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Discussing with a Keynesian -broken window fallacy..need some help!

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Heather posted on Thu, Oct 20 2011 1:14 PM

I just fresh signed up with this site and happen to currently be in a discussion with a guy at work who i will call "Mark". I sent him an email containing Lew Rockwell's article on where he talks about the broken window fallacy. http://www.lewrockwell.com/rockwell/broken-window.html

The following is Mark's response to the article.

OK so I have read the article on the Broken Window Fallacy and here is my critique. I will agree that government spending after disasters does not act as an economic stimulus (via the money multiplier) to those that have suffered a true loss (like a flooded house.) However,  there is a whole segment of companies that do find a way to profit from a natural disaster without suffering an economic loss. Think Home Depot and the extra plywood sales they make. That is true economic stimulus via the money multiplier.  In other works the Broken Window Fallacy only explains one side of the economic equation. Those that suffered a loss.   

 Economic activity is just too complicated to be explained by simple theories and laws.

 Economic activity is so complicated that even the best minds in economics get it wrong all the time.

 Economics attempts to explain or predict human behavior and no one will  ever come up with a formula or theory that correctly predicts human behavior. Impossible! We are irrational creatures.   

If all economists were laid end to end, they would not reach a conclusion.

 

Like i mentioned earlier, i'm pretty new to all of this, but i really want to help enlighten this guy. How do i go about this one?

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Mark:

The Broken Window Fallacy says that the glazer will have to spend his money, to replace the window. Money,  he could have spent on a  new suit Therefore, the whole economy is worse off. The tailor won’t get to sell the glazer a new suit. As an economic argument I would agree with this statement 100%

 However, what really happens is the government steps in and gives the glazer the money to fix his window (new money in the economy) and once again the glazer can afford to buy the new suite. This new money triggers the money multiplier.   

 Now it is an error in logic by using the “well then if disasters and wars are good of the economy we should just destroy buildings and have wars to get us out of this mess” argument. If you want to pump new money into an economy to spur economic growth you can do it in a lot of ways that don’t cause destruction.  An unemployment checks is a much more efficient way of dumping money into a struggling economy. Breaking windows is just terribly inefficient.   

 Aid flows into an area after a disaster to order to help people in need. People that have lost their house, People who’s lives have been destroyed. Making those people whole is the reason we send in aid.

Oh I get it.  So it's not the destruction that makes for the stimulus.  It's the new money that is printed.  Well great.  Why didn't you say so?  Why don't we just skip the bombing stage and go right to printing up a bunch of money and hand it out to people?  Sort of like an "economic disaster aid"...

Why don't we do that?

 

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the government steps in and gives the glazer the money to fix his window

And where does the government get that money? You can't wave the question off... if printing money is of no economic consequence, then why is counterfeiting illegal? Hell, we should want counterfeiting to be legal since this would certainly inject far more money into the economy far faster than the government alone could ever manage.

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z1235 replied on Thu, Oct 20 2011 8:16 PM

Mark:

However, what really happens is the government steps in and gives the glazer the money to fix his window (new money in the economy) and once again the glazer can afford to buy the new suite. This new money triggers the money multiplier.   

Wow, the government with their "new money" comes in, loads up their trick "money multiplier" and abolishes scarcity! With the all powerful, benevolent government -- "new money" in one hand, "money multiplier" in the other -- the broken window could be fixed, a new shop built, and BOTH the shopkeeper and the glazier could each have not one but TWO extra suits, EACH -- only if they were vocal enough to demand some of the "new money" for themselves. ("Yes, they CAN!"). Oh almost forgot, and free education and iPhones... and puppies for ALL! 

 

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Gah. He obviously hasn't read the entire article.

Where does the money for unemployment benefits come from in the first place, buddy?

Edit: Whoops, I didn't notice the second page. Now I feel like a copycat.

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Hey HeathieAK! You also live in Alaska, I presume? I am from Fairbanks.

Anyway, I have a question for you: have you carefully explicated that taxation, being theft, is itself a Broken Window Fallacy?

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I've challenged the broken window fallacy here:

http://mises.org/Community/forums/p/6825/436250.aspx#436250

Maybe the discussion there will help you understand the issues involved and determine what exactly is being contested.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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Heather replied on Fri, Oct 21 2011 12:05 AM

 

 

Hey! i have some bitter-sweet news:

I work four days a week and today is my "Friday" Mark doesn't go on the computer unless he is at work so our debate (and his holding onto his ego for dear life) will have to continue on Monday. 

Some of your points really stirred me, and i want to let you know.

 

Autolykos (who i will now call Spock), when you said,

"This dude apparently has a problem being shown up. You're revealing the depths of his ignorance, at least to himself. So I'm not surprised that he's personally offended and therefore trying to wipe out what he sees as the source of the offense - you." 

I honestly got the chills!

