Irish Liberty Forum

Idle Resources Explained

with 2 comments

One of the main arguments that stimulus proponents have been making is that there are “idle resources” in the economy right now. Our productive capacity has not changed and our labour force has not lost its skills – yet these factors of production are laying idle. Thus, the government must “stimulate” these factors back into productive use. Any government spending cannot possibly “crowd out” private spending, as there is literally nothing to crowd out. Unfortunately, there is little explanation of why idle resources have piled up in the first place.

Here I will cite Peter Schiff, Tom Woods and Robert Murphy as to why resources are suddenly idle, why stimulating these resources is undesirable, and why targetting idle resources can’t possibly work.

 

In an excellent speech called “Why You’ve Never Heard of the Great Depression of 1920”, Tom Woods cites Peter Schiff’s book Crash Proof. Schiff provides the most succinct illustration of the Austrian Business Cycle Theory I’ve heard:

Let’s suppose a circus comes to a small town, temporarily increasing the population and bringing a surge of business to local merchants. One restaurant owner, however, mistakes the upturn in his business for a permanent increase in demand and proceeds to hire more workers and add a new wing. This is the boom. All is well until the circus pulls up stakes and moves to another town, leaving our restaurant owner with surplus staff and capacity and exposing a malinvestment that must now be unwound. This is the bust. So the bust had to occur to correct for the malinvestments of the false boom that preceded it. Had the increased patronage been the result of a real increase in the town’s population, the expansion would have been economically justified and the bust unnecessary. It is only because the owner misinterpreted the economic signals that there had to be a false boom and a corrective bust. Had the owner tried to prevent the recession by keeping the additional workers on and the new wing open, he would have been looking at bankruptcy. The recession was necessary to restore balance and maintain the viability of the business. [pp. 88-89]

So just like the restranteur mistook increased patronage for a real increase in population, businesses mistook the expansion of money and credit for a real increase in savings and damand. The boom was not real, but rather circus-induced, or in our case central bank-induced.

Now armed with this knowledge, we may confidently ask: why would we want to stimulate resources that have clearly been misallocated? We surely must liquidate and re-allocate them to other ends.

Robert Murphy  argues that government fiscal stimuli cannot possibly target only the idle resources:

To build a bridge requires a lot more than cranes and generic laborers. For example, gasoline will be burned in order to transport the newly employed workers to and from the work site. Nails, screws, steel, lumber, and other resources will be channeled into the new bridge, and at least some of these inputs will be diverted away from other private-sector uses, rather than simply leaving a state of idleness.

Within the broad category of “labor” we find a similar situation, once we actually contemplate doing this project for real. If the city of Houston wants to build a new bridge, is it really the case that every last person even remotely involved with the project, will come from the ranks of the unemployed who are within commuting distance of the Houston bridge site? Surely the project will draw on engineers, construction foremen, and other skilled workers, who were still gainfully employed even amidst the recession, and who therefore will not be able to work on as many private-sector projects as they otherwise would have.

In his speech, Woods mentions the specific example of Barack Obama’s plan to weatherise 1 million homes as part of his fiscal stimulus. Obama recently pumped $5 billion into the Weatherisation Assistance Plan. But Woods objects to this: “there are a lot of unemployed bankers, car makers…but not a lot of weatherisers”. This is the ultimate Keynesian fallacy: not only is capital a homogeneous blob, but so too is labour; all workers are interchangeable for one another, do not need to be retrained and can perform any task they are given.

Argument from idle resources is a half-baked attempt at justifying government deficit spending on an unimaginable scale, and unfotunately, such policies can only prevent real recovery for taking place.

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Written by 20000miles

April 7, 2009 at 7:26 pm

Posted in economics, inflation, USA, World

2 Responses

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  1. Good post however , I was wanting to know if you could write a litte more on this subject?
    I’d be very thankful if you could elaborate a little bit more. Kudos!

    Anonymous

    August 2, 2013 at 1:32 am

  2. I really like what you guys tend to be up too.
    This sort of clever work and exposure! Keep up the terrific works guys
    I’ve incorporated you guys to my own blogroll.


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