Cargo Cult Economics

December 18th, 2010

By Brianna Aubin

Pretend that you are on a desert island with six other people.  One guy hunts, another fishes, a third collects firewood, the fourth hauls water, the fifth gathers fruits and vegetables, the sixth builds huts, and you … eat.  Yes, that’s right.  Your job is eating.  You pick up seashells off the beach, and give them to the other inhabitants in exchange for fresh fish and palm frond huts, and explain to them as you do how lucky they are that you are there to stimulate their production.  After all, if you weren’t there, who would they sell those coconuts to?  Who would consume their fish fillets and firewood?  And how else would they get all those nifty shells?

The truth is, if this were happening on a real desert island, you would have been tossed offshore a long time ago.  After all, it’s blatantly obvious that you’re not pulling your own weight in this scenario.  You clearly haven’t produced any valuable goods and services.  And those seashells aren’t actually worth anything; they’re just empty tokens that you’re trying to give away in order to pretend to be earning your own keep.

So if this is such an idiotic idea, how come we teach it in economics classes the world over?

Don’t believe me?  Just replace the word “beach” with “Federal Reserve,” the word “seashell” with “dollar bill,” and the word “island” with “America.”  It’s the dominant economic idea of our times.  All we have to do is get Bernanke to turn on the presses and give the dollar bills to the unemployed, who will go out and give them to businesses in exchange for goods and services, and this will stimulate demand and help the economy.  Right?

Well no, not exactly.  Because you see, the unemployed in the real world have done as much to acquire their empty dollar bills as the loafer on the island did to acquire his seashells.  They haven’t produced value.  They haven’t contributed to the economy.  They just used their empty tokens to transfer resources from the productive to the non-productive.  And whether those men were not productive because they were lazy or because they couldn’t find a job is immaterial.  The intentions of the man holding the worthless token do not change the facts of the case.

During WWII, the American forces who landed on Pacific islands to fight the Japanese had planes come in with supplies, some of which they were usually willing to share with the natives.  Once the war was over and the Americans went away, the islanders often tried to imitate the practices of the soldiers in the hope that this would bring them and their wealth back to the islands.  They built crude imitation landing strips, aircraft and radio equipment, and mimicked the behavior of the soldiers they had seen in hopes that these sympathetic gestures would lure planes full of cargo onto the island.  Of course it never worked, and eventually most of the practices stopped.

These groups were called cargo cults, and the label cargo cult eventually came to stand for a group or an idea that imitated superficial behavior while missing the point of the whole exercise.  In the case of the islanders, the point they missed was that while planes do indeed need landing strips in order to land somewhere, a pilot will only fly a plane to a destination if he actually has a reason to go there.  In the case of the Keynesians, the point they missed is that while money is indeed a requirement for modern commerce, money only works when the person who holds it has actually produced something of value in order to acquire it.  Otherwise, it will simply take its value from the goods that someone else has produced, making the man who gives away the empty money in exchange for the goods nothing more than a liar and a thief.

Keynesian spending is cargo cult economics, and printing money to stimulate demand is no more likely to bring wealth to a country than having islanders build straw airplanes and coconut radios.  It does not bring prosperity, merely a transfer of resources from the productive to the non-productive until the productive catch onto the scam and band together to vote the loafers off the island.

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12 Responses to “Cargo Cult Economics”

  1. Brian |

    But, but, but…

    It’s as your friend said, you can only regulate productive activity; the consequences of reality regulate the non-productive, and the Keynesians are attempting to nullify reality.

    If printing money stimulated the economy, then surely the Weimar Republic should have been “stimulated” out of its post-WWI problems, and the Hungarians should have been stimulated out of their post-WWII economic crisis as well. More recently (well, 1993/94 being more recent than the mid-1920s or the late 1940s) with the Mexican government indicating a 90% devaluation of their currency in one fell swoop by lopping the trailing zero off of the “Old Peso” to give a “New Peso” value (100 Old Pesos = 10 New Pesos) should have stimulated Mexico into wealth untold.