 

John James- all your posts are just great. I like how you kinda get pissed. I really like this excerpt-

"Everything has to be a big question mark because the person talking doesn't have the slightest clue, so the only way he can call anyone else wrong is to say that no one can be right.

It's a common form of rationalization...A philosophical con game people play to make reality fit their own feelings. "I don't have the evidence or knowledge or insight to draw a conclusion, so I'm going to claim no one does."  (see here for an explanation of this)"  

What a Shakespearean  insight into human nature! lol, but really.

 

Clayton-

I appreciated your point when you said, "if printing money is of no economic consequence, then why is counterfeiting illegal?" I hadn't thought of that.

 

RothbardsDisciple-

Cool name, Yeah from Alaska, Ketchikan actually. I haven't explained to him how taxation is the broken-window fallacy because i'm not really sure how it is.

 

I've already learned a lot from you, and reading what you post is so much more fun and feels more personal than reading it in a book. 

After reading your responses (and comparing them to "Marks") my first thought was I definitely know the kind of guy I want to marry…and this is way more fun than Facebook;)

 

 

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HeathieAK:
After reading your responses (and comparing them to "Marks") my first thought was I definitely know the kind of guy I want to marry…and this is way more fun than Facebook;)

I like how you kinda get pissed.

smiley  It's gonna be a lot of fun having you around.  Glad you found our little corner.

Don't forget to check out the new member thread for tips about using the forum.

 

 

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@Heathie: Frederic Bastiat wrote the essay from which the Broken Window originates. It is called That Which is Seen and That Which is Not Seen. When you have time, I recommend reading the whole thing because Bastiat is a very conversational writer. What's amazing is that these same arguments have been going around for over 150 years when Bastiat was writing to refute the very same nonsense, in his day.

Here is the section where he discusses taxes:

Have you ever chanced to hear it said "There is no better investment than taxes. Only see what a number of families it maintains, and consider how it reacts on industry; it is an inexhaustible stream, it is life itself."

...

The advantages which officials advocate are those which are seen. The benefit which accrues to the providers is still that which is seen. This blinds all eyes.

But the disadvantages which the tax-payers have to get rid of are those which are not seen. And the injury which results from it to the providers, is still that which is not seen, although this ought to be self-evident.

When an official spends for his own profit an extra hundred sous, it implies that a tax-payer spends for his profit a hundred sous less. But the expense of the official is seen, because the act is performed, while that of the tax-payer is not seen, because, alas! he is prevented from performing it.

You compare the nation, perhaps, to a parched tract of land, and the tax to a fertilizing rain. Be it so. But you ought also to ask yourself where are the sources of this rain and whether it is not the tax itself which draws away the moisture from the ground and dries it up?

Again, you ought to ask yourself whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation?

There is one thing very certain, that when James B. counts out a hundred sous for the tax-gatherer, he receives nothing in return. Afterwards, when an official spends these hundred sous and returns them to James B., it is for an equal value of corn or labour. The final result is a loss to James B. of five francs.

It is very true that often, perhaps very often, the official performs for James B. an equivalent service. In this case there is no loss on either side; there is merely in exchange. Therefore, my arguments do not at all apply to useful functionaries. All I say is, - if you wish to create an office, prove its utility. Show that its value to James B., by the services which it performs for him, is equal to what it costs him. But, apart from this intrinsic utility, do not bring forward as an argument the benefit which it confers upon the official, his family, and his providers; do not assert that it encourages labour.

When James B. gives a hundred pence to a Government officer, for a really useful service, it is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes.

But when James B. gives a hundred sous to a Government officer, and receives nothing for them unless it be annoyances, he might as well give them to a thief. It is nonsense to say that the Government officer will spend these hundred sous to the great profit of national labour; the thief would do the same; and so would James B., if he had not been stopped on the road by the extra-legal parasite, nor by the lawful sponger.

Let us accustom ourselves, then, to avoid judging of things by what is seen only, but to judge of them by that which is not seen.

...

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HeathieAK:
Thanks again for your input, though i'm not sure he is getting it. In your experience do these people ever quit hardening there brain and open up a little?

I honestly see it as "a war of attrition". People often need time for new ideas to sink in - assuming they're at all open-minded.

HeathieAK:
"Mark" goes on to say;

 It does not matter where the money comes from, any new dollar into an economy acts as an economic stimulus to the recipient of the money. A dollar raised by taxes or given as a donations spends exactly like any other dollar. Trying to expand  the argument from one little shop keeper out to the economy as a whole just does not make the argument work. If that were true you could make the argument that trade does not grow an economy it just merely redistributes wealth.  

Inflation has no place in this discussion at all it is just a red herring.

A tax dollar is not a new dollar into the economy. Neither is a borrowed dollar. The only new dollars put into an economy are those created from thin air. Doing this is the prototypical definition of (monetary) inflation. So despite "Mark's" efforts to stifle mention of inflation, it turns out that inflation isn't a red herring at all.

