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Money is Not Wealth and the Fallacy of Prosperity Through War


In science, if a theory leads to a result that is not confirmed in nature, then the theory - regardless of how elegant it might be or in spite of the academic pedigree of the person advancing it - is instantly dismissed as bogus.  The same criterion obviously does not apply to economics, or the bogus theories economists confidently advance as subtle truths.  A foundational aspect of modern economic theory holds that governments have the capacity to stimulate the economy simply by spending money.  The most obvious manifestation of this belief is the widespread notion that war-time spending provides a great economic benefit to society.  Indeed, Paul Krugman, Dunce #31, (1), famously told CNN's Fareed Zakaria an alien invasion was the best thing that could happen to the economy;
"If we discovered that space aliens were planning to attack, and we needed a massive build-up to counter the space alient threat, and inflation and budget deficits took second place to that, this slump would be over in eighteen months." (2)

The bogus notion of wartime spending being a path to prosperity overlooks an immutable fact that even the widespread division of labor and the use of money as a transaction medium can't obscure.  This simple fact is all consumers ultimately trade their production for the production of other consumers.  In other words, you can only demand what someone else has first produced.  Before the widespread introduction of money, the only way to acquire goods was through barter or trading.  The classic economic model featured an economy comprised of a butcher, baker and candlestick maker.  If the baker wanted a candlestick, he had to first bake some bread.  Similarly, if the candlestick maker wanted a steak, she had to first make some candlesticks.  

With the introduction of money, it was no longer necessary to barter for goods.  More significantly, the widespread use of money allowed for increased specialization and the division of labor.  No longer was it necessary for a consumer to produce a complete finished good themselves.  Instead, a consumer could be paid with money on the basis of their individual contribution to the entire production process of a particular good.  The consumer could then use the money to purchase the goods they desired without the need to barter.  

However, the use of money and the increased specialization of labor should not obscure the fact that as a member of an economic system an individual is still trading their production for someone else's production.  I worked as a mechanical engineer at several different oil refineries, including a large one just outside New Orleans, LA.  An oil refinery is a complex collection of pressure vessels, piping, valves and rotating equipment.  My salary was - or at least it should have been - based on my contribution to the refinery's total production.  Obviously, I wasn't responsible for producing any of the finished products like gasoline, jet fuel or diesel myself.  Moreover, I didn't go to the local Winn-Dixie, Dorignac's or Rouse's supermarket with a 55-gallon drum of gasoline to "make some groceries." (3)  Nevertheless, the fact that I only played a very small role in the refinery's total production, and I was paid in money, shouldn't obscure the truism that I was essentially trading finished petroleum products for whatever it was I ended up purchasing with my money.  A German proverb of the 17th century provides a succinct summary of the preceding discussion, "The world is like a shop stocked full of goods.  They are on sale for work - toil may buy them."

The concept of trading your production for the production of others immediately exposes the lunacy of basing society's prosperity - even on a temporary or stop-gap basis - on the increased production of weapons.  As a refinery worker, I could essentially trade gasoline or diesel for the goods I desired.  Gasoline and diesel are valuable commodities and are needed by large numbers of people and all types of businesses.  Where does the notion of trading your production for someone else's production leave the worker in an AMRAAM (advanced medium range air-to-air missile) factory?  How many GAU-8 Avenger aircraft canons can you trade for an automobile?  How many Rheinmetall M256 smooth-bore Abrams tank main guns does it take to trade for a house?  To take Paul Krugman's clearly erroneous idea to its logical conclusion, how many of the "ray guns" needed to defend earth from a completely fictitious alien invasion does it take to purchase some bread and milk?

The Krugman's of the world - and all the modern monetary theorists (MMT) for that matter - will argue that the people who work in weapons factories are paid money wages, and merchants will not be able to distinguish the money I earned helping to produce gasoline from the money others earned helping to produce "ray guns."  This is the Keynesian fall back position of using inflation - the increased circulation of money - to obscure the fact that there are no more of the goods that people really want available for purchase, in spite of all the extra money floating around.  In short, the defense proffered by Paul Krugman and others who believe economic wealth can be created by wartime spending is simply the foundational fallacy of modern economic thought - confusing money with wealth.

The primacy of production - and not simply the circulation of money - in the wealth of society was trenchantly expressed by the great Ludwig Erhard, a key-player in Germany's postwar _Wirtschaftswunder (economic miracle);
"May I ask you all where the standard of living comes from if not by production?  Anyone who can suppose that it is possible to raise the standard of living without the necessary production must be living in a world of fantasy or cloud-cuckoo land.  We cannot consume more as a community than we have produced by our communal labor." (4)
How does the production of weapons - which are of no value to consumers - improve a society's standard of living?  The answer is obvious, producing weapons - whether needed in an actual war or a mythical war against fictitious aliens - does not increase society's wealth.  Indeed, by consuming resources of land, labor and capital that could otherwise be used to produce the goods consumers do want, producing weapons decreases the wealth of society!

None of this discussion should be used as justification for getting rid of the defense department or there isn't a need for society to produce weapons to defend itself against external threats.  The discussion merely shows that the production of weapons decreases the wealth of society; it can never increase the wealth of society.  President Eisenhower, who saw far more war than he ever wanted to, understood the true cost of dedicating so many resources to the production of weapons, and explained these costs as  follows,
"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed; those who are cold and not clothed.  This world in arms is not spending money alone.  It is spending the sweat of its laborer, the genius of its scientists and the hopes of its children...This is not a way of life at all in any true sense.  Under the cloud of threatening war, it is humanity hanging  from a cross of iron." (4)

The inability of the Paul Krugman's of the world to see the true costs of producing weapons when President Eisenhower saw them so clearly is the result of Paul Krugman and others confusing money with wealth.  This simple - albeit colossal - mistake has become the foundation upon which much of modern economics is now built.   

Peter Schmidt
10 FEB 2019

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(2) Joe Wesienthal, "Krazy Keynesians" The Truth About Paul Krugman's Alien Fantasy," Business Inside, August 16, 2011,

(3) In New Orleans, people don't go grocery shopping.  Instead, the "make some groceries."

(4) Ludwig Erhard, The Economics of Success, D. Van Nostrand Company, Princeton, 1963, p. 97

(5) Dwight D. Eisenhower, from a speech before the American Society of Newspaper Editors, April 16, 1953