Up In Smoke

John Lopez over at No Treason writes,

Every thin dime that this government confiscates is money that will be spent in a manner that doesn’t benefit all parties involved. In principle, as DuToit affirms above, it might be spent well (sort of) on things that (maybe) might be worth doing, kind of. In practice, most of it gets simply wasted. It’s potential wealth that gets lost, just as surely as if you take out a loan and burn the money rather than investing it.

I agree with the point Lopez is trying to make here, but I think this particular metaphor doesn't work. If you take out a loan and burn the money instead of investing it, you may be destroying your own wealth, but you are not destroying "social wealth" - the aggregate wealth of society as a whole. For every dollar you destroy, you have increased the purchasing power of every other dollar still in circulation. Your personal loss is exactly countered by the equal gain of every other currency holder, leaving us with no net loss or net gain to society - a complete wash.

Share this

That is exactly what Lazarus

That is exactly what Lazarus Long, the protagonist of "Time Enough For Love" does to the paper money that has been deposited in his bank.

Look at pages 271-272 to see Heinlein's ingenunity on the matter. You can see the pages online by clicking this link to Amazon's 'Search inside this book' feature, and by using "banking and currency" as the search terms.

Micha, I agree with the

Micha,

I agree with the point Lopez is trying to make here, but I think this particular metaphor doesn’t work. If you take out a loan and burn the money instead of investing it, you may be destroying your own wealth, but you are not destroying “social wealth” - the aggregate wealth of society as a whole. For every dollar you destroy, you have increased the purchasing power of every other dollar still in circulation. Your personal loss is exactly countered by the equal gain of every other currency holder, leaving us with no net loss or net gain to society - a complete wash.

Your basic point is correct, but your last sentence is not.

No interpersonal comparison nor any equality is possible.

All you can really say is no one else will be made worse off if you destroy your own money, assuming that their well-being is not dependent on your future purchasing decisions.

When you destroy a part of your cash balance, no one else is affected unless and until you refrain from bidding up the price of some good as a direct result of your smaller cash balance.

Regards, Don

Don, You may be correct that

Don,

You may be correct that no interpersonal comparison is possible if what we are comparing relates to the value people place on the marginal dollar. After all, with diminishing marginal utility, one dollar to Bill Gates may be valued much less than one dollar to you or me.

However, an interpersonal comparison is possible, and does result in a net wash, if what we are comparing is solely the purchasing power of the dollar. Regardless of whether Bill Gates values the next marginal dollar at much less (or even much more) than we do, the purchasing power of that dollar remains the same whether it is spent by him or by us.

When you destroy a part of your cash balance, no one else is affected unless and until you refrain from bidding up the price of some good as a direct result of your smaller cash balance.

I don't see why it would matter if the destroyer of money himself changes his behavior. Suppose I am incredibly wealthy and control exactly half of the U.S. dollar money supply. If I decide one day to have a great big bonfire and destroy all of my money, the prices of all goods should decrease accordingly, and the purchasing power of all other dollars in circulation should increase accordingly. Just as, when the government decides to create money, the prices of all goods should increase accordingly, as the purchasing power of all dollars in circulation should decrease accordingly.

That said, you may have a point about the speed and influence the creation or destruction of dollars has on the economy. Before burning my money, if I had decided to keep it all under my mattress for long enough, prices may have adjusted so as to ignore the existence of these dollars, since they were not included in regular circulation.

In that sense, you may be correct that prices would not change much if the destruction did not affect my behavior.

"Just as, when the

"Just as, when the government decides to create money, the prices of all goods should increase accordingly, as the purchasing power of all dollars in circulation should decrease accordingly"

But we know this isn't the case Micah, right? I mean, the first recipients of new money benefit at the expense of the late-comers. People on fixed incomes are boned. Debtors benefit at the expense of creditors, etc. Right? And it happens this way because the inflation is pretty much secret, isn't it? Your bonfire would be a ginormous public affair, and would probably like, block out the sun's rays for a few days. Currency debasement, on the other hand, is a thief in the night.

Micha, I don’t see why it

Micha,

I don’t see why it would matter if the destroyer of money himself changes his behavior. Suppose I am incredibly wealthy and control exactly half of the U.S. dollar money supply. If I decide one day to have a great big bonfire and destroy all of my money, the prices of all goods should decrease accordingly, and the purchasing power of all other dollars in circulation should increase accordingly. Just as, when the government decides to create money, the prices of all goods should increase accordingly, as the purchasing power of all dollars in circulation should decrease accordingly.

It is my claim that, assuming a given supply of goods, changes in the purchasing power of the monetary unit in response to changes in money supply can only come about through the means of changes in the buy/no-buy decisions made in response to changes in the relative subjective valuations of purchaseable goods and money.

No matter how much of your money you burn, if you do not as a result refrain from purchases that you would have otherwise made, the purchasing power of money will not change at all.

If you have an alternate method by which changes in the supply of money result in changes in the purchasing power of the monetary unit, please suggest it.