Trade per se indeed does not grow an economy. What grows an economy is production. How much stuff do we enjoy today vs. people 100 years ago? Where did it all come from?

Simply put, he has all too little understanding of Bastiat's parable. He still doesn't get the point of it.

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HeathieAK:
Regarding the bomb a few cities question "Mark" said;

 I did not argue that wars and natural disasters stimulate the economy. I argued that they bring “new” dollars into the economy in the from of aid. New dollars into an economy are different that old dollars in an economy.

Why does he now put the word "new" in quotes? Either they're new or they aren't, right? I think he should make up his mind.

As I've already mentioned, there are no new dollars unless they're created out of thin air.

"Mark":
The Broken Window Fallacy says that the glazer will have to spend his money, to replace the window. Money,  he could have spent on a  new suit Therefore, the whole economy is worse off. The tailor won’t get to sell the glazer a new suit. As an economic argument I would agree with this statement 100%

 However, what really happens is the government steps in and gives the glazer the money to fix his window (new money in the economy) and once again the glazer can afford to buy the new suite [sic]. This new money triggers the money multiplier.

So where did the government get the money from? If it came from taxes, then guess what? That means the government took the money from someone else already. Therefore it isn't new money. It's only "new" from the point of view of the baker - not the glazier - because he didn't have the money before.

And really, the guy can't even get the parable straight? He's confusing different characters within it, for the mythical Christ's sake. If he can't even keep the baker and the glazier in their actual roles in the parable, I'm not sure how much more we can expect from him intellectually.

"Mark":
Now it is an error in logic by using the “well then if disasters and wars are good of the economy we should just destroy buildings and have wars to get us out of this mess” argument. If you want to pump new money into an economy to spur economic growth you can do it in a lot of ways that don’t cause destruction.  An unemployment checks is a much more efficient way of dumping money into a struggling economy. Breaking windows is just terribly inefficient.

Well at least he sees that breaking windows is destructive. What he doesn't see (pun intended) is that the money government - or any other organization, for that matter! - uses to repair and compensate for damages does not produce any additional wealth. It's even worse with government-provided aid, as that involves essentially breaking some windows to pay for the repair/replacement of others!

"Mark":
Aid flows into an area after a disaster to order to help people in need. People that have lost their house, People who’s lives have been destroyed. Making those people whole is the reason we send in aid.

This is his real argument. You'll notice it has nothing to do with anything he said earlier, aside from sharing the same context. His economic gymnastics are just an effort at rationalizing this argument. There's no need for us to go take the scenic route to it - we can attack it directly.

It comes down to a rather simple question: if person A loses his house, or his life has been "destroyed", do you think that entitles him - or others on his behalf - to go out with badges and guns and steal money from others so that he can be "made whole"?

You'll notice this has nothing to do with economics. It has to do with morality.

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Fool on the Hill:
I've challenged the broken window fallacy here:

http://mises.org/Community/forums/p/6825/436250.aspx#436250

Maybe the discussion there will help you understand the issues involved and determine what exactly is being contested.

Your "challenge" is a clear-cut example of the nirvana fallacy.

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cporter replied on Fri, Oct 21 2011 10:45 AM

Mark:
However, what really happens is the government steps in and gives the glazer the money to fix his window (new money in the economy) and once again the glazer can afford to buy the new suite. This new money triggers the money multiplier.

He is trying to equate those receiving aid money with the baker because both of them have suffered. However, this this is incorrect. Those receiving aid money are the glaziers. Those being taxed are the bakers.

He claims that dumping money into a struggling economy will help it without examining where the money is coming from. There are now other people who have been taxed to supply that money, and those people can't also spend those same dollars on something else. This is no different than Bastiat's example of dumping money into the struggling window glazer economy. In that example, there are now other people (bakers) who lost those same dollars to the glazers and cannot now spend them on something else.

The broken window fallacy doesn't claim that the glazers (the people getting aid money) are no better off for the window being broken. It says that the overall economy is no better off because that money was taken from the baker (those being taxed to provide aid) and now can't be spent elsewhere.

 edit: Oh look, there was a second page. What I'm saying was covered somewhat by Autolykos above, as well.

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Fool on the Hill:

I've challenged the broken window fallacy here:

http://mises.org/Community/forums/p/6825/436250.aspx#436250

Maybe the discussion there will help you understand the issues involved and determine what exactly is being contested.

Is that supposed to be a joke?  I didn't really read the rest of the thread, but skimming over it doesn't look like anyone even addressed it, so I guess they assumed it was?  Are you serious with that scenario stuff?

 

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Wheylous replied on Fri, Oct 21 2011 12:11 PM

cporter, I feel ya :P

I have a question, though: isn't money borrowed from abroad "new money"? I have a friend who says that the US should borrow from abroad to improve the economy, which injects this "new money."

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