Can I steal from myself? Of course not. Further, I cannot hold too much of my own stolen property. My future plans to dispose of my stolen property cannot be constrained by the possibility that I will have to restore it to its rightful owner, since I will have to restore it to myself.
Similarly, the world cannot steal from itself and the world economy cannot be deprived of its assets. In the absence of expropriation from Mars or Venus, the claim that “the world economy has too much swag” is a misunderstanding. The growth of demand in 2011, 2012 and later cannot be held back by allegedly excessive “global theft”.
These remarks are surely obvious. Nevertheless, a common argument since the meltdown is that an overhang of excessive booty will hold back acquisition and lead to a prolonged period of weak demand.
Substitute “debt” for “theft”, and this is the opening of Tim Congdon’s latest Marketplace column for Standpoint magazine, arguing that debt is no burden on the economy, since there is always a credit to match the debit. The logic is as true for theft as for debt. For every victim who has lost an asset there is a criminal who has gained an asset. And yet it is obvious that an economy in which theft was rampant would be less well off than an economy in which people acquired property only by voluntary exchange.
Tim is treating the economy as a zero-sum game, and assuming that the value of assets remains proportional to the money that was exchanged for them. In reality, wealth can be created or destroyed through changing ownership and use of property. The pie shrinks or expands accordingly.
In the case of theft, wealth is usually destroyed, because the stolen good is worth less to the criminal than it was to its rightful owner. In the case of voluntary exchange, wealth is usually created, because each participant obtains a good that they value more highly than the good that they exchanged (otherwise they would not have agreed to exchange). In the case of debt, whether wealth is created or destroyed depends on the use to which the borrowed money is put.
I lend money to a borrower on the basis that they are able to make better use of it in the short term than I am. If I am right, they repay me with interest gleaned from the profitable use to which the money was put. We are better off. Wealth has been increased. But I might be wrong. In that case, I will not be paid the full amount due. We are worse off. Wealth has been destroyed.
It is little consolation that, until the point of default, the debit and credit remain in full on our respective books. Nor does it help if we distort monetary values and demand through monetary policy, so that the debt is able to be repaid in full in nominal terms. It is not real. If the money has been badly invested, wealth has been destroyed, and nothing can change that.
As an amateur, I hesitate to criticise one of our leading professional economists and defenders of the free market. But Tim seems to me in this article to have crystallized the monetarist philosophy into a form so pure that the underlying errors can be seen clearly through the cubic zirconium intellectual construct.
