In the following video, oft-venerated economist Paul Krugman claims that the U.S. economy would benefit from investment in an alien invasion contingency plan. Unfortunately, this is not a joke.
http://www.youtube.com/watch?v=nhMAV9VLvHA
Krugman's point stems from a fallacious belief held by many "mainstream" Keynesian economists; government spending (regardless of the final product) is a key to economic growth. A favorite anecdote for this school of thought is the idea that World War II was a mechanism for restoring economic stability and rescuing the U.S. economy from the Great Depression.
The following point from economist Art Carden posted at Mises.org dismantles this assumption:
A serious problem arises with government spending: How do we assess something not traded in markets? We can assess my computer, my shirt, and my pen because I voluntarily exchanged money for them. How do we assess government purchases? In the national-income accounting they are valued at cost, but at best this only tells us what those resources could have earned in alternative lines of production. The costs don't indicate the value of what the government has produced.
This problem was compounded by price controls during World War II — official prices simply did not reflect the true cost of the war. If we are going to have meaningful economic calculation, we need real market prices. Price controls and similar interventions introduce arbitrariness and uncertainty. Procurement at below-market prices is a way to mask the cost of any endeavor. Consider the draft, which forces people into military service at wages below what they would earn on the unhampered market. The amount spent on wages and board for conscripts is an underestimate of the real cost of maintaining the force.
In other words, the books are inherently cooked. You cannot gauge true value in a monopoly market. Suffice it to say, you needn't be a mathematical genius to understand the real costs of war.
"War prosperity is like the prosperity that an earthquake or a plague brings." - Ludwig von Mises
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