Steve Landsburg was at GMU yesterday, giving a talk about his recent book, The Big Questions. His premise is that economics has a lot to contribute to philosophy, and in each of his chapters he addresses a different Big Question from the perspective of an economist/mathematician.
I haven’t read the book, but during the seminar my colleague Will Luther drew attention to this passage from page 171:
Is it okay to steal? Certainly not, and I’ve already told you why: The time and effort you spend stealing things is time and effort you could spend producing things instead. Theft leaves the world poorer than it could have been.
Is it okay to counterfeit? Certainly not, because counterfeiting is stealing. The time and effort you spend producing a phony dollar bill entitles you to a Hostess cupcake or a bus ride or a Blockbuster video rental without adding anything to the world’s stock of food, transportation, or entertainment. The cupcake you eat is made of flour and sugar that someone else could have eaten.
In case it is not obvious, Landsburg’s standard of morality is economic (Kaldor-Hicks) efficiency. “Certainly not” is a strong statement, and Will, who has done some interesting work on the subject of counterfeiting, asked some insightful probing questions. I asked a follow-up question: “Is it okay to counterfeit if the central bank is not being sufficiently expansionary?”
Landsburg looked at me skeptically. “Are you going to keep the seigniorage?” he asked. “Sure. That’s just a distributional question,” I replied. Landsburg thought for a second, smiled, and very graciously admitted he did not have an answer.
It was a fun exchange, but now I wish I had pushed even harder. In my question, the central bank is the first mover and makes an error. As the counterfeiter, all I am doing is correcting the central bank’s error. Let us instead analyze the situation in which the central bank is the second mover and never makes errors.
Suppose that the central bank is planning to undertake the optimal action of increasing the money supply by $200. I am a counterfeiter, and I print up $100 and spend it. The central bank detects that there is an extra $100 in the economy and expands the money supply by $100 instead of $200. The optimal money supply is still produced, leaving efficiency unchanged.
The obvious reply is that the central bank is more efficient at printing money than I am. It already has the Bureau of Engraving and Printing, which is a sunk cost. I have to invest in resources to produce realistic-looking bills, and those resources could go to more productive purposes.
However, there is a reply to the obvious reply. The inefficiency of my printing setup is more than made up for by the extra efficiency with which I spend the seigniorage. The marginal dollar of government spending is spent very wastefully, producing less than a dollar’s worth of output. In fact, I would argue that the marginal dollar produces negative output in the form of enforcing ill-conceived regulations and upholding government-sponsored cartels. If this is the case, then counterfeiting is efficiency-improving.
Despite my small quarrel with the book, it really is self-recommending. Landsburg is a brilliant and fascinating guy. This was my second encounter with him, and it reinforced my recollection that he is also super-nice. You can find his blog here.
Update: Landsburg blogs about the issue here.
What if we took into account the negative effects of perpetrating fraud throughout the economy? You are claiming to have bills that are not real. Also, if the government printing and spending of money is de facto inefficient, you are more likely to make other’s dollars worth less, creating inefficiency similar to the theft argument above.
Ryan, in my second scenario, I am supposing that the amount of “fraud” that takes place is constant. Either the government does it or I do. The negative effects of this should be pretty much identical in either case.
The difference is that when I spend the money, some *real, valuable thing* gets produced. When the government spends it, it does not. That’s what I mean by efficiency and inefficiency.
It sounds like you’re saying that if the government takes longer to spend the money, it will be less inflationary. That may be so, but if the government has a particular target in mind, it will adjust to compensate for this, so I’m afraid that doesn’t refute the argument.
By counterfeiting, wouldn’t you be making it increasingly inefficient to print money (in effect, reducing long-term economic efficiency)? New regulations and perhaps changes to the production of money would become necessary to combat the counterfeiting. The government then ends up wasting more money, and in turn, counterfeiting becomes more costly. The cycle continues, and I would predict that the net outcome is a decrease in total economic efficiency.
Greg, that could be, but I think there is plenty of room to accommodate at least some additional inefficient regulation and nevertheless end up with an efficiency-improving result.
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