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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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Because resources that were consumed to replace a window cannot be used for something else.  See here.

What you are saying is that the glass for the new window cannot be used for something else (as opposed to the money used to buy the window), whereas if the window was not broken it could be?

The baker needs to break his window before he can replace it?  I've never heard of that in my life.  The window could quite possibly be repaired for a lessor cost, but even if couldn't, it could certainly be replaced without taking the effort to break it, and creating a mess to clean up...thus putting extra cost on the baker.

So if the "kid" who threw the rock at the window in Hazlitt's scenario instead carefully removed the window and threw it away, that wouldn't be an example of the broken window fallacy? How about this? They didn't carefully remove the windows, and they made a huge mess. Is that an example of the broken window fallacy--does it destroy wealth? You say a broken window is a broken window.

You wouldn't be just creating an unrealistic businessman just to try and make your example work, now would you?  Not to mention, the window in Hazlitt's story doesn't seem to have this frightening crack that is the driver of your entire scenario.

I am not saying that Hazlitt's scenario doesn't present an example where net wealth is destoyed. Rather, you asked me to present alternative variables where breaking a window could lead to an overall increase in wealth (if we are accepting that as the same thing as my two criteria).

Um.  That is not what you said.  You literally said "His losses are in effect redistributed to the majority".  Redistribution of losses is the same thing as "socialized losses".  When you redistribute something you spread it around among other people.  The only way to redistribute losses is to force other people to pay for someone else's misfortune.  This is also called a "bailout".

Sorry for the confusion. I meant that the property he lost (i.e. the money) was redistributed to other people.

Um.  That's the whole foundation of what we've been discussing.  An overall economy being better off means the population as a whole is wealthier than before.  The entire point of the parable of the broken window is to illustrate that destruction of property does not make the population wealthier, it makes the people poorer overall.

Part of the problem is that what constitutes creation vs. destruction is in no way neutral. In order to make wood for construction, one must destroy a tree. If destruction of property necessarily means that wealth is destroyed, then cutting down a tree necessarily destroys wealth. But if nothing can be destroyed, then how can wealth be created? Isn't it rather more relative than that? Isn't it possible to destroy the "wealth" of those who enjoy hinking in a forest preserve by chopping it down while at the same time creating wealth for those who get to live in houses made from that wood?

Perhaps the thing I find most troubling about Hazlitt's argument is not that he uses it to explain instances where poverty has followed property destruction, but rather that he uses it to explain away instances where the reverse seems to be true. He says, "look, all of the empirical evidence leads you to think that World War II got us out of the Great Depression. But look! I have one highly idealized example that proves that it's not true!"

(Whether WWII really did get us out of the Depression or not, I don't wish to address. I merely assert that such an example that Hazlitt presents is insufficient for drawing such conclusions.)

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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z1235 replied on Sun, Dec 4 2011 6:38 PM

JJ, this subject has been explained to FOTH ad nauseum by many others (e.g. here). I am still dumbfounded by his deliberate misrepresentations of Hazlitt's argument and by his persistently illogical responses. 

 

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Hello, I am a university student currently studying economics and I apologise if this is a silly question.

I have researched the Broken Window Fallacy and understand how the cost to the community is the broken window and that resulting economic activity is merely a redistribution of income.

The Broken Window must be repaired to avoid further damages which means £500 must be allocated to the replacement of the window. It is stated that the opportunity cost for the baker is a new suit which is implied to cost £500 also. However,

In practise the individual might be a saver and will instead choose to save a high portion of the £500, therefore consumption within a given economy will fall. Does this mean that the damages (or high levels of fiscal expenditure), will in fact have a more credible impact on aggregate demand? Is this a fair critique of the Broken Window Fallacy?

