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whereaminow (77.51)

The Peter Gibbons School of Economics

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March 07, 2010 – Comments (8)

When Peter Gibbons (Ron Livingston) wasn't hammering out TPS reports or watching Kung Fu with his soulmate Joanna (played by the lovely Jennifer Aniston), he was plotting the downfall of the evil Initech Corporation.  Peter and his buddies, Micheal Bolton and Samir Nagheenanajar, would plant a computer virus in Initech's accounting software that would take the fractional remainder of the company's banking transactions and siphon them off into an account they had set up. If they caper worked, they would be set for life and no one would ever know the money was missing. The movie, Office Space (1991), became an instant classic and remains one of my favorites.

Unbeknownst to Peter, his plan would have been perfectly legitimate if he were the Chairman of the Federal Reserve rather than a lowly programmer, working long weekends under Bill Lumber's micromanaging eye.

The Peter Gibbons School of Economics has a simple premise: 

- There is money available for the public good. 
- That money is being hoarded by an evil entity, the capitalist class. 
- Taking that money, if done in very small amounts spread acoss a large number of transactions, has no negative impact on the public good.
- On the contrary, by placing that money in the hands of spenders, the money will flow through the economy, stimulating more demand and employment.

Sounds familiar, doesn't it?

In case you are still fuzzy on how this all works, Peter explains the concept brilliantly to his skeptical girlfriend (I apologize that I don't have the exact lines, but I've seen the movie enough times that my memory is pretty close):

Peter: It's like the tray at the store with all the pennies.
Joanna:  You mean the cripple tray?
Peter:  No, I mean the Take-A-Penny Leave-A-Penny tray.  That's all we're doing.  And it's just a fraction of penny, only we're doing it from hundreds of trays, thousands of times a day.
Joanna:  And how is that not stealing?
Peter: It's not stealing.

Replace Peter with either Alan Greenspan or Ben Bernanke and replace Joanna with Ron Paul and you have the crux of every debate they've had over the last 20 years.

An Interesting Read

Outside of Garet Garrett, my favorite libertarian writer might be Henry Hazlitt. Even though his time covered the New Deal and the post WWII reconstruction, his insights into the workings of modern political economy ring true today.  His observations are brilliant and his logical analysis of the various government schemes for economic planning are devastating.  Unfortunately, those familiar with his work knows that no one in government has ever paid any attention to Mr. Hazlitt.  They repeat the same fallacies over and over and over again. 

The Illusions of Point Four (pdf) is a lengthy essay (48 pages) cutting through the fantastical promises of foreign economic aid.  Specifically concering a plan by Harry Truman called the Point Four Program, Hazlitt's analysis applies to all American efforts to improve the well being of foreign peoples through government aid.  He exposes economic fallacy after fallacy that makes up the core of the aid program and also brings to light the Communist origins of foreign aid programs in general.

One of the best passages concerns the idea of privatizing profits for American investors while socializing losses for American taxpayers. Ha!  Where have you heard that before?

Private enterprise is to be "encouraged." How? By authorizing the Export-Import Bank to "guarantee United States private capital against the risks peculiar to those [foreign] investments Some investments may require only a guarantee against the danger of inconvertibility, others may need protection against the danger of expropriation and other dangers as well."

What is the President here proposing? He is proposing that in order to induce American private investors to risk their funds abroad, we are to allow these private investors to keep the profits of their investment, but to force the American taxpayers to assume the losses. - Hazlitt, The Illusions of Point Four, page 31.

It reminds me of Jorg Hulsmann's opening remarks at Mises University this summer:

I love you..... and I hate government. 

Have a great week!

David in Qatar 

8 Comments – Post Your Own

#1) On March 07, 2010 at 2:47 PM, whereaminow (77.51) wrote:

This article can also be found at Freedom Chatter. I also hope you'll extend your support for fellow FC contributor and Congressional hopeful Jake Towne.

David in Qatar

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#2) On March 07, 2010 at 3:04 PM, sleepreading (< 20) wrote:

LOL... "You know, the Nazi's had flare that they made the jews wear."

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#3) On March 07, 2010 at 4:11 PM, Option1307 (30.54) wrote:

"It was the Jump to Conclusions mat. You see, it would be this mat that you would put on the floor, and would have different conclusions written on it, that you could jump to..."

Ha ha ha, I love that movie!

