My son sent me the picture with the following note:
I just came across this photo today and it’s actually how I’ve always thought of your economics. In particular, if someone pours money into the manufacture of cars (for example), and it’s not value adding, there are all these other companies that feed into the process (i.e. the parts manufacturers) that will eventually get hurt as well, and then the economy as a whole.
This is what we mean when we talk about the structure of production. Producing a car is the work of an economy with many different producers of inputs all across the economy, and where each of these producers also has the same need for inputs which are also spread across the economy.
When government indulge in their wasteful spending, it is not just the end products that are produced but they distort the structure of production so that all of the inputs into their non-value-adding forms of production also get produced. When the ability to finance these valueless activities is finally exhausted, it is not just the final government demand that is wound back but so too are all of the inputs down the line. The economy may have looked good for about a quarter or two but it was a delusion that gets discovered soon enough.
The other aspect my son does not touch on – but understands well enough after all those years living with me – and which is also crucial to understanding how an economy works although almost never mentioned by most economists, is that every one of these inputs was a premeditated form of production that did not spring spontaneously into existence. Each was the product of a decision by someone somewhere to produce these various inputs and was a decision made well in the past before the car assembly began. The notion that aggregate demand is what drives an economy rather than the premeditated directives of entrepreneurs whose production is entirely financed by the economy’s stock of savings is wilfully inane. Yet this is what we teach and such shallow concepts are now the stock and trade of the entire profession. It is no wonder economic advice is so dreadful when economists never actually learn how an economy actually works.
Isn’t there a bit of ying and yang here?
You aren’t going to spontaneously build a steering yoke for a falcon. There has to have been a request from the downstream manufacturer: a demand if you will.
I would have stuck to your son’s original analogy of the dangers of artificially creating demand above what the market requires.
For an example of supply creating demand, there are plenty of product examples (eg iPads). But supply of the iPad created demand for the components. Not the other way around. Or have I misunderstood what you are saying?
Entropy
23 Feb 13 at 11:43 am
Ahh, I think I have. Yes. The decision to make and supply the iPad (or the next model car) would have been made long before demand was known/tested in the market.
It is the finished product that is produced that is relevant to supply and demand.
Entropy
23 Feb 13 at 11:57 am
Hayek observed that the economist is often asked to give advice on questions of public policy and yet his advice is usually ignored almost from the moment it is uttered.
Karp Popper in Prediction and Prophecy in the Social Sciences put up as the role for a social scientist is to trace the unintended social repercussions of intentional human actions.
He went on the argue that much of the rest of advice from social sciences is what we cannot do. For example, you cannot, without increasing .productivity, raise the real income of the working population.
Popper concluded that the role of science in social life is the modest one of helping us to understand even the more remote consequences of possible actions; in other words, to choose our actions more wisely
Jim Rose
23 Feb 13 at 12:11 pm
I’ve heard of smart bombs, dumb bombs, cluster bombs, all sorts of bombs. But I’ve never seen or even heard of a neat bomb!
Every home with a teenager could use one of these little suckers once a week.
Winston SMITH
23 Feb 13 at 12:16 pm
Begs the question, what real benefit do we gain for funding any education?
NoFixedAddress
23 Feb 13 at 12:29 pm
If you disassembled a T-34 tank, it would look just as impressive as your disassembled car — and yet government alone was responsible for it.
I don’t get two things about your denial of aggregate demand, Steve:
1) For me, when employment seems precarious for some reason, I dial down discretionary expenditure. I consume less and save more.
Maybe I’m just a weirdo? But if I’m not — if other people have the same attitude — then consumer spending dives when unemployment (or expected unemployment) rises. And thus AD falls, leading the economy into recession. It seems to make sense to me.
2) Entrepreneurs, no matter how brilliant, are surely responsive to consumer spending (and thus the level of AD). Does anyone build anything without consideration of whether there is enough consumer demand to make a profit?
Piett
23 Feb 13 at 1:32 pm
I would argue like most things, it isn’t black and white.
The economy grows when goods are supplied, the easiest examples being when a whole new product genre is created. Before iPads were created, nobody bought tablets.
But producers also respond to demand. They make as much of a good they can knowing it is selling well. Apple can’t make enough iPads and there is a waiting list. Even during a recession. And a producer makes less of one that does not, so HP had to stop making their webOS tablets and give those they had already made away for a fraction of cost.
Entropy
23 Feb 13 at 5:24 pm
Oh, and a t-34 tank disassembled might look impressive, and I am sure it worked just as well as when it was still put together. That is quality government manufacture right there, along with the trabant.