 

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z1235 replied on Sun, Feb 19 2012 8:49 AM

Tim Inman:
In practise the individual might be a saver and will instead choose to save a high portion of the £500, therefore consumption within a given economy will fall. Does this mean that the damages (or high levels of fiscal expenditure), will in fact have a more credible impact on aggregate demand? Is this a fair critique of the Broken Window Fallacy?

Tim, welcome. Yes, capital/wealth can be consumed or saved (for postponed consumption). The proportion of capital consumed vs. saved determines the time structure of production (a uniquely Austrian Econ concept). The more consumption has been postponed, the more capital has been saved to be invested into satisfying said consumption in the future.

Yes, moral/ethical issues aside, by stealing my saved $500 and consuming them in my stead you would definitely have a "more credible impact on [current] aggregate demand" but you would have interefered with the structure of production . The  $500 will not be available to be invested towards satisfying future consumption (demand) -- in this case, mine. 

Along the same lines, Keynesians focus on maintaining and supporting (current) aggregate demand (consumption) at all cost while being completely oblivious to what that does to the structure of production. They foolishly think that fiat money (created ex nihilo) is capital and that increased current consumption (of real resources) would have no impact on savings (i.e. ability to satisfy future consumption demand). When their delusions collide with the hard laws of economics (physics, really) they blame "animal spirits" and roll up their sleves to further boost current "aggregate demand" which inevitably makes things even worse going forward.

 

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In practise the individual might be a saver and will instead choose to save a high portion of the £500, therefore consumption within a given economy will fall. Does this mean that the damages (or high levels of fiscal expenditure), will in fact have a more credible impact on aggregate demand? Is this a fair critique of the Broken Window Fallacy?

Yes. The notion that respecting private property "rights" is ipso facto better for the community is ridiculous and dogmatic to the extreme. The reasoning goes something like this:

Why shouldn't we violate property rights?

Because it makes the community worse off.

Why is the community worse off?

Because property rights have been violated.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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z1235 replied on Sun, Feb 19 2012 11:28 AM

FOTH, private property is the means through which postponement of consumption (savings) can occur. Without private property, every economic agent would be incentivised to consume everything in front of him as fast as possible lest someone else does it before him. You're welcome to build a society without private property and prove its sustainability -- not on my property, though. In this light, private property is also the ultimate embodiment of "live and let live" and the Golden Rule. Under private property, you can do/try what you think would work better without dragging everyone else -- kicking and screaming -- down with you.

 

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FOTH, private property is the means through which postponement of consumption (savings) can occur. Without private property, every economic agent would be incentivised to consume everything in front of him as fast as possible lest someone else does it before him.

Kind of like a buffet, where every customer tries to eat all of the food as fast as they can lest others eat it first? Or like how water is free in my city, causing everyone to consume all of the water as fast as possible by say, leaving the shower on 24/7? Or maybe like the library where everyone always has the maximum number of books checked out? Obviously people consume things simply because they are in front of them.

The dichotomy between consumption and production is really absurd anyway. If UPS spends their money on new trucks, they're "saving" their money, "deferring" consumption, expressing their preference for "future goods." While if I spend my money on a car in order to get to my job at UPS, I'm "consuming" my money and expressing a preference for "present goods."

In this light, private property is also the ultimate embodiment of "live and let live" and the Golden Rule. Under private property, you can do/try what you think would work better without dragging everyone else -- kicking and screaming -- down with you.

