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The Broken Window and the Recession

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Neodoxy Posted: Wed, Aug 1 2012 2:37 PM

Well I've thought that traffic on this site has been a little sparse so this is the first in a number of threads I'm planning to help Spur discussion of Mises.org! cheeky

Now my basic thesis here: The broken window fallacy (the creation of additional demand for its own sake) is economically inefficient and does not increase human welfare or employment because it only takes employment and money from areas where it would have otherwise have seen demand. This is Mises.org 101, why government spending cannot increase employment. With this said this is only relevant at full employment, and during an economic downturn with significant amount of unemployment it might not be the case.

In short the broken window fallacy and the usual explanation of it does not, in and of itself, refute the Keynesian paradigm. This is important because stimulus spending to end the recession is one of the biggest areas where government spending is demanded  today. The Broken Window Fallacy, in its basic state necessitates that the money which would be spent on the broken window, would otherwise have been spent on something else, either invested on producer's goods or spent on consumer's goods. However, if we grant the usual Keynesian assumption that money is merely hoarded during a recession and prices are sticky, then this is no longer the case.

If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window. If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money, thusly boosting the economy from what it would have been. If we assume this on a mass scale, then unemployment will be reduced and output would increase from an increase in general demand, from many broken windows.

If we did not break the windows, and increase aggregate demand, then we're stuck in the recession and below full employment, UNLESS we can prove that there is another way to get out of the recession, and that the market will adjust in some other way or there is another negative aspect to spending, but the movement of resources from a market provided use to a state provided use, and thusly the absence of a gain in net productivity, is not an argument during a recession as such.

So for once and for all, the broken window fallacy in and of itself cannot even touch Keynesianism by itself, and it does not apply during a recession. It is a good mental exercise and an important part of government lies, but it is not a compelling counter argument to normal Keynesianism.

 

 

EDIT In order to reduce the astounding amount of confusion on this thread I would like to make this very clear: I AM NOT ARGUING IN FAVOR OF KEYNESIANISM, I AM MERELY STATING THAT THE BROKEN WINDOW FALLACY BY ITSELF AND UNAIDED BY OTHER ARGUMENTS DOES NOT ADDRESS KEYNESIANISM, however effectively other Austrian arguments can. There are very good Austrian objections to Keynesianism, but the broken window is not so long as we're dealing with the heart of Keynesian work: Recessionary macroeconomics. 

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Bogart replied on Wed, Aug 1 2012 4:03 PM

This is not the case at all:

"this is only relevant at full employment, and during an economic downturn with significant amount of unemployment it might not be the case."

It assumes that labor is completely generic where any unit of labor can be substituted for any other.  This could not be further from the truth.  Labor in any complex economy is extremely specialized.  It can months to years for employers to determine if the crop of those seeking to provide labor is the most profitable.  Furthermore, it takes weeks to months (Probably lots of months) for laborers to train up to the point that they are profitable for their employers.

But also the whole arguments misses the relevance of the Entrepreneur and of Economic Calcuation.

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Neodoxy replied on Wed, Aug 1 2012 4:13 PM

I don't see how the non-specific nature of labor changes the argument.

"But also the whole arguments misses the relevance of the Entrepreneur and of Economic Calcuation."

The broken window fallacy does not take this into consideration either.

I want to make it very clear I'm not arguing for Keynesianism, merely the irrelevance of the fallacy in response to Keynesianism.

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The fallacy is good for refuting world war 2. (u know what i mean)

i think the debate is more of short term vs long term, sometimes if you use stimulus you will see some temporary short term growth (That which is seen, the bubble), but in the long run it isnt any good because inflation will just make everyones money worth less (which is not seen, when interest rates rise again and that new employment is wasteful, and not needed).

Of course we cant ignore the short term, but we cannot also ignore the long term effects.

I think thats right.....

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Why grant the assumption of sticky prices?  Are these being taken as a necessary phenomenon of the market?