 

 

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#4) On March 07, 2010 at 4:26 PM, whereaminow (77.51) wrote:

There is a lot more I would love to say on this subject, but in consideration of brevity I decided to keep it short. (Readers have been clamoring for shorter posts here on CAPS.)

(Also, I clearly need to hire an editor. I do proofread, but I never catch all of my mistaks. Ugh.  I apologize.)

So clearly I'm writing this post satirically, but the sad state of affairs is that the policy of moderate inflation operates in exactly the same fashion as Peter's plan to rip off Initech.  And as Joanna points out, it is just as evil.

Inflationism, as an idea, is the premise that economies can only grow if the money supply grows as well.  Therefore, if we keep the money supply growing at 2-4% per year, the economy will have an environment of monetary stability in which to prosper.  This idea is nonsense, of course, but it's not enough to just say so.

To begin with, in practice, the policy works as follows:  when new money is created artificially (i.e. created out of nothing - no production, no labor), it devalues the holdings of every citizen as it steps through the economy.  In other words, prices will rise in the areas where the money is spent, and as the money is circulated throughout the economy, prices rise in general.  This is called The Cantillon Effect of money creation.  Inflationists do not consider this to be a valid theory.  Reality disagrees.

Let's say the money supply is increased by 1% with no correspondening increase in the productiivity of labor.  After the money has stepped through the economy, every person has seen a 1% drop in their overall standard of living.

It's of course more complex than that, but the point is that even if the Fed is only taking a fraction of a penny from every citizen each time it creates excess capital, it is still theft.  Theft is evil because human experience shows that an universal policy of theft is destructive to human affairs.

When you look at America today, you can take the apologists' point of view and consider that the standard of living in America is far greater than it was in 1913, and therefore the policy of Inflationism is a good policy.  However, this a logical fallacy.  There have been multitudes of policies throughout history that have been in place during times of growth that are clearly wrongheaded or downright evil and they still do not break the path of human progress.  Just because a policy exists does not presume that the policy is wise.

What the Inflationists can not see, and what the general public does not see, is the opportunity cost of removing wealth from the general public and placing it in the hands of the politically well connected by the policy of deliberate moderate inflation.

Yes, it could be worse.  But it is little solace to the victim of a robbery in pointing out that he should be thankful his car and 401k account weren't pillaged as well.

We are missing opportunities for growth, opportunities for private capital to be employed by their rightful owners as those owners dim necessary, whenever we take money from them and hand it over to the political class.

You can be thankful for the progress we have made despite the policy of Inflationism, but never forget all the progress that has been lost due to it as well.  Our standard of living and our wealth as a whole would be much higher today without it.

For a more scholarly review of the policy and history of Inflationism, here is Ludwig Von Mises' The Inflationist View of History, excerpted from Human Action.

David in Qatar

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#5) On March 07, 2010 at 4:34 PM, whereaminow (77.51) wrote:

Edit:

(Again, I need an editor!)

After the money has stepped through the economy, every person has seen a 1% drop in their overall standard of living.

I meant a 1% drop in the value of their cash assets or a 1% drop in their income if they are on fixed incomes.  In other words, a theft of 1% of their savings and a 1% reduction in their purchasing power.

David in Qatar

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#6) On March 08, 2010 at 10:47 AM, PeteysTired (< 20) wrote:

whereaminow

Do you think inflationary effects are the same when a gov't spends using borrowed funds as they are when a central bank increase the money supply?

If they are the same, then is one more harmful then the other?

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#7) On March 08, 2010 at 11:40 AM, whereaminow (77.51) wrote:

PeteysTired,

Very good question.  They are not the same, however, excessive borrowing in the past has led governments to monetize their debts (i.e. create money to pay them) and this is very inflationary.  It is uncertain to what extent the Fed is engaging in this practice right now and we won't know unless there is an audit.  If the government merely borrowed money, spent it wisely, and paid it back on time with interest, the inflationary effects would be minimal.  Unfortunately, it doesn't happen this way.

David in Qatar

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#8) On March 08, 2010 at 3:25 PM, USNHR (36.57) wrote:

 If the government merely borrowed money, spent it wisely, and paid it back on time with interest, the inflationary effects would be minimal. 

The way the government and the bankers want you to behave when you borrow money.  One set of rules and expecations for the citizens and another for Uncle Sam.

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