Entropy
23 Feb 13 at 5:26 pm
It cost more to build and was less functional, and to get there the government had to emulate an economy anyway.
wreckage
23 Feb 13 at 5:49 pm
A T34 was designed to have a combat life of 20 hours. Try selling a modern car with the same build quality.
Winston SMITH
23 Feb 13 at 6:06 pm
Now get a team of economists and politicians to put the car together. They couldn’t even do that much, yet they are somehow expected (or, at least sell themselves as being able) to co-ordinate an economy to produce all the requisite parts to the required specifications, materials and standards.
Keith
23 Feb 13 at 6:23 pm
that is a long combat life given the russian commtiment to frontal attacks
Jim Rose
23 Feb 13 at 6:32 pm
Hunter-killer UAVs are gong to dramatically change the way tanks are used. Tanks could possibly become Cold War era relics. Just thought I’d post that for no particular reason.
John Mc
23 Feb 13 at 6:39 pm
This, this, exactly this.
wreckage
23 Feb 13 at 7:01 pm
I imagine tanks will begin operating with heavy duty ECM and ECCM. That was how aircraft adapted.
wreckage
23 Feb 13 at 7:05 pm
It would be a rather good thing if each economist graduating in Australia was required to build one of those parts of their very own, in the company who produces it. On night shift.
I never regret the many hours spent training uni vacation students and even sometime high school work experience students. Practical experience is completely different from sanitised lectures and labs.
Bruce
23 Feb 13 at 7:26 pm
Jim, that was the design life – not the actual life. Which I imagine would be ‘somewhat’ less.
Winston SMITH
23 Feb 13 at 7:40 pm
…it could have unintended consequences. I could have joined the AMWU and agitated for more subsidies for expensive, ugly and shithouse Australian made cars.
.
23 Feb 13 at 7:42 pm
It would be a rather good thing if each
economistpolitician in Australia was required to build one of those parts of their very own, in the company who produces it. On night shift.Fixed that little bugger for you, Bruce.
Winston SMITH
23 Feb 13 at 7:42 pm
wreckage, the germans got around the bombing of the ball-bearing plants by recognising that the tank will be destroyed before the make-shift ball bearing wears out.
Jim Rose
23 Feb 13 at 7:46 pm
The notion that aggregate demand is what drives an economy rather than the premeditated directives of entrepreneurs whose production is entirely financed by the economy’s stock of savings is wilfully inane.
Entrepreneurs invest to earn a return and they have access to credit. Bank credit creates savings.
The nineteeenth century is over Steve.
sdfc
23 Feb 13 at 7:59 pm
Jim, and substitution. Instead of using ball bearings to rest the turrets on, they used roller bearings – cheaper and easier to make. Also the use of Assault Guns instead of Tanks.
Interestingly, both AFV have the same main gun.
Winston SMITH
23 Feb 13 at 8:25 pm
Sorry – just realised I was derailing the fred…
Winston SMITH
23 Feb 13 at 8:28 pm
Didn’t the T34 have the reputation as the most effective tank in the war.
sdfc
23 Feb 13 at 8:33 pm
sdfc, The Germans has good tanks too, but the allies and soviets had lots of tanks and air superiority.
One reason for the air superiority was the bombing of Germany.
Forcing the withdrawal of German fighters to the home fronting conceding air superiority in the east and west. Armaments production and aircraft production was redirected to air defence.
Jim Rose
23 Feb 13 at 9:41 pm
The German we’ll take youse all attitude on was found wanting a couple of occassions.
sdfc
23 Feb 13 at 9:45 pm
SDFC, why Hitler declared war in the USA is the less well-explained aspect of WWII.
Jim Rose
23 Feb 13 at 10:18 pm
Stupidity I suppose.
sdfc
23 Feb 13 at 10:20 pm
I thought the A10 had already done that.
Steve of Ferny Hills
23 Feb 13 at 10:42 pm
Maybe the last military aircraft where the pilot is stick and rudder flying by the seat of their pants, and not a ‘systems manager’.
Absolutely awesome aircraft and awesome capability. It’s no wonder they’ve not been able to retire them despite trying to.
John Mc
23 Feb 13 at 10:53 pm
One reason that the A10 is so good is it was at least partly designed by this guy. I had to hunt for that post pretty hard, because it has one of the best descriptions of him I’ve ever read:
Bruce
24 Feb 13 at 8:34 am