It is an old and strange idea that political authority–say, Joe Biden, Donald Trump, or Louis XIV–can “inject money” in the economy. Speaking of a recent federal law, a Wall Street Journal report matter-of-factly mentions “the Inflation Reduction Act, a broad clean-energy, tax and healthcare law that injects nearly $400 billion into the U.S. economy (“Biden Struggles to Push Trade Deals With Allies as Election Approaches,” December 28, 2023).
This formulation can convey a misleading impression, for a dollar injected in the economy by a government is ipso facto extracted from it, either by current or future taxes or by inflation. To speak in terms of real resources, the government has to obtain command over the resources (labor and other inputs) that it needs to divert to its projects.
Keynesian economic theory claimed that during a recession, when many resources are idle, the government could stimulate the economy, even if it paid people to dig holes and refill them (as Keynes’s General Theory of Employment, Interest and Money famously suggested). Such injection was meant as short-run solution but it was bound to become a permanent activity, and it was already drifting there in the General Theory.
Jean-Baptiste Say, the famous 19th-century economist and successful entrepreneur, emphasized the gross error of considering government expenditure as an injection in the economy. In his Treatise on Political Economy (Elliot & Co, for the 4th edition), a translation of the Traité d’économie politique (1803 for the original edition), he wrote:
Madame de Maintenon mentions in a letter to the Cardinal de Noailles that, when she one day urged Louis XIV to be more liberal, in charitable donations, he replied, that royalty dispenses charity by its profuse expenditure. …
When Voltaire tells us, speaking of the superb edifices of Louis XIV, that they were by no means burdensome to the nation, but served to circulate money in the community, he gives a decisive proof of the utter ignorance of the most celebrated French writers of his day upon these matters.
Rulers of course had a personal interest in this sort of voodoo economics. J.-B. Say also quotes Frederick II of Prussia:
My numerous armies promote the circulation of money and disburse impartially amongst the provinces the taxes paid by the people to the state.
The money disbursed by Louis XIV as wages or input purchases came either from taxes that his subjects had been forced to pay or from other exactions such as trade monopolies, sale of government jobs and privileges, occupation of the royal domain, obstacles to private enterprise and social mobility, and so forth.
Whether monarchic or democratic, a government spends its subjects’ money. These expenditures may serve to produce “public goods” for the subjects, but if they are not to result in a waste, the value produced must be higher than the value taken (see my post “Is It True that the State Produces Nothing?”). The question under consideration here is different: Does the mere injection or circulation of money from the government’s expenditures generate something over and above the value of the final goods or services produced for the subjects? The answer to this question is no.
To reformulate Say’s argument differently: The person who gets money from the Prince as wages or profits has to work for it, but he had already worked to pay the taxes that pay his remuneration. The government’s money that circulates and is supposed to benefit him makes him work twice (at least) to get the same remuneration, that is, to allow him the same consumption of private goods. The government does not inject anything that it has not extracted.
READER COMMENTS
roundtree
Jan 7 2024 at 12:28pm
Isn’t this basically the argument against the so-called Keynesian multiplier? I know during Obama’s administration that they reiterated frequently that the multiplier was 1.2 or greater, but there’s no logical way for that to happen (as laid out here).
Scott Sumner
Jan 7 2024 at 1:21pm
In that case, it would be more accurate to say “Cause existing money to circulate more rapidly.” It’s the Fed’s job to inject new money. Fiscal policy works with existing money.
Thomas L Hutcheson
Jan 7 2024 at 6:11pm
The way a real multiplier works in recessions is that some inputs to an expenditure have marginal costs < their market price, so the benefit of the expenditure is greater than the cost by some “multiple.” Just basic CBA; nothing mysterious about about it,
Pierre Lemieux
Jan 7 2024 at 11:22pm
Thomas: “Basic CBA” is probably the most mysterious unicorn in economics (if not in the observable universe). Imagine that: Bureaucrats or consultants horse-trading politicians elected despite Condorcet paradox and Arrow’s Impossibility Theorem, trace the long-term consequences of the actions and reactions of millions of individuals, draw their demand and supply curves, put a money value on the net cost or net benefits to different individuals from all that (neglecting a well-known result that adding Harberger triangles does not measure welfare–such as Samuelson’s “Social Indifference curves”), compare the costs and the benefits, and conclude (nearly always, for that what they are expected to do by those who pay them) that the individuals who lose will not be harmed as much as those who benefit will be favored, and impose their results by the force of laws and regulations. And nearly everybody applauds a scientific achievement and benevolent state action.
Thomas L Hutcheson
Jan 9 2024 at 9:53am
So what criterion do you suggest as an alternative?
Pierre Lemieux
Jan 9 2024 at 11:14am
Thomas: It is certainly better to have no criterion than a patently arbitrary one, isn’t it? Hence Anthony de Jasay’s three liberal principles: “in case of doubt, abstain”; “the feasible is free,” and “let exclusion stand.” (See his Against Politics, which I will soon review in Econlib’s “Liberty Classics.”) If one still believes in the indispensability of the state, pursuing a political-constitutional system where each and every individual, making his own personal cost-benefit analysis, has a net benefit would be the criterion. From this perspective, Buchanan and Tullock’s seminal The Calculus of Consent must be re-read. If that appears too abstract, resorting to more traditional rules and the internal consistency of a liberal system might provide a criterion: after all, there was no CBA at the time of the Enlightenment and the Industrial Revolution, and neither would have passed the magical test of a cost-benefit analysis. If this is still too radical, at the very least please don’t suggest that CBA can resolve any deep problem of “social choice.”