Regards, Don

Wait a moment, how can you

Wait a moment, how can you call somebody destroying his money a destruction of wealth? Isn't the rational economic actor satisfying some higher ranked preference, for instance, perhaps he prefers the warmth and light provided by his monetary fuel source to whatever pleasure he deems he will receive from the use of the money?

So who are we to say he is destroying his wealth?

Please do not burn your

Please do not burn your money. That is against the laws of man and the universe.

You can accomplish the same thing by removing it from circulation by sending it to me. I shall place it with the rest of my wealth and thereby, legally, increase the value of all currency. For fund transfer instructions, visit Get Rich Quick! at http://richardquick.blogspot.com.

Lazarus Long's a good friend of mine. If anyone wants to know what he's been up to, check out www.new-utopia.com

See you on the veranda!

Millionaire Richard Quick, Esq.
Founder, National Association for the Advancement of Wealthy People

Don, my intention was to

Don, my intention was to show how both in voting and in economic matters the acts of one individual are vanishingly small. Yet corporately they are large.
Yes, I agree that free economic exchange produces two winners, a concept sadly omitted from most people’s moral training. In voting one winner takes all, but is constrained and his position is temporary, unless he is president for life like Fidel.
I favor shifting more of the power to the first scenario. Perhaps education is the answer.
Also I am arguing that you can’t escape from the laws of economics by acts of will. I can burn a hundred dollars and I can hold my breath for two minutes. These showmanly acts don’t have any influence in the long haul.

Economic terminology always

Economic terminology always throws me, but it seems as though you have to think of money as a commodity. Sure, it has alternative uses, such as fuel, illumination, mattress stuffing or toilet paper. And it would be used for those things if there were hyperinflation but not otherwise. You could also use platinum bars as doorstops and the diamonds to pave the roads. That would only happen if vast deposits of platinum and perfect diamonds were discovered.
The effect of one or a few persons behaving uneconomically is nil. This is because we assume that economic factors are as powerful as gravity. No significant number of people will fly around without support and no significant number will burn their money.
The effect of one person burning some of his money would be like the effect of one or a hundred persons not voting.
Every time you spend a dollar you vote for a commodity. You hear all the time that voting changes nothing, so voting to abstain from spending by burning money would have no more effect than burning a ballot.

Dave, Economic terminology

Dave,

Economic terminology always throws me, but it seems as though you have to think of money as a commodity. Sure, it has alternative uses, such as fuel, illumination, mattress stuffing or toilet paper. And it would be used for those things if there were hyperinflation but not otherwise. You could also use platinum bars as doorstops and the diamonds to pave the roads. That would only happen if vast deposits of platinum and perfect diamonds were discovered.
The effect of one or a few persons behaving uneconomically is nil. This is because we assume that economic factors are as powerful as gravity. No significant number of people will fly around without support and no significant number will burn their money.
The effect of one person burning some of his money would be like the effect of one or a hundred persons not voting.
Every time you spend a dollar you vote for a commodity. You hear all the time that voting changes nothing, so voting to abstain from spending by burning money would have no more effect than burning a ballot.

The two situations are not parallel.

Voting chooses only one winner, and the margin by which he wins is not, in the end, consequential.

OTOH, every mutually beneficial voluntary exchange produces two winners.

According to the logic of your argument, it would make no sense to pave an inch of roadway since an inch is insignificant in comparison to the wheelbase of an automobile. But, in fact, there is no way to pave a mile of roadway without paving every inch along the way.

Regards, Don

Isn't it worse than just

Isn't it worse than just burning the money? It costs something to burn money - the government takes your money and creates rent seeking opportunities whereby others expend resources to get the subsidy. So if the government takes $2 from you to give to someone meeting XYZ qualities, someone then expends nearly $2 to get the subsidy. Thus it's a -$2 + $2 - $1.99 = -$1.99.

Perhaps the analogy would be better said as the government taking out a loan and then burning the money. Isn't this effectively what the government is doing through deficit spending and inflation?

What nonsense. I don't

What nonsense. I don't understand how you guys could be so confused. One need not consider the money supply, or other actors. Obviously, if someone chooses to burn their money they must value the act higher than the value of holding the cash. Therefore, "social wealth" doesn't merely stay the same but actually increases.

As an example, suppose a rich man with a black heart is in a country where the average yearly income is one hundred dollars. Then if that rich man uses a hundred dollar bill to light an expensive cigar in front of some starving native to express his contempt then obviously the owner of the cash is deriving more pleasure than he possibly could by keeping the money in his pocket. The native is left no poorer by the act and has in fact been schooled as to his place in life. A valuble education. That is, according to certain schools of economics, as far as I can tell. :)

Does that sound about right or have I made a mistake?

Brian, What nonsense. I

Brian,

What nonsense. I don’t understand how you guys could be so confused. One need not consider the money supply, or other actors. Obviously, if someone chooses to burn their money they must value the act higher than the value of holding the cash. Therefore, “social wealth” doesn’t merely stay the same but actually increases.

