Monday, December 17, 2012

Spot That Fallacy!

It's time for Spot That Fallacy, the game show in which you, the voter, decide which Keynesian program promises the most, and delivers the least. This week, it's the fixed belief that human labor alone, even without doing anything, is somehow the sole effective factor of production! According to Rick Newman of U.S. News and World Report, a George Mason University economist has explained that,

"Even now, with the U.S. economy in a rut and too many people out of work, productivity is rising, which means a larger population would generate more wealth per person than a smaller one." (Rick Newman, "Why a Falling Birth Rate is a Big Problem," U.S. News and World Report, 12/04/12.)

The concern in the article is that a significant drop in the U.S. birthrate will have disastrous consequences for the economy. We agree. We also agree that, despite all that's going on, the U.S. economy is still the largest in the world, although possibly not the strongest, relative to its size.

Before we address the problem with the professor's logic, however, we'd just like to point out that the article confirms what we've been saying since the "downturn" began in 2008: we are in a depression, not a recession. A decline in the birth rate always happens during bad economic times. People tend not to have children when they can't afford them, and they see no hope of things getting better.

Adolph Berle used the declining birthrate during the 1930s to justify the claim that the U.S. had reached the stage of "economic maturity." Berle claimed that the U.S. therefore needed more direct State control of the economy, possibly even outright ownership of critical industries and companies. The "economic maturity" thesis was one of the arguments advanced to justify the New Deal.

The problem is that if "the population" (a.k.a., "people") don't produce by means of their labor ("jobs") or their capital ("ownership"), exactly how are they producing? The professor seems to accept as a proven fact that, in a developed and growing economy, more people automatically means more wealth is generated per person.

We don't follow his argument. If productivity — typically measured as output per labor hour — is rising, it's because either the numerator is increasing, or the denominator is decreasing in the equation. Since the professor makes the claim that there are "too many people out of work," it is logical to conclude that the denominator, "labor hours," is decreasing.

This gives a "false reading" for the equation.  It creates the illusion of economic growth occasioned by a decrease in the number of people who are employed. Even if the numerator is increasing, however, it is because capital, not labor, is becoming more productive. This results in more wealth around . . . but not more wealth to go around.

Put it this way. Suppose there are ten people in a room. One of them has $1 million. The other nine have nothing. What is the per capita wealth in the room? $100,000. That sounds pretty good . . . until they go out for lunch. The other nine can't spend the first one's money — any more than more people automatically create more wealth just by being born.

Yes, the amount of wealth produced per person may be increasing, but the wealth is going to fewer and fewer people. The fact is, most people don't own a meaningful capital stake. They rely for their income on artificially high wages and benefits, or welfare — both, ultimately, backed up by an increasingly powerful State . . . in a world in which governments are finding it harder and harder to keep the promises they've made so lavishly.

Capital in the U.S. is astonishingly productive, but the productivity of labor is declining rapidly. If something isn't done — and done soon — owners of capital are going to have a very hard time selling the goods and services their capital produces at such an incredible rate to people with no money — and who have no money because (consistent with Say's Law of Markets) they aren't producing anything.

If a Capital Homestead Act were enacted tomorrow, we estimate that within three to five years we would see a complete economic turn-around — and the birthrate would increase . . . if anyone stopped to care about it. As R. Buckminster Fuller claimed in Utopia or Oblivion, poor people have too many children, the middle class has the right amount, and the rich have too few — nor is he the only one to make this assertion. When the economy is justly structured and everyone has the opportunity to be productive, whether through ownership of labor, or of capital, or both, the rate of population growth seems to be matched naturally to the number of people we "need" to keep things running — as if people were made for the economy, and not the other way around.


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