet of cars. Or one could try to make a case that there's something patriotic about the American automobile industry. Or one could make any number of other additional arguments for cash for clunkers that would have to be addressed on their own. But as far as the Broken Window argument goes - they call it a "fallacy" for a reason. I absolutely don't think cash for clunkers is a good idea.
Um... I think you're arguing from two different and unrelated premises.
ReplyDeleteThe western (christian) code of war, is to get the other side to surrender. The problem with viscousness is that the resulting population is harder to manage. People tend to react less badly to destruction of built capital than they do to rape and murder. It doesn't have anything to do with the capital. That's what the literature recommends anyway. The general assumption is that if you are strong enough to take something, you're strong enough to develop the economy. And this turns out to be true, as a rule of thumb.
Lenin's critique is a moral one, not an economic one. It says that capitalists don't care about human beings.
I mean, conversely, as a military tactic, building a horde of neutron bombs and using them is certainly the most effective and cheapest way to conduct a war, and sure, the land is easier to occupy and make use of.
But the purpose of war is COERCION not confiscation. You have to DEFEND that land, and make it productive if you depopulate it. That's expensive. As an advisor said to the Khan "My lord, if we tax the chinese we profit much more than if we kill them."
Very interesting points, Curt, but I wasn't trying to get into any of that.
ReplyDelete