If someone decides to burn their money they have demonstrated that that they have shifted the economic value of their money from an exchange-valued good to a subjective use-valued good. Since we don't know whether this represents an increase in the use-value or a decrease in the exchange value of the money for the individual involved, there is no conclusion possible about even individual wealth.

Regards, Don

Ghertner's argument might

Ghertner's argument might not be the most correct, but he can sure title a blog post. Subtle yet effective.

Don, True, money can become

Don,

True, money can become valueless during hyperinflation and I would agree that one might burn it for that reason. But I was just having fun. I thought about the example and first wondered what would motivate someone to do so. The first thing that crossed my mind was a rich guy lighting his cigar with a crisp note. I do find similarities in buying luxury goods for display purposes and burning money. I'm not sure economics captures all the nuances of this kind of human behavior regarding social standing. Then again I'm no expert.

Brian, True, money can

Brian,

True, money can become valueless during hyperinflation and I would agree that one might burn it for that reason. But I was just having fun. I thought about the example and first wondered what would motivate someone to do so. The first thing that crossed my mind was a rich guy lighting his cigar with a crisp note. I do find similarities in buying luxury goods for display purposes and burning money. I’m not sure economics captures all the nuances of this kind of human behavior regarding social standing. Then again I’m no expert.

There's no need for money to become valueless for it to be rationally burned by an owner. All that is required is that the marginal unit be more highly subjectively valued in its consumption use in burning than its marginal exchange value given up.

Regards, Don

When paper currency devalues

When paper currency devalues to the point where it is more valuable used as firewood than money we laypeople refer to it as "valueless". There might be special circumstances such as being trapped in a blizzard after a bank robbery where burning valuable money would make sense but that was not what I was referring to.

People get tired of lighting

People get tired of lighting their cigars with hundred dollar bills.

“There’s no need for money to become valueless for it to be rationally burned by an owner. All that is required is that the marginal unit be more highly subjectively valued in its consumption use in burning than its marginal exchange value given up.” Don
Why burn it? Before this course is taken, why not just give it away. For instance you could give it to poor starving Africans. Since many people are genetically and socially programmed to help other people, which may be the basis of all the high-flown talk about ethics, long before you do something as stupid as burning the money, you could contribute it to charity.
Many infamous people such as Rockefeller, Carnegie and now it seems Bill Gates have taken this approach, and Don’s comment explains it. This is where you not only preserve “social wealth” but increase it. Plus you get to write it off.

Brian, Your argument for an

Brian,

Your argument for an increase in social wealth is not advanced by your cigar example. Value may be created for the cigar smoker as he shows contempt for the poor man but the poor man most likely suffers a loss from being humiliated. These benefits and losses can't be measured but I'd like to suggest the unlikelihood of an arrogant American pulling off that stunt in a dark alley or decrepit apartment building in a very poor country.

David Rossie, I was being

David Rossie,

I was being sarcastic. I was poking fun at certain ideas, not advocating them. The smiley face was a big hint. I was "taking a dig" at certain economist. I'm not sure if it is fair dig or not. It might not be fair but I can't think of a reason why it isn't. That's why I asked if I'm right.

I don't think economic theory models certain issues very well. Things such as social standing. Although I think Austrian economics and libertarianism are the best models in their areas I find that my moral compass on rare occasions tends to point it directions that those theories do not account for. Other theories, like Marxism and socialism, almost never point in the direction my moral compass says is right.

BTW, the use of the term "arrogant American" shows a certain bias, don't you think? Americans haven't cornered the market on arrogance.

Your "sarcastic "humor", if

Your "sarcastic "humor", if you want to call it that, was sick and mean-spirited. "Poking fun" at such perversion and then excusing yourself in good jest that you yourself aren't advocating the behavior is about as convincing as a "comedian" goose-stepping in full Nazi regalia in front of an Auschwitz survivor. Jokingly, of course. Lots of laughs, right?

I have no idea what economist you think you're making fun of. Even Rand at her worst was never that hateful.

The fact that your moral compass does not align itself with economic theory, given your humorous views about the plight of the poor and your deep seated, unarticulatable fear of brown people, says worlds more about your moral compass than it says about economic theory.

BTW, the use of the term "arrogant American" shows a certain bias, don't you think? Americans haven't cornered the market on arrogance.

You're doing a bangup job of proving that point.

Not sure how we got to the

Not sure how we got to the conclusion that Macker's got a deep seated fear of brown people from his comment, in poor taste as it was.

Macker's deep seated and

Macker's deep seated and unarticulatable fear of brown people is demonstrated in his comment from a different thread, which I will be discussing shortly in a new blog post.

Brian was making a joke,

Brian was making a joke, which even if tasteless, was just a joke. The skeptic in me hesitates to draw deep-seated motivations from a joke. If that tactic was applied universally, I doubt any of us would be left untouched.

If that tactic was applied

If that tactic was applied universally, I doubt any of us would be left untouched.

You speak for yourself: I'm pristine.

Also, some of the best jokes are mean-spirited. Most of them probably.