Eli Dourado

Is counterfeiting wrong?

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.