Steven Horwitz

In his September 28 New York Times blog post, Paul Krugman announced that “economics is not a morality play.” That turn of phrase is his way of defending the idea that in unusual times, such as the sort of deep recession we are in, we can get strange relationships between economic cause and effect. The result is that actions which we might find highly distasteful can have positive effects. Thus we cannot afford to be overly concerned with morality if the goal is to get out of the recession.

Specifically, Krugman defends the claim that World War II got us out of the Great Depression, because “this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn’t particularly wise.” Even spending on something destructive like war, he argues, is what is needed to solve the problem, especially when the “political consensus for [domestic] spending on a sufficient scale” is not available. In Krugman’s version of Orwell’s Newspeak, destruction creates wealth, and war, though not ideal, is morally acceptable because it produces economic growth.

Thankfully, we can get behind his Newspeak to see the fallacy of his economics. To believe that spending – any kind of spending – is the cure for what ails us is to ignore the subjective nature of wealth and the microeconomic basis of economic growth in favor of an absolute reification of economic aggregates such as GDP and unemployment. Spending trillions of dollars fighting a war can certainly bring idle capital and labor into employment, driving up GDP and lowering unemployment. But this does not mean we are any wealthier than we were before.

Wealth increases when people are able to engage in exchanges they believe will be mutually beneficial. The production of new goods that consumers wish to purchase is the beginning of this process. When instead we borrow from future generations to spend on goods and services connected not to the desires of consumers, but rather to the desire of the politically powerful to rain death and destruction on other parts of the world, we are not allowing individuals the freedom to do the things they think will make themselves better off. And we are certainly not extending that freedom to those killed in the name of our economy-enhancing war. At a very basic level, the idea that any kind of spending is desirable overlooks the fact that spending on war (and, I would argue, public works as well) actively prevents people from enhancing their wealth through production and exchange linked to consumer demand.

Employing people to dig holes and fill them up again, or to build bombs that will blow up Iraqis, will certainly reduce unemployment and increase GDP, but it won’t increase wealth. The problem of economics is the problem of coordinating producers and consumers. This coordination happens when we produce what consumers want using the least valuable resources possible. That is why it is wealth-enhancing to dig a canal using earth-movers with a few drivers rather than millions of people using spoons, even though the latter will generate more jobs.

Sending soldiers off to war is a waste of human and material resources, and is almost by definition wealth-destroying, no matter what it does to GDP or unemployment rates. The only way one can view economics amorally, as Krugman wishes to, is if one is only concerned with total GDP and not its composition. However, it is the composition of GDP, in the sense of how well what we’ve produced matches consumer wants, that ultimately matters for human well-being. It’s easy to create jobs and generate spending, but those do not constitute economic growth, and they are not necessarily indicators of human betterment.

So yes, Professor Krugman, it does matter how we try to get ourselves out of depressions. The world is not upside down and vices aren’t virtues. War isn’t peace and destruction isn’t wealth-creation. The real solution to digging out of a recession is to remove the barriers to the free exchange and production that actually comprises wealth-creation. Borrowing trillions more from our grandchildren to spend on building the equivalent of pyramids or on blowing up innocents abroad only digs the hole deeper. And when one is reduced, as Krugman is, to saying we “needed Hitler and Hirohito” to get us out of that hole in the 1930s, one has abandoned morality to worship at the altar of economic aggregates.

No critic of free-market economics can ever again accuse us of being irrational and immoral when it is Paul Krugman who says destruction creates wealth, and war is an acceptable second-best path to economic growth. Don’t let Krugman’s Newspeak fool you: War and destruction are exactly what they appear to be. To argue as Krugman does is to abandon both economics and morality. Big Brother would be proud.

Steven Horwitz
for The Daily Reckoning

Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of two books, Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback, and Monetary Evolution, Free Banking, and Economic Order. His work has been published in professional journals such as History of Political Economy, Southern Economic Journal, and The Cambridge Journal of Economics.

  • Kenny the JMR

    Thanks Steven, it is altogether too unusual to see ethical considerations contained in economic conversations. But I for one, consider it essential. It comes back to the Bhudda’s “Right Livelihood” and when viewed from the perspective of wealth production as in farming, planting corn produces corn, peas produce only more peas, and it is just as certain that the seeds of death and destruction will not (no way in hell) create happiness and prosperity for those who plant them.

  • Ian Smith

    Well said Steven. It’s indeed a strange world when your clearly logical concept of economics is rejected in favour of the voodoo nonsence of the big name economists.
    The truth does really set us free.

    Cheers Ian Smith

  • Jerry

    I have been reading my child’s school book, Economics in one Lesson by Henry Hazlitt. Home school curriculum of course. There are rules in economics that never change but seems like are never followed.

  • ben

    Only a academic moron who couldn’t survive a month in the real world would be published in the NYT.
    He keeps doubling down on his stupidity – why do we bother to care what this fool says?

  • Tim

    First of all, Krugman’s thesis shows that he has no moral backbone.

    Secondly, we are actually running two and a half wars at the moment (for those not paying attention Iraq and Afghanistan, and sometimes Pakistan) which have added several trillion to our National Deficit, nonetheless our economy is in shambles anyway. Doesn’t this disprove Krugman’s thesis all on it’s own? If not, how many more wars does Krugman think we need to engage in simultaneously in order to get to economic recovery?

  • Model T

    Winning ‘The Bank of Sweden Prize in Economics in Honor of Alfred Nobel’

    …allows you to say anything, because it proves that you are above reproach from the lumpen unwashed public and all the clinging sycophants in acadamia.

  • Ed

    Somebody tell Krugman that his death will help the economy by way of the funeral home. Let’s see if he’s willing to do his part.

Recent Articles

Can Money Printing Cause Deflation?

Marc Faber

"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...

Forget the Oil Crash – Crush the Market With Biotech Stocks

Greg Guenthner

The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.

How Low Will Oil Go – And What Can You Do?

Matt Insley

The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”

Cuba’s Berlin Wall Moment

Peter Coyne

Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...

The $4 LED Trend You Don’t Want to Miss

Chris Mayer

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.

How to Make the Casinos Pay You for a Change

Greg Guenthner

It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.