Craig
Jan 7 2024 at 3:33pm
Article made me think of the Mississippi Company and some of the ideas of John Law were adopted by the post-Louis XIV’s regent for Louis XV with respect to Mississippi and soon a bubble was created. Henry Thornton noted: “He (Law) forgot that there might be no bounds to the demand for paper; that the increasing quantity would contribute to the rise of commodities: and the price of commodities require, and seem to justify, a still further increase.” <– you can print the money, but you can’t print the goods.
Pierre Lemieux
Jan 7 2024 at 4:37pm
Craig: If you are the government printing the money, you can “print the goods” in the sense that the new money will allow you to bid away from your subjects the resources you need to build your palace (or whatever). Of course, the government cannot “print the goods” twice–that is, a second time for the subjects from whom it has bid away the resources that would otherwise have been used to, say, grow the food they want.
Craig
Jan 7 2024 at 5:04pm
“If you are the government printing the money, you can “print the goods” in the sense that the new money will allow you to bid away from your subjects the resources you need to build your palace (or whatever). ”
I agree but I do feel like I need to pick a nit here because if I were a counterfeiter, I could print the money and for sure one could say that I am ‘printing the goods’ as you note, but the Secret Service might say that this is, morally ‘stealing the goods’ and so if I might offer a correction, when you write the above quote, perhaps consider: “If you are the government printing the money, you are “stealing the goods”
And here we are thinking the average politician is just your run of the mill oxygen thief.
😉
Pierre Lemieux
Jan 7 2024 at 11:29pm
Craig: Good economic logic! I think it’s better than Thomas’s “basic CBA.” But in polite society and in certain political philosophies, we say “diverting.”
Thomas L Hutcheson
Jan 7 2024 at 6:04pm
You left out the other alternative, that if the monetary authority has an inflation target, the expenditure reduces other expenditures that would have been carried out or financed by the persons who bought the new debt.
Pierre Lemieux
Jan 7 2024 at 11:43pm
Thomas: That’s a good point, but doesn’t it still amount to what I was saying? What the buyer of government bonds would have otherwise financed is, say, the bread factory (or anything that was the object of market demand), leading to a reduction of bread production and consumption. The Prince has still bid away resources from his subjects. There is no way the Prince can finance his projects without diverting away resources from his subjects, either through overt taxes or other ways.
Thomas L Hutcheson
Jan 9 2024 at 9:59am
I did not mean it as a refutation.
Monte
Jan 7 2024 at 6:09pm
Many economists still defend this theory (including current CEA chair Jared Bernstein) in spite of its underlying flaws and poor track record. But Keynesians must, of course, close ranks around it, because to admit that this theory is flawed would be more hurtful to their professional pride than a failure of their policies.
David Seltzer
Jan 7 2024 at 6:16pm
Monte, Friedman said, to highlight the logical folly, “Why not give them spoons?”
john hare
Jan 7 2024 at 6:26pm
Re digging holes and filling them.
In my company there is an expression that “there’s one pot of gray on this job, and the more biscuits there are, the less gravy for each biscuit. And I like a lot of gravy on my biscuit”. Might only make sense in the south where biscuits and gravy is a breakfast item.
Craig
Jan 7 2024 at 6:31pm
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
― John Maynard Keynes, The General Theory of Employment, Interest, and Money
When I read this back in college, I rejected Keynes. It struck me as ‘make-work’ and actually instead of spending time and labor to bury the money which impels people to then unbury it why not just give them the money straight up, after all the work aspect is just a ‘tax’ to get the money they want you to spend. Indeed WW2 often credited with ending Depression, but if so, if sending a gazillion men over to foreign countries to fight is really good for the economy, we could just as well ‘invade Antarctica’ in time of peace and the soldiers will only need to brave the hazards of penguin poo.
Monte
Jan 7 2024 at 6:51pm
Yes! One of Friedman’s many entertaining (and astute) observations I’d completely forgotten about! Thanks for the laugh!
Mike Sproul
Jan 17 2024 at 9:01pm
Craig:
For a different perspective on money injection, see my post on JP Koning’s blog:
Moneyness: Banknotes in bottles in coal mines
Matthias
Jan 12 2024 at 9:54am
The government can inject inject nominal dollars into the economy just fine. I see no problem there.
Separately, they can also cause the people to be able to consume more goods and services, you could measure that in ‘real’ dollars, if you wish. Just don’t confuse the two.
Perhaps the simplest way for the government to do the latter, is to eg repeal wealth destroying regulation like the Jones Act or price controls or tariffs etc.
Knut P. Heen
Jan 18 2024 at 6:32am
I have never read Keynes, but I somehow got the impression from other sources (an interview with Hayek) that “digging holes and refill them” was just one way to put newly created money into circulation. According to the interview, Keynes worried that British labor unions at the time were too strong to lower nominal wages through the normal process. The unions used violence against strike breakers without police interference. Keynes’ proposed solution was to lower real wages through inflation instead. This is at least a story that makes some sense if you believe that the unions don’t understand the difference between real and nominal as Keynes clearly thought.
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