The Parable of the Asteroid

At Bloomberg Noah Smith explains in the form of a parable why a universal basic income will not work:

Rejoice, people of Earth! News outlets are reporting that NASA is planning to visit an asteroid made of gold and other precious metals! At current prices, the minerals contained in asteroid 16 Psyche are said to be worth $700 quintillion — enough to give everyone on the planet $93 billion. We’re all going to be richer than Jeff Bezos!

OK, now for the bad news: This isn’t going to happen. Yes, 16 Psyche and other asteroids will probably be mined for their metals. But once those metals start hitting the market in large quantities, they’re unlikely to be precious for much longer. As any introductory economics student knows, price is a function of relative scarcity — flood the market with gold, and it will go from being a rarity to being a common decoration. Supply goes up, price goes down.

But in fact, there’s a more fundamental reason why a giant golden asteroid wouldn’t make the world fabulously rich. It’s because wealth mostly doesn’t come from big hunks of metal. It comes from the ability to create things that satisfy human desires.

In addition once people start buying things other than gold with all of that newfound gold the prices of those things will rise in turn and we’ll be right back where we were before all of that gold was plopped on the Earth.

It doesn’t actually matter whether an asteroid made of gold was towed back to the Earth or we just extended credit to ourselves. Sweeping plans like a universal basic income cannot work simply because of the way they are constructed.

That is not to say that nothing should be done to ameliorate the circumstances of the poor. They should! We should try all sorts of carefully designed and painstakingly regulated measures, adopting those that work and abandoning those that don’t. One thing that we might try is to stop subsidizing the rich and the near-rich. An outrageous suggestion but worth a try for the very same reason an asteroid of gold won’t do it.

The very best measure to reduce the burdens of poverty would be a meaningful job which brings benefits that do not arrive in the form of a purse of gold.

6 comments… add one
  • TarsTarkas Link

    A similar situation occurred in the 16th and 17th century when the fabulous mines of the New World flooded Europe with cheap silver, wreaking havoc on the existing monetary exchanges. It also didn’t do Spain a bit of good either, since it all went right out the door to pay for the Habsburgs’ endless wars with France, the Turks, and the Protestant heresies instead of being used to build up the economy.

    But of course this time they’ll do it right. Modern Monetary Theory has all the answers. Just run the printing press, confiscate the estates of ill-gotten wealth, and require all other debts to be paid in full based on the original value.

  • steve Link

    Setser looks at how our tax code, and the recent tax reform, has helped to keep companies and profits offshore.

    https://www.cfr.org/blog/trump-tax-reform-seen-us-balance-payments-data

    Steve

  • TastyBits Link

    Actually, the result would be similar to our Modern Monetary System, but there would be an tangible not fiat value created. Most likely, there would not be a sudden flood of tangible value injected into the monetary-financial system.

    Furthermore, gold has unique properties as a metal, and these would be utilized – gold plated cars.

  • If each person on Earth were given $1 billion of itself it would create no new land, no new houses, no new cars, no new clothing, no new food, etc. The prices of everything would rise very rapidly to absorb the money. The poor would still be poor; the rich would be richer.

    It might impel some additional factories to be built, etc. but I doubt it. We already have tremendous overcapacity.

  • TastyBits Link

    It is a nonsensical thought experiment. There is no theoretical way to simultaneously deliver the gold to everybody, and without a simultaneously delivery, the time differences would produce similar effects as QE1, QE2, …, QEn.

    Gold is a commodity. If you change gold to gasoline, plywood, or solar panels, the result would be similar. If we are going to electrify everything, gold is going to help.

    Gold plating deters rust. Gold is an excellent conductor of heat and electricity. Let’s not forget about gold teeth.

  • Grey Shambler Link

    GOLD!
    I would hoard it!

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