It has nothing to do with the Golden Rule. Because my employer owns their property does not mean that they treat me the way I want to be treated. Private property is monarchy and totalitarianism--even people like Hoppe have admitted this. The decisions of private property owners directly affects other people. An employer is perfectly able to drag other people down with them. Laying people off, evicting them from their homes, is not "live and let live." Oh, but it is if it respects their private property? Well, that's just begging the question.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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The dichotomy between consumption and production is really absurd anyway. If UPS spends their money on new trucks, they're "saving" their money, "deferring" consumption, expressing their preference for "future goods." While if I spend my money on a car in order to get to my job at UPS, I'm "consuming" my money and expressing a preference for "present goods."
spending your money on transportation to work is a capital expenditure. you are the one who insists that laborers cannot be capitalists, obviously an absurd proposition.
It has nothing to do with the Golden Rule. Because my employer owns their property does not mean that they treat me the way I want to be treated.
because you choose to voluntarily associate with them, they must be treating you in a way that is acceptable to you. This is a matter of definition. If you did not accept it they would not be your employer.
Keep the faith, Strannix. -Casey Ryback, Under Siege (Steven Seagal)
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spending your money on transportation to work is a capital expenditure. you are the one who insists that laborers cannot be capitalists, obviously an absurd proposition.

In that case, the poor spend a higher percentage of their income on capital expeditures. They save more than the rich and yet somehow have less. Therefore, wealth inequality can't be justified or explained based on time preference.

because you choose to voluntarily associate with them, they must be treating you in a way that is acceptable to you. This is a matter of definition. If you did not accept it they would not be your employer.

I chose to voluntarily associate with the city government by moving here. I guess that means that the taxes and laws they impose on me are acceptable to me by definition?

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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In that case, the poor spend a higher percentage of their income on capital expeditures.
define these "poor." also, please explain your methodology in aggregating their expenditure profiles.
I chose to voluntarily associate with the city government by moving here. I guess that means that the taxes and laws they impose on me are acceptable to me by definition?
well that depends on the specific acts involved in your acceptance a payment of taxes and the title to land that you hold. Was this meant to contradict or obfuscate my point about your voluntary association with your employer?
Keep the faith, Strannix. -Casey Ryback, Under Siege (Steven Seagal)
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z1235 replied on Sun, Feb 19 2012 2:45 PM

Fool on the Hill:
Kind of like a buffet, where every customer tries to eat all of the food as fast as they can lest others eat it first? Or like how water is free in my city, causing everyone to consume all of the water as fast as possible by say, leaving the shower on 24/7? Or maybe like the library where everyone always has the maximum number of books checked out? Obviously people consume things simply because they are in front of them.

Typical communist rant -- an insult to strawmen. Yes, private property (and voluntary exchanges of same, i.e. markets) arise in a world with scarcity. If roasted chickens fell from the sky, buffets appeared at the snap of your finger, and drinkable water came out of faucets on its own perhaps private property would not be a fundamentally important determinant of society's viability. In the meantime...

The dichotomy between consumption and production is really absurd anyway. If UPS spends their money on new trucks, they're "saving" their money, "deferring" consumption, expressing their preference for "future goods." While if I spend my money on a car in order to get to my job at UPS, I'm "consuming" my money and expressing a preference for "present goods."

Money is never "consumed". It is merely the medium of exchange. The money you spent on your car is a mere token for the goods or services you've voluntarily exchanged for it in the past -- making the world a better place for all parties involved in those exchanges. The dichotomy is not between consumption vs. production but between present and postponed consumption. So your car represents both present consumption (when you take your girl for a ride in the woods) and postponed consumption (when you use it as saved capital, investment, to drive it to work so you can get paid and be able to afford a car and a house five years down the road). 

It has nothing to do with the Golden Rule. Because my employer owns their property does not mean that they treat me the way I want to be treated. Private property is monarchy and totalitarianism--even people like Hoppe have admitted this. The decisions of private property owners directly affects other people. An employer is perfectly able to drag other people down with them. Laying people off, evicting them from their homes, is not "live and let live." Oh, but it is if it respects their private property? Well, that's just begging the question.

If you don't like how you're treated on someone else's property, leave. If others don't like how you treat them on your property, they can leave, as well. If you think you know best how everyone should be treated, start entering into mutually beneficial voluntary exchanges, acquire capital, postpone its consumption, accumulate your own wealth, acquire property, and implement on it whatever proper society you envision. All other ways of shepherding independent economic agents into strictly following your deluded vision (no matter how benevolent it may be in your view) have been tried and failed miserably -- ask Stalin and Mao.

 

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define these "poor." also, please explain your methodology in aggregating their expenditure profiles.

Someone who lives at subsistence levels necessarily spends a greater proportion of their money on "capital expenditures" (future goods) than someone who spends money on luxury items.

well that depends on the specific acts involved in your acceptance a payment of taxes and the title to land that you hold. Was this meant to contradict or obfuscate my point about your voluntary association with your employer?

I'm showing that you are inconsistent. You are saying that private property is justified because it is voluntary but what is voluntary is determined by it being private property. It's a circular argument. If you want to pursue this point, define what you mean by voluntary.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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Typical communist rant -- an insult to strawmen. Yes, private property (and voluntary exchanges of same, i.e. markets) arise in a world with scarcity. If roasted chickens fell from the sky, buffets appeared at the snap of your finger, and drinkable water came out of faucets on its own perhaps private property would not be a fundamentally important determinant of society's viability. In the meantime...

Well then, why don't you present some evidence to convince me? Oh wait, let me guess, you know this a priori.

Money is never "consumed". It is merely the medium of exchange. The money you spent on your car is a mere token for the goods or services you've voluntarily exchanged for it in the past -- making the world a better place for all parties involved in those exchanges. The dichotomy is not between consumption vs. production but between present and postponed consumption. So your car represents both present consumption (when you take your girl for a ride in the woods) and postponed consumption (when you use it as saved capital, investment, to drive it to work so you can get paid and be able to afford a car and a house five years down the road).

So what is consumption, when I gain enjoyment out of something? (The Austrian definitions for words are always different, so I have to ask.)

If you don't like how you're treated on someone else's property, leave. If others don't like how you treat them on your property, they can leave, as well. If you think you know best how everyone should be treated, start entering into mutually beneficial voluntary exchanges, acquire capital, postpone its consumption, accumulate your own wealth, acquire property, and implement on it whatever proper society you envision. All other ways of shepherding independent economic agents into strictly following your deluded vision (no matter how benevolent it may be in your view) have been tried and failed miserably -- ask Stalin and Mao.

Well, I can just as easily say if you don't like how your treated on your property, you can leave.

When did I ever say anything about shepherding economic agents? What does that even mean? 

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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Prime replied on Sun, Feb 19 2012 11:13 PM

 "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. "

As someone stated earlier, where does the governement get this "new" money? It first had to take it from some other individual X in the economy, and now X is that much poorer. Now X can't purchase what he desires. This entire scenario is just one big giant redistribution scheme and there is no overall net benefit, no overall money multiplier.

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z1235 replied on Mon, Feb 20 2012 8:20 AM

Fool on the Hill:
Well then, why don't you present some evidence to convince me? Oh wait, let me guess, you know this a priori.

Drop "Das Kapital" and read ''Human Action". You are ready.

So what is consumption, when I gain enjoyment out of something? (The Austrian definitions for words are always different, so I have to ask.)

Not sure of the "correct" definition, but I'll give you mine which is close to yours: Satisfaction of wants.

Well, I can just as easily say if you don't like how your treated on your property, you can leave.

Absolutely. And I can just as easily say nothing and just slaughter you, regardless of whose property you're on. I'm sure humanity has tried all of these modalities of social interaction. Social evolution (natural selection) seems to have somehow converged on the concepts of "private property" and "dont just kill whomever bugs you" across continents separated with oceans. Moreover, judging from the few centuries evidence we have, there is a clear correlation between a society's (1) respect for private property (and abundant voluntary exchanges of same) and (2) everyone's ability to satisfy their needs and wants (i.e. wealth). The counter-factuals are also abundant (e.g. Stalin, Mao, North Korea). 

When did I ever say anything about shepherding economic agents? What does that even mean? 

How do you plan to implement whatever vision you have for society?

 

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