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Leaving Holes Undug, Paper Unprinted

Mises Daily: Tuesday, January 20, 2009 by

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I had a busy weekend. I dug a hole, filled it in, and dug it out once again. I shoveled my driveway and then threw the snow back so that I could shovel it a second time. I vacuumed the carpet in our family room, shook out a bag of Cheerio dust, and vacuumed the same as before. Based on the prevailing view of political economy, I worked and therefore eased our economic crisis.

Of course, I haven't been paid for my efforts, but I hear tell that Obama will reward my labor in the near future. His paper payment, though late, will be his way of paying me for a weekend of hard work.

But, is it true that labor alone is the key to fixing our economic woes? Or, do we need to once again produce value based on consumer preferences? Let's take a look.

When Obama pays me for my weekend of repetition, he will be papering over nonsense. I produced nothing, so I have nothing of additional value to bring to the market. In essence, Obama is simply funding a winter planting of Lysenko wheat — he's printing dollars that will reap nothing save bare fields and embarrassment, and if pushed to its logical end, starvation.

Sometimes the easiest way to understand economic truths is to abstract away from paper money. Consider a farmer's market where folks come from afar to truck and barter. To simplify the explanation, let's assume that this market is the only market for our contrived agrarian society.

So farmers and others bring their wares in order to exchange them for what they desire but cannot or do not produce. Would anyone suggest that, in order to improve this society's standard of living, farmers should spend their free time digging holes, only to fill them in again? Of course, such a question is subject to the political views of the day. Certainly, the local Nobel-laureate wannabe might suggest as much, but the farmers would set pitchforks to britches and send this village idiot on his way.

If, on the other hand, someone suggested that, in order to raise the standard of living, farmers save real goods — their produce — to lend to the local ironsmith so that he could produce better plows, the farmers would set pitchforks to ground, lean on the handles and muse, Seems that fellow's onto something.

After the roundabout process is lengthened and new plows brought to market, the farmers would be able to trade for those plows and reap a larger harvest. And it is the larger harvest — the larger supply — that will ultimately lead to an increased demand and improved economic conditions for all.

What if it became evident that our smithy was hopelessly unfit for the task of creating an improved plow? All the invested wares are now sunk, with losses all around. Would our farmers agree to continue funding the hapless ironworker even though nothing of value would ever come from his forge? Or, would the farmers cut off their investment, forcing the smithy to take some other employment so that the forge and iron works could end up in the hands of someone better suited for the task? The questions are rhetorical and the answers obvious.

Next, let's assume that a true crisis hits our society: a late freeze nips most of the early-planted crops. Would our farmers now chase down the village idiot for advice? Would digging holes suddenly make sense? Of course not. The farmers would either attempt a replant or look for other means to produce foodstuff or value for their own survival and trade.

What about a sudden change in preferences? Suppose farmers qua consumers no longer desired (say) parsnips as before. In the short run, farmers who grew parsnips would have to modify their exchange ratios (i.e., lower their prices) in order to clear the market. In the long run, those very same farmers would have to adjust future production to meet demand, or suffer a loss. But no new holes need to be dug.

"When Obama pays me for my weekend of repetition, he will be papering over nonsense."

When we add paper money back into our example, things get a little cloudy. Money becomes the intermediate step in the process when a farmer trades, say, wheat for corn. First, the farmer exchanges wheat for money, and then he exchanges money for corn. Nevertheless, there is no way for additional paper notes to bring more corn or wheat to our market. Paper simply allows the market to be more efficient by facilitating indirect exchanges. That is all paper can do; it can do nothing else.

The blob in DC — regardless of party — wants us to believe that digging holes and printing paper are better than saving wares and improving plows. They want us to believe that only they — and their printing presses — can improve the economy. Why?

The answer is simple: they produce nothing but paper and waste. They are a drag on the economy. Truth told, in spite of their ever-present lapel pins displaying the American flag, the DC folks are unable to guide our economy any better than Kim Jong-il can guide the economy of North Korea.

In order to bring our economy back on track, government needs to get out of the way of entrepreneurs and capitalists. We need to leave holes undug and paper unprinted.