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Clayton replied on Wed, Aug 1 2012 5:47 PM

"And now, folks, for the true cause of our unemployment... lack of government spending! Step right up and buy bonds, let's all chip in our part to support the war effort, our boys overseas deserve nothing less than the best! Things might be tight for awhile during this difficult time of credit restructuring and post-structural crisis but rest assured that your government is doing all it can to save the economy and daggumit we'll spend the Moon if we have to in order to get this economy out of this damn slump."

*applause*

(Meanwhile, backstage, Uncle Sam and his thugs actually cause unemployment with minimum wage, union protections, mandatory benefits and other labor demand-killing regulations...)

---------

If you want to cure a patient with an infectious disease, the answer is to stop the infection, that is, to remove the causal factor which is bringing about the diseased condition. Performing rain-dances or sticking pins in a voodoo doll might be a desperate last measure to make the patient feel better but so long as the infection is in operation, the diseased condition will not heal. The government - or its lackeys in academia - cannot credibly prescribe measures to heal unemployment on some speculative theory whilst it is at the same time persisting in actually causing unemployment. Repeal your MW laws, remove union protections (and corporate subsidies while we're at it), end mandatory employment benefits and other labor demand-killing regulations. Then and only then can we talk about whether rain-dances or stimulus spending might or might not further heal the economy.

Clayton -

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Sticky prices are merely friction. Friction is a basic "fix" to perfect neoclassical models, something Austrians do not object to.

That being said, a basic search for sticky prices turns up this:

http://mises.org/daily/4906/Are-Sticky-Wages-a-Market-Failure

http://mises.org/daily/4353/

http://bastiat.mises.org/2012/03/whose-afraid-of-sticky-prices/

http://archive.mises.org/9861/mankiws-differing-views-on-deflation/

There is also this thread:

http://mises.org/Community/forums/t/29535.aspx

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Sticky prices are merely friction. Friction is a basic "fix" to perfect neoclassical models, something Austrians do not object to.

Sure, but there are different degrees of 'stickiness'.  Austrians do not think that market friction prevents recovery.  My questions were leading towards: why grant the assumption that it does?  This doesn't disprove Neo's point concerning the broken window fallacy, but it does argue against the benefits of stimulus in all but the extreme 'short run'.

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If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window. If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money, thusly boosting the economy from what it would have been

This is impossible to prove without interpersonal utility comparison, which is, of course, impossible.


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Neodoxy replied on Wed, Aug 1 2012 10:07 PM

@Kelvin Silia

The biggest refutation of the WWII myth, is that after the war GDP plummeted with the end of spending, and the economy did fine, just as the unions decreased in status, government price fixing ended, and the labor force increased infinitely.

@Aristuppus

Make that argument by all means, it has nothing to do with the Broken Window Fallacy. I agree that those are the type of arguments that need to be made in more intellectual circles, because that comes to the heart of the matter and actually helps to deal with Keynesianism.

@Clayton

Agreed.

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Wheylous replied on Wed, Aug 1 2012 10:28 PM

the labor force increased infinitely.

ಠ_ಠ

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Sure, I agree with you.  The reason I asked why you would need to grant any Keynesian assumptions was due to the fact that your point seems to be that the Broken Window Fallacy has nothing to do with stimulus in recessions even from an Austrian perspective.  We therefore don't really need to bring Keynesianism into it, do we?  Maybe this is splitting hairs but I think it's important since it isn't that Austrian economics concedes this point to Keynesianism and therefore calls the Austrian assumptions into question, but rather that the point is correct even within the Austrian paradigm.

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Ohh yeahh i see since gdp has government spending alo included in it. Tho wouldnt the private consumption part of the gdp calculation go up after the war?

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Wheylous replied on Wed, Aug 1 2012 10:54 PM

According to Woods, private spending didn't go up nearly enough to cover government cuts. I don't exactly get how that would result in increased GDP, but that is a mystery for another thread.

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All the soldiers would come back home and fuck their wives, then after a few years youd see lots of babies.

