24A006 Fireworks and Holes in the Ground by Jim Davies, 2/6/2024

Suppose three men, employed by government @ $100 a day, spend a day digging a large hole in the ground, and then another day flling it up again. How much has been added to the nation's Gross Domestic Product (GDP)?

(3 x 100 x 2 =) $600 has been spent, but that's not the question. How much has been produced?

Obviously, nothing; for nobody wanted the earth to be shuffled around in that way, no benefit has been added to anybody's life. Notice, it's not the same as turning over the soil in a garden, so that flowers and veggies can grow better; those are results to be valued and enjoyed; but this ex-hole did zilch. There was no product, that anyone wanted to buy.

So if a passing economist wished to measure the mens' contribution to GDP, he would have to record zero; or possibly even minus $600. If he were honest.

But that's not how it's done. If government spends $X, then $X is added to that measure of what the nation has produced. The bland and wicked assumption is that if government did it, the people valued it - at whatever "it" happened to cost. This is the completely false premise of Marxism: that there is an "objective value" to labor, that if a person works diligently for 40 hours a week, he has a right to be paid whether or not anyone wishes to purchase what he produced.

Change the picture to a fireworks factory, whose whole purpose is to fabricate certain chemicals, place them in a small container and attach a fuse. These are offered for sale, and people buy them - because they see value. That value is the pleasure they experience after lighting each fuse and watching spectacular displays of color bursting overhead and filling the sky with patterns.

The whole of the product (except perhaps the stick) burns up with a bang and a puff of smoke, so all the work the employees did, and the raw materials that were bought, vanish. Even so the pleasure, hence the value, remains. That value - the price the fireworks buyer agreed to pay - can validly be added to the GDP.

Change it once more, to a bomb factory. The owners also make products in containers (usually larger) which vanish after use, and which create an even more spectacular bang - destroying not only itself but, whoopee, a good deal of what- or who-ever happens to be standing within range.

With rare exceptions (such as a landscaper who needs to move rock with dynamite) the only buyer of these munitions is government, a monopsonist; and government is buying with someone else's stolen money. Assuming his agents aim straight, the bombs will explode on a rival government's patch, so no loss is suffered by Nation A; the products vanished after use, like the fireworks but without any associated pleasure, but did not attract any additional negative cost. Thus, their net effect on the GDP was zero, but not anything less, because the resulting costs were imposed upon Nation A's government's enemy.

So the GDP is recorded as having been increased by the cost of the bomb because that's what the government spent (like the hole in the ground, above) whereas it ought, rationally, not to have been. The GDP got over-reported.

Should a government wage war, using many bombs etc. and spending a total of one trillion dollars, that trillion gets added, incredibly, to its GDP, the measure of its economic health; the GDP is overstated by that amount. For example, in the table here, "real" GDP for the US from 1938 to 1945 doubled! - and while the unemployment rate tumbled as everyone got to work making or using weapons, the actual standard of living did not rise at all. Arguably it fell, for several goods were rationed and others, not available.

Currently, just that is happening in the War of Russian Independence. European NATO member countries have cut off trade, so damaging their own prosperity quite seriously, but Russia has managed to become more self-reliant by raising its manufactured output. That bit truly adds to its GDP; but it is also rapidly increasing its munitions production which, as just explained, appears to raise its GDP but actually does no such thing.

So although Russian GDP reportedly grew last year at about 3% (quite healthy and twice that of its Westward neighbors) that 3% is overstated. War hurts everyone.

170 years ago this paradox was observed by the French economist Fréderick Bastiat, who called it the "Broken Window Fallacy." If a window is broken, its repair provides work to the glazier; so let's all go break some windows! The fallacy is that if nothing had been broken, the glass worker could have made something new and valuable, that didn't exist before. A mirror, maybe.

And such is war; and there was never a war waged, but by government.