Underground economics and the modern US economy

You know, for a long time I was opposed to the practice of prostitution. Not on moral grounds. Once you deconstruct the religious contentions, there’s not much argument left.

No, the reason I opposed prostitution was on economic grounds. As I saw it, prostitution did not create much wealth. It had no real multiplier effect. Nothing of greater value was ever substantially produced or created.

Suppose, for example, that a certain Mr. John solicited the services of a hypothetical working girl called Barbie. Mr. John indicates his desire–say, “full service, one hour.” Barbie then names her price–oh, I really wouldn’t know, say, $100. The transaction ensues to ultimate completion.

Now, I ask you: Has any additional wealth or economic growth been created as a result of the aforementioned transaction?

No. Clearly it is a straightforward transaction, with no additional benefits accruing to anyone. What we basically have here is a fixed pie, a zero sum game. We have wealth redistribution rather than wealth creation.

Even if Miss Barbie had a manager, and the manager reaped a commission, the transaction would still be static, not dynamic. Mr. John would be $100 poorer; Miss Barbie $100 richer. Even if Barbie divided her earnings with her manager, the money would still remain the same, just divide further; no new industries would be created.
Nothing is created.

The same might be said of gambling. If A bets B that sports team F will defeat sports team G, no matter what the outcome, we basically end up with the same prostitution scenario above: no additional wealth creation, no mighty multiplier effect, no new jobs, no nothing; just a straightforward, direct transaction, with no additional benefits for anyone else.

Here we are essentially dealing with a kind of old fashioned mercantilism: with balance of trade and balance of payments issues. This is the obsolete industrial, pre-information age paradigm (yes, paradigm).

Now suppose we have a going manufacturing concern instead. The situation would be altogether different. Take the garment industry.

First of all, a garment factory would have to be built, which automatically brings revenue and jobs to the construction industry. (The construction industry, meanwhile, now has more money for capital investment or employee training, or whatever it wants to spend on.) But even before that, land needs to be purchased or leased (money for the real estate people). Then we have shipping and insurance. Legal and accounting firms will be needed. Raw materials must be procured. Security guards must be employed. In short, many other multiple transactions take place throughout the entire chain of multiplier effects. Here, far more is at stake. Here, much more money is created throughout.

It seems like a compelling argument indeed. It is, in fact, the argument many pundits exploit to lament the radical transformation (some say evolution) of the American economy, which has gone from a manufacturing dynamo of the early 20th Century to a service and information-dominated economy fast approaching the 21st Century.

“America has gone from producing automobiles and textiles (manufacturing) to flipping burgers at MacDonald’s (service),” many experts complain. So, in a sense, America has gone from garments to gambling and prostitution.

It is a curious development–one highlighted by racy economic indicators: low inflation, a record low unemployment rate, robust GDP growth, and a booming stock market.

If this is a prostitution and gambling-oriented service economy, Americans are in Heaven–or Vegas: What’s the difference? Bring on the babes and roll the dice. I’m game.