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Nielsio replied on Thu, Aug 2 2012 5:15 PM

PM from Smiling Dave to my Reddit account:

For various reasons, I cannot post at mises.org for a bit. Could you please go to http://mises.org/Community/forums/t/30256.aspx and post there that I have posted a reply to the OP on my blog at these two links:

http://smilingdavesblog.blogspot.com/2012/08/broken-windows.html
and
http://smilingdavesblog.blogspot.com/2012/08/broken-window-part-two.html

I will appreciate your kindness.

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Is SD having trouble reading mises.org also?  I don't see how the first critique is relevant to the topic at all, since Neo was only talking about the use of the BWF to make a particular point against Keynesianism.  Furthermore, the second part appears to have a straw man:

The question is, is the economy better off before the window was broken, or after? So let's look at this way. The window is there, the money is hoarded, the glazier is unemployed. The poster at mises.org claims we are better off breaking the window, so that the glazier can fix it.

No where that I can see did Neo say that the economy is 'better off' in the way you are talking about here.  He was simply discussing the Keynesian argument concerning employment in a recession.  You didn't demonstrate that he is incorrect in this at all, you simply argued that there are bad consequences that have nothing to do with employment.  If the options are either a permanent economic collapse or your scenario of breaking more and more windows, is not the latter preferable?  It is for this reasion that Neo wrote:

If we did not break the windows, and increase aggregate demand, then we're stuck in the recession and below full employment, UNLESS we can prove that there is another way to get out of the recession, and that the market will adjust in some other way or there is another negative aspect to spending

It is because Austrians think that the recession as a stage of the business cycle is in fact part of the recovery that they would reject your proposal of breaking more and more windows.  But this doesn't say anything against what Keynesians claim are the immediate effects of stimulus in a recession.

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Yeah, can we keep the cursing to only when necessary and not just random cursing?

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Neodoxy replied on Thu, Aug 2 2012 7:22 PM

Okay, Aristippus more or less covered the relevant points, but I feel obliged to respond myself, but I'll keep it brief:

  1. He starts off his reply with a strawman: "Someone over at the mises.org forum came up with a critique of the Broken Window Fallacy, and how it does not apply in the real world". Where did I say that? Nowhere. I should think that it was pretty obvious since it's in the title of the thread, and repeated several times afterwards, that what I was saying only applied during recessions. The Broken Window fallacy is perfectly true, but only under certain situations, just as the economic theorem that inflation of the money supply will cause an increase in  most prices is true, only if there is not net hoarding or large increases in productivity.
  2. Perhaps the above point is why his response has, as far as I can tell, absolutely nothing to do with anything that I've said. He talks about the creation of unproductive jobs, which is only relatively related, but more importantly he ignores the multiplier effect, semi-productive jobs, the metaphor of the broken window, and the Keynesian assumptions, E.G the crux of my entire argument. The broken window fallacy was used by Bastiat in the early 19th century to display that an increase in demand would not increase employment or all-around economic wellbeing. He uses the example of a child breaking a neighbor's window as an example, to help show the absurdity of the idea, and then he goes into an explanation of actual policy suggestions which follow the same basic idea, increasing demand. Because Dave never talks about any of the above, he in no way deals with my argument. Let's give him the benefit of the doubt that every government job is 100% unproductive, well this doesn't matter if through the multiplier effect the government employing a lot of people causes a general increase in employment and output so that overall output and the number of, as he so eloquently puts it, "goodies" in the economy increases as a result of spending. You can argue this was or was not the case, but either way it has nothing to do with the broken window
  3. I agree with just about everything that he says about unproductive state jobs, and it's a very important point to be made and to understand, and it does relate to the broken window fallacy, but not to what we're talking about here, which is the existence of broken windows within a recession.
  4. I appreciate that Dave specifically pointed out my typo and poked fun at me while utterly failing to address a single point that I made.
  5. It's nice to see someone who has the nerve to act like an ass to a Mises Institute member on their own site find a way to reply no matter what it takes...
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"If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window."
 