    Governments do not ever create wealth, and it doesn’t matter if it’s a tyrannical oligarchy or a “loving, caring” oligarchy. The failure of the USSR is evidence of the former, and the dominoes falling in Western Europe, even as we read and write here, is evidence of the latter.

    I like to call Keynesian economics “magical thinking,” along the same lines as a 5 year old child believing in St. Nick or the Easter Bunny. And if you think about it for a moment, the analogy hits the nail squarely on the head: the 5 year old thinks his toys literally fell out of the sky, when the reality is that the adults provided the bounty. Just substitute “Keynesians” or “the non-productive” for the 5 year old child, and, well, I guess there’s no need to substitute for the word “adult.”

    If we really want to test the Keynesian economic model, we should just print up $300,000,000,000,000,000 and give every man, woman, and child in the United States $1,000,000,000. That should really stimulate us into productivity.

  2. Tom Carter |

    Brianna, excellent work! It’s hard to disagree in principle, but I think there’s a problem with degree. Brian, you take it to the absurd extreme, and while I get the point, I don’t think that’s a valid argument.

    On the specific issue of unemployment compensation, it seems to me that no decent society would be without it. Of course it’s specious to argue that unemployment compensation stimulates the economy, as some have tried to do recently. It may appear to be true in a short-term, looking-through-a-straw sense, but in the long term it tends to create inflation, reduce productivity, and prolong high unemployment. As with almost everything else, there’s a golden mean somewhere between the extremes. Unemployment compensation is a valid social need that government should provide for. The devil is in the details, as usual. Six months of reasonable levels of unemployment compensation is fine. Extending it to a year in unusual circumstances is about the maximum I would think is justifiable. Going beyond that, as we are now, is probably a very bad idea.

    People who advocate limits on the amount of time that unemployment compensation will be paid, as I just did, are often accused of being hard-hearted and not caring about the plight of those who have lost their jobs. I think that’s rarely true. The real point is that public policy has to be formulated on the basis of the best solutions for the most people and the country itself.

  3. Brian |

    Tom, it’s called reductio ad absurdum, as I am sure you are aware. If it’s absurd (irrational) in the extreme, it’s absurd at any level. You may not like that it’s a logically valid argument, but the validity of the argument doesn’t rest on your likes or dislikes, nor mine either. You might dispute the truth of the premises, but you’d be on shaky ground there, as you’ve already asserted that you “get my point.”

    Using the language (semantics) of formal logic doesn’t permit you to change definitions (use of the term “valid” in this context implies an observance of the rules of formal logic) in mid-stream. I would suggest that in place of “valid” that you use the word “agreeable,” since that seems to be what you intended.

    A similar non sequitur would be the assertion that “there are no absolutes,” which would be a contradiction because that assertion itself is an absolute. One cannot employ the rules of formal logic to deny the rules of formal logic. And if you think about it for a moment, you’ve done exactly that. By “getting my point,” you’ve agreed that my argument is both true and valid, and in the very next phrase, you deny the validity to which you’ve just agreed.

    The degree doesn’t change the irrationality nor immorality of it, only the amount of damage that can be done at any given time by it.

  4. Tom Carter |

    “If it’s absurd (irrational) in the extreme, it’s absurd at any level.” That’s self-evidently not true, and painfully so. Ingesting a certain amount of water each day is a good thing; ingesting absurd, extreme amounts of water will kill you. Taxation is a necessary — and I would argue, a good thing because it permits government to function — but excessive taxation reaches a point where no taxes are collected. Running is a good thing; attempting a marathon when you’re not prepared can kill you. A reasonable amount of unemployment compensation is a good thing in several senses; too much for too long has serious negative results. Government spending on public works projects at a reasonable level for projects that are functional and useful is a good thing during certain economic conditions; spending too much at the wrong time on useless make-work projects has negative results. The number of examples is huge.

    Your statement that Keynesian economics can be tested by giving every man, woman, and child a billion dollars is, if you’ll pardon my French, absurd and extreme. The fact is, a reasonable amount of spending at the right time and in the right way will have a stimulative effect. One doesn’t have to be a Keynesian to understand that. In an ideal world it would never be necessary, but the world is rarely in an ideal state.

  5. Dan Miller |

    [T]he world is rarely in an ideal state.

    Ah, Tom, then you disagree with Voltaire’s Dr. Pangloss, the famous professor of métaphysico-théologo-cosmolonigologie and my hero. Indisputably, this is the best of all possible worlds.

    Shame on you, Sir, for disputing his wisdom.

  6. Tom Carter |

    I confess to not knowing a heck of a lot about Dr. Pangloss, and I’m unlikely to correct such an obvious failing any time soon — or ever. I’m more likely to ponder — but not often — where John Galt has gotten off to or when John Frum will reappear.

    I remember when I first came across cargo cults thinking about parallels with organized religion in general. The advantage cargo cults have over other forms of religion is they’re much more fact-based, in that their worship is centered on things that actually, provably, factually did occur. And that’s all I have to say on the subject.

  7. Brian |

    Tom, modal logic is a tricky business, and its employment should be minimized, and that applies double when talking about the legitimate functions of government. An academic question that modal logic might answer is “how many grains of sand does it take to make a sand pile? Does 1 grain makes a sand pile? Do 2 make a pile? 10? 1000?”

    We could apply the same logic to “stimulus spending,” but that sort of spending is too rife with opportunities for abuse, as I’m certain you’re aware. Does stimulus spending “promote the general welfare” of the Republic? I’m sure that some would argue that it does, obviously I don’t.

    Building roads and bridges that will actually promote the general welfare by promoting more efficient commerce are not, and should not be, considered “stimulus.” Businesses that need “stimulating” should fail because they are not meeting their goal of filling some public desire. Businesses grow and thrive by having happy customers. If they don’t have happy customers, throwing “stimulus” money at the failing business isn’t going to produce happy customers. That is the essence of “cargo cult economics.”

    And if you think about it, paying people not to work has the same effect on the economy as throwing stimulus money at businesses that aren’t making happy customers. I’d say the only benefit to unemployment “stimulus” over business “stimulus” is that ultimately, it’s cheaper. At least with unemployment, we aren’t helping to perpetuate pensions that must be paid, we aren’t supporting massive executive compensation packages, we aren’t buying manufacturing resources to make things that nobody wants to buy, thereby making scarce resources even more scarce by increasing the competition for them with other business that actually do have happy customers. That makes the final product more expensive for everybody, including the people being “stimulated” to stay at home.

    Wealth comes from one place, and one place only: the production of goods and services that people want to buy. Government has only 2 legitimate function to that end: protect the producers from plunder, and a physical infrastructure (roads, bridges, ports, etc) that makes commerce equally available to all. The more the government “stimulates” the economy, the fewer resources (labor and material) available to businesses that are actually making things and providing services that people want to buy.

    Stimulating the economy with unearned money harms the economy in several ways. Harming the economy does not promote the general welfare.

  8. Tom Carter |

    I don’t disagree with you in principle, Brian, but you take things to extremes. For example, unemployment compensation, properly designed, doesn’t “pay people not to work.” It helps people and their families who need it when they lose their jobs under defined conditions, and it includes the requirement to take a job if one’s available. I agree that a year or more is too long, and I understand that it can incentivize people not to work in that case. However, that’s not a logical argument to have none at all.

    If you define stimulus as only efforts to provide stimulus to businesses, I think you’ve drawn it too narrowly. Expanded government spending on infrastructure projects during hard economic times does, in fact, stimulate the economy and it produces value and benefits the public good.

