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Comment by WalterBright | Hacker News Reader

His talk makes the mistake that spending money is what drives the economy. This is a fundamental error.

What drives the economy is people creating value. When people have created value, they can exchange that value for things they want from other people who have created value.

Simply handing people money to spend is not stimulative because it does not create value. Put another way, taking money from A and giving it to B so B can buy things from A does not (and cannot) make A wealthier.

The route to greater wealth for A and B is that both A and B specialize in creating things that the other wants. Then, they trade, and each winds up with a higher standard of living than if each tried to do both. Economies are built on the greater efficiency that comes from specialization, and the resulting trade.

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I don't think its fair to describe that as a fundamental error. Rather, your explanation while OK as far as it goes is overly simplistic. Yes, its the real value not the currency that we are after, but you also have to take into account secondary effects like 'aggregate demand'. Perhaps that's an ideological bent of yours or perhaps just omission?

Either way, the process of creating 'real value' on both sides cannot get started in some cases because neither A nor B has any confidence (or capital to support their confidence) that the other side will have the currency to buy the real value they intend to create.

Sure, the currency itself just goes around in circles, and only acts as a catalyst to creation of the 'real value' we are after. But by injecting actual currency to one side or the other (through tax cuts or other means) we increase the aggregate demand and thus amount of flow of this currency in the economy as a whole. This could then (hopefully) increase the confidence of A and B that the other will buy their real value and thus is a way to restart the circular flows of productivity that ultimately creates jobs (and real value).

His talk sort of just assumes you are aware of all the above. His actual point is that by giving tax cuts to the wealthy instead of workers a greater percentage of the stimulus / tax cut stays in bank accounts and thus the effect on aggregate demand is less.

Money in bank accounts is not idle. It is loaned out - and nobody is going to borrow unless they have plans to spend it.

(As eloquently put by Jimmy Stewart in "It's a Wonderful Life".)

Value can be measured in currency. When the target audience of some product has no currency, you could say that economically it has no value. Whereas if you ask these penniless people, they will tell you that it has enormous value to them.

Therefore, placing currency in the hands of the masses can and will drive value creation, because it will assign economic value to what brings value to the masses.

It really is much more complicated than that. Money in bank accounts give the banks the right to create a proportional amount of money, under the assumption that value will be created to match that amount.

> Simply handing people money to spend is not stimulative because it does not create value. Put another way, taking money from A and giving it to B so B can buy things from A does not (and cannot) make A wealthier.

Sure they can, according to some models.

Here's the argument: Say A and B produce goods for each other, and so A might buy something from B for $5, and B might come back and buy something from A with the same $5. They are happily creating value, trading back and forth. Now, say something scares A so that he wants to save some of his money instead of spend. Then B is getting less income from A, and so she also becomes worried about her future income and spends less. Then A gets even less money, and is even less willing to spend. As you can see there is a feedback cycle where A and B produce (and spend) less and less. This is a recession.

Now give B some money, possibly even taken from A. Now B is getting a more reliable income, an is more willing to spend on A, who thus earns more and becomes more willing to spend on B, and so on in positive feedback.

This is basically Krugman's "Babysitting Co-op" scenario.

Nevermind its simplicity, that model is just not an accurate representation of why economic transactions take place. I will only pay you $5 if I value the goods I'm getting in return more than my money, and likewise you will only accept it if you value the money more than the goods. The "babysitting co-op" scenario would only happen if everyone involved ultimately values everything equally, which of course they don't.

I believe the Babysitting Co-op scenario is a little different. The solution there was not to redistribute the scrip but to print more.

This is only true if you believe recessions are caused by a lack of confidence, rather than by negative returns on bad choices.

It also assumes that A stuffs the money into the mattress rather than lending it to C, who uses the money to create something that B wants to buy.

It's a very simplistic two-part scenario and has a lot of problems, not in the least what the 'something scares A' part of it. It also assumes that nobody else wants to buy products from B.

In fact the more I read it, the less I am convinced it has any merit at all.

In fact the more I read it, the less I am convinced it has any merit at all.

Which? The model ealloc describes or the Babysitting Co-op scenario? They aren't actually the same.

I cannot up vote this enough. Value creation is key. One new theory I've been exploring lately is that, while people can value good and bad things (moral and immoral, sustaining and destructive, etc), the creator of value has a responsibility not only to give people what they want, but actually what they deserve. The distinction this makes can be explained with an example:

John makes software for law firms. His software has lots of bugs. John justifies this because he can make more money by adding features and isn't at risk of losing his cash flow because there are no competitors in his space. IMHO, John has an obligation to write better software simply because his constituents deserve it. I also think it could be warranted that he charge even more for it at this point. While I'm not sure bug-free software is a universal good, there are definitely products that ought to be better or not exist (pornography and cigarettes come to mind). The government should not have to regulate these.

Value creation is bullshit. You create job when a. you need a service b. you can't do it with the resource you have c. you can't automate with a machine d. you can afford hiring someone d. the income you generate can support it

Value does not exists per se.

You are so simplicistic here, guys, when you talk about rich and poor.

I know you are not so young, but sometimes it seems you are a group of small kids talking about life.

Thats a good point. Wouldn't the logical conclusion to that point be that it is a mistake to think that a businesses purpose is to create jobs (as opposed to value)?

Yes. Fundamentally, the goal of a business is to create value, in the form of lower prices or better services.

The reason there is so much political emphasis on job creation is that the unemployed are a small but vocal minority, who's political decisions may rest almost entirely on job growth. Whereas value benefits a lot of people in a small way, but value alone probably will not be enough to sway someone's voting decision.

(Not trying to be snarky) Who ever said (or honestly believed) that the purpose of a business is to create jobs?

I've heard it said by several politicians in political speeches. (Not to start a partisan battle, but it my recollection, they were primarily U.S.-ian Democrats.) It's typically couched as a social responsibility to hire, or a responsibility to hire locally rather than outsource/offshore.

Business lives in a community of people , a State. We, as the People, can decide the rules.

Economy has no rules outside the square we create. So, there's no such thing as Economy per se.

You have to remember that the reason a group of people doesn't go out and take what they want is that there is a State, there are laws, there is a monopoly of legitimate force (the police): all of this can survive only if there is a contract between state and the people. All the people, not just the rich or who has a job or <put a category here>

I'm guessing you are from a part of the world that is/was recently totalitarian.

The community of people is far, far more than the State. Cultural/religious norms shape the State and the rules. If corruption is tolerated, for example, it doesn't matter what the official State rules are.

Furthermore, economics are baked in to human nature. Indeed, gender differences are a kind of specialization of labor. Economic activity and surplus allows the creation of the State, not the other way around. In fact, while certain State activities like protecting property rights advances the Economy, most activity by the State is parasitic on the Economy.

if you think economy lives outside a state, you are not paying attention to the number of laws you have to respect. And, by the way, there is no economy without States.

Well, if you think fishing and hunting are economy, go with that.

Your last statement goes against basically all of human history. Economy is the exchange of value (i.e. trade). Trade has always existed, and for nearly all of human history, it existed outside of the state (since there were no states). Even during the age when states began to form, loads of trade took place outside the state's borders (i.e. likely as much trade took place on the silk road as it did at each terminus).

States can certainly make trade easier and safer (though it doesn't always do so), but to say trade cannot exist without the state is simply wrong.

Of course. Hiring people is only done in the service of creating value.

And only if the target audience of that value has currency.

Says Law says it all. No consumption without production first.

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