I have these ideas that kind of just sit in the back of my mind while I try to piece things together. One of them is,
Is fraud actually stimulative to an economy?
My thinking is this, if fraud creates extra transactions even if they’re not tied to real production, wouldn’t that increase how often money is moving?
And if that’s true, does it just add to velocity like extra noise on top of real activity, or can it actually start to reinforce itself through things like recycled spending, credit, etc. and behave more like a multiplier inside the system?
Basically, is fraud just an additive distortion to velocity?
Or can it create loops that make it look multiplicative, even if real output isn’t increasing?
I’m trying to understand where economists draw the line between actual economic activity vs activity that just looks like growth because money is moving more.
Is fraud a multiplicative or additional effect to the velocity of money?
byu/GoldThenCrypto inAskEconomics
Posted by GoldThenCrypto
1 Comment
That sounds a lot like broken window fallacy style thinking.
Fraud doesn’t necessarily mean “more economic activity”, it’s just shifting it around. If you get scammed for $100 you would otherwise have used to buy new clothes and the fraudster uses that money to buy new clothes for themselves, this doesn’t really matter to “the economy” growth wise.
It could in some sense make a difference if you would have saved this money and the fraudster spends that money on consumption goods instead.
That said, when economists talk about things like “output” or “economic growth”, they usually ultimately mean *real goods and services*. In that regard, the “origin” of the demand is kind of irrelevant. If the economy produces, and people purchase, 10 more cars than last year, that’s economic growth. It doesn’t matter whether the money for those purchases is stolen or not. The 10 more cars are real.
Money velocity is also usually measured as the relationship between the money supply and nominal GDP. It can change if people for instance decide to save more and spend less on consumption goods. Then, nominal GDP and velocity would change.
But it’s unrealistic to expect fraud to have a significant impact. There plainly isn’t that much of it. Big numbers sometimes, sure. But very small numbers relative to the massive GDP of the US.