    You might want to be a little cautious on condemning recent efforts to stimulate businesses. The results aren’t all in yet. While there were obviously things done that were dumb, a lot of the money is being repaid by businesses that received it, and some companies may have been saved — to the benefit of everyone. We’ll know the real results in a decade or so, when economists and historians look back on this period.

  9. Clarissa |

    “It’s the dominant economic idea of our times. All we have to do is get Bernanke to turn on the presses and give the dollar bills to the unemployed, who will go out and give them to businesses in exchange for goods and services, and this will stimulate demand and help the economy.”

    -Erm. . . seriously? Have you been living in the same country where I live? The Fed is giving all those handouts to the unemployed? Sheesh, where have you been in 2008-10? All those billion-dollar bailouts went to the unemployed?? Or did they, rather, go to Goldman Sachs?

    This is why it’s so hard to take the Conservatives seriously. They never address facts. All they say is framed in terms of hysterical, silly, unsubstantiated emotions. How can anybody seriously discuss the outlandish idea of Bernanke as the champion of the unemployed?

    People who claim to have read Ayn Rand keep creating fantasy land around themselves. The current deficit was caused by the unemployed, sure enough. For those who can’t afford to buy a calculator, surely.

  10. Elisheva Levin |

    Uh, Clarissa, it really doesn’t matter whether the money was given to Goldman Sachs or to people who are unemployed. The principle is the same. The dollars are just so much ink and paper and do not stand for productive work. They are as worthless as a check drawn on insufficient funds. They are monopoly money, and the Fed and others are only hoping you don’t see that until it is too late. When inflation comes, it always hurts the people who get the Federal Reserve Notes last the worst. The first people who pass on worthless money get the face value of it in trade for the items purchased. The last people take it to the merchants, and by then the merchants know they can get nothing for the paper. It’s not worth a “Continental damn!” (as they said about the unbacked Continental Congress notes by 1777). And who gets it last? Not the big houses–the Fed gives it to them first–but the average joe. And the “poor.” And by then, they will be able to trade those worthless pieces of paper for nothing.

    Clarissa, you are straining at gnats while swallowing camels.

    Book suggestion: The Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed. The book does not mention Ayn Rand, or John Galt, so you are safe. Ahamed is a middle of the road economist who describes the slide into the Hell caused by the same kind of monopoly money trades. The slide began with Germany and hyperinflation in the early 1920’s and ended with a Depression in the West, and the Great Depression in the United States. Whether you completely agree with Ahamed’s reasoning or not, the slide into hyper-inflation and inflation, and then depression cannot be denied.

    Purchasing commodities now–clothing, tools, food storage–certainly cannot hurt.

  11. Dale Netherton |

    In the comments is the statement that taxation is necessary for government to function. If you add “as a criminal” that statement might more accurately reflect the reality of how government operates. Taxation is in essence legalized stealing. All other services rely on voluntary contributions and government is nota special case when it comes to how it acquires revenue, People have simply accepted the notion that there is no way people will voluntarily pay for government services. Check you premises. Think outside the box. MIllions are raised voluntarily for campaigns and candidates but no one would contribute voluntarily for government operations? Those who seek capitalism should recognize that a government that can confiscate wealth is a government that is trending away form capitalism and toward statism.

  12. Brianna |

    @Clarissa – the reason I addressed the issue in reference to the unemployed is because I have indeed been seeing the idea in reference to the unemployed. Specifically, Jim claimed that the “consumer was too big to fail” and that giving money to them would stimulate production less than a month ago on this very forum. I’ve also seen it on MSNBC, the Huffington Post, from Nancy Pelosi, and from statements made by Congress and the President when they passed the tax deal that extended unemployment benefits. Elisheva is quite right however; whether those printed dollars are given to the poorest or the richest person in the country, the money is worthless either way unless the person who received it produced something of value to acquire it.

    Incidentally however, since you are the one who brought up a lack of facts, could you please point to the flaw in my logic?

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