Windows are not a trivial asset to a business; they are typically a tremendous promotional tool as well as a source of risk.  Given this value, if there is an assumption to be made about the broken window in a recession it is probably exactly the opposite of yours: the higher the unemployment and uncertainty, the more likely it is to be replaced.


"If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money..."

 

Says who?  What's to say the window repair person won't hoard that money just as the business owner would have?

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Neodoxy replied on Thu, Aug 2 2012 8:37 PM

^

I don't think you understand the context of this argument, look up "the broken window fallacy"  or 'the parable of the broken window' on this site. The point is not windows the point is demand creation which could be achieved through breaking windows and the resulting transfer of money to fix it, and furthermore I believe that the window in the parable is supposed to be the window of a house.

Even if the repair person spends just a fraction of the money he receives, then net spending has increased and businesses will do slightly better, but once again, it's about demand creation in general with things like stimulus, not just a broken window.

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Rcder replied on Thu, Aug 2 2012 9:21 PM

Neodoxy,

In a market where all aggressive intervention is absent, wouldn't a situation where sticky wages/prices/interest rates/et al. persist be a product of voluntary human interaction?  If so, wouldn't it be inefficient from a Pareto standpoint to try and increase total spending in an effort to reverse this state of affairs?

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"I don't think you understand the context of this argument, look up "the broken window fallacy"  or 'the parable of the broken window' on this site."

I know the parable, but I have my concerns as to how well you understand it, evidenced further by a subsequent statement of yours:

"...furthermore I believe that the window in the parable is supposed to be the window of a house."

For some reason I don't think Bastiat was being ambiguous when he wrote, "Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass?"  Nor do I think Hazlitt was wrong in his retelling of the parable as, "A young hoodlum, say, heaves a brick through the window of a baker's shop.  The shopkeeper runs out furious, but the boy is gone."

"Even if the repair person spends just a fraction of the money he receives, then net spending has increased and businesses will do slightly better..."

Again, who says so?  Your conclusion relies on the assumption that one instance of demand creation will (indeed, must) produce a flow of demand creation across all "businesses", when there's no logcial reason to believe that should be the case.

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Neodoxy replied on Thu, Aug 2 2012 9:54 PM

I understand the basic idea of Pareto Efficiency, but I'm not certain how it applies in the way you're using it here.

At any rate, while you're perfectly right that it would be an outcome of individual behavior and decisions, but you could also make the argument that the entire scenario is a collective goods problem. It makes sense for everyone to spend and revitalize the economy. It doesn't make sense for anyone to spend, however.

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Neodoxy replied on Thu, Aug 2 2012 9:58 PM

@myhumangetsme

Please forgive me for my mistake.

Are you denying the multiplier effect and the circular flow diagram? And yes, there is a very good reason to believe that money circulation to one person creates eventual demand to a host of other areas. If this wasn't the case money would be useless. It's inherent in its nature that the acquisition of money is meant for future consumption.

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Neo, I have two questions:

1) Are you saying that stimulus in recession really does revitalize the economy in the sense of resulting in a greater satisfaction of wants?  And over the long-term?

2) Is it necessarily the case under the Keynesian paradigm that there is a recession in all areas of production and not, during the overall recession, any room for investment in any line of production?  I can see how this would be the case under Keynes' theory as it followed from his conception of the propensity to consume, but if the problem is merely 'sticky' prices, are all prices necessarily sticky across the board?

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Neodoxy replied on Thu, Aug 2 2012 11:37 PM

"1) Are you saying that stimulus in recession really does revitalize the economy in the sense of resulting in a greater satisfaction of wants?  And over the long-term?"

Oh lord now there's a tough question. At any rate, I'm increasingly having a hard time posing really strong objections to stimulus spending on theoretical grounds as such. That is to say in a world where the government acts perfectly, I'm having a hard time criticizing stimulus. I think that there's a lot of stuff that goes into this, a lot of it dealing with expectations and a shortfall in demand that results from the end of spending. At any rate, yes, I do think that it is POSSIBLE for stimulus to do everything you described above, but I think that it's a very small chance because of one thing; GOVERNMENTS ARE STUPID

This is honestly, and ironically the largest area where libertarians are lacking today. They deal with each and every specific case of government intervention on theoretical or historical grounds, but the fact is that the government could theoretically do a lot of good in the areas of collective goods and externalities, but with this said... They won't, because the incentive structure of the government is god awful. A world in which there is no government failure is a world in which there could be no market failure in the first place.

Any way, back to the question is yea, they could, but it's not likely for a whole host of reasons, but it's important to remember that most of the spending which comes about as a result of stimulus spending is not from the government, but from individual citizens within the market who receive the money somewhere down the line... Multiplier n such...

"Is it necessarily the case under the Keynesian paradigm that there is a recession in all areas of production and not, during the overall recession, any room for investment in any line of production?"

No, not as such. That could or could not be the case, but I think it's assumed that at very leas in areas of high elasticity of demand that they will be recession proof unless things get reeaallly bad.

"but if the problem is merely 'sticky' prices, are all prices necessarily sticky across the board?"

Okay, this is sort of off topic but I've actually heard it said before that price stickiness was not an essential part of Keynes' model as he developed it within the general theory. Having never read the work, I cannot verify or falsify this. It was only when Keynesianism as a whole swept over the economics profession that  this became a standpoint of the ideology... Ironic, I know. I would also bet that post-Keynesians also have a thing or two to say on the matter.

At any rate, I'm pretty sure that prices in general are not assumed to be very sticky, fairly sticky, but not amazingly so. It's mainly wages which are assumed to be sticky, and that's the whole problem, so no, not all prices have to be sticky.

 

 

 

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No, not as such.

In that case, wouldn't the Broken Window Fallacy still apply to a certain extent?

Okay, this is sort of off topic but I've actually heard it said before that price stickiness was not an essential part of Keynes' model as he developed it within the general theory. Having never read the work, I cannot verify or falsify this.

It's true, and that's what I was getting at: Keynes' General Theory is correct assuming his concept of the propensity of consume is correct (which it isn't), but here we are talking about something different and less clear-cut, as you admit (i.e. price stickiness).

It's mainly wages which are assumed to be sticky, and that's the whole problem, so no, not all prices have to be sticky.

Just to clarify, by what means does stimulus counteract this wage stickiness?  Surely not by tricking the wage earners through rising nominal (but falling real) rates?  That can only be a very short-term stop-gap 'solution'.

In order to address the other issues in your last post, I have to clarify the ones presented here first.

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Neodoxy replied on Fri, Aug 3 2012 12:27 AM

"In that case, wouldn't the Broken Window Fallacy still apply to a certain extent?"

Yes, but not to a great degree.

"Just to clarify, by what means does stimulus counteract this wage stickiness?  Surely not by tricking the wage earners through rising nominal (but falling real) rates?  That can only be a very short-term stop-gap 'solution'."
 

It works in two ways. If we assume money printing then what you're talking about will take effect, and to the contrary that is much more likely to work, simply because people have a tendency to look at nominal, and not real wages. If the government taxes/spends money they have stored up then it merely puts more money into the economy so that the old wage levels can be justified on a full employment basis, for instance if it takes 500 dollars to employ everyone in the economy at set wage rates, then consumers must spend that much.

 

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Clayton replied on Fri, Aug 3 2012 12:37 AM

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Yes, but not to a great degree.

Hmm, perhaps some amendments to the original argument are in order, then? (see below)

to the contrary that is much more likely to work, simply because people have a tendency to look at nominal, and not real wages.

But this isn't necessarily the case at all.  By comparing the rise in their wages vs. the rise in other prices, they may demand even higher wage rates to make up for this.  In fact, it could make the situation worse, with higher real wage rates being demanded than before due to the forecast of even more stimulus and price rises, exarcebated due to the illusion of nominal vs. real wage rates.  Not to mention, of course, that 'labour' is not homogeneous.  Again, the effects of the stimulus being discussed in this thread only apