Now, this is not a theory of capital like that developed by the Austrian School, beginning with Carl Menger. Instead, it is a theory that says that the construction and addition of capital to the economy is useful mainly in the amount of short-term spending that it brings. Thus, the actual performance of new capital takes a back seat to the fact that when business enterprises purchase the capital, they spend money, and it is that short-term spending that is significant.
For those who might argue differently, Krugman lays out his view in his column that claims the new iPhone will provide "stimulus" to the U.S. economy. True, it seems that others also have drunk the Kool-Aide, and others seem to be even more enthusiastic about this latest rendition of the "Broken Windows Fallacy" than even Krugman (although he does seem to buy into the concept):
A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.Once again, we see the most important element of economic thinking go missing: opportunity cost. The money that people will spend for new iPhones is money that will not be directed in the purchase of other goods. We do not have new "spending" arising from nothing; what we will have is a redirection of how people spend their incomes.
It’s all pretty straightforward. But the implications are wider than most people realize.
The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.
Not surprisingly, Krugman does not end at that point. If you believe in the "iPhone stimulus," he crows, then you believe that more government spending will boost the economy. But, hey, why even stop there?
Why not go whole hog and hope that the invasion of the space aliens comes complete with the Little Green Men stopping at the Apple Stores and elsewhere to buy the iPhones before they set out to destroy the earth. However, if that is their plan, then we should not resist the invasion because doing so would invoke "weaponized Keynesianism," and Mitt Romney supports that, so it must be bad. (Actually, it is bad, but not because Mitt likes it. Yes, Paul, there is more to life than partisan political thinking.)
No, we should not resist because after the Little Green Men With iPhones destroy the earth, we then will have the Ultimate Keynesian Stimulus of rebuilding just about everything. As Krugman writes:
Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was “use, decay, and obsolescence”: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.The Little Green Men With iPhones could accelerate that process, all to the better. In fact, I will slightly change Krugman's next paragraph to demonstrate exactly what I mean:
But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have theSo, all it takes for us to experience new stimulus is for E.T. to phone home. If he does it with an iPhone, all the better.
governmentLittle Green Men With iPhones step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the governmentLittle Green Men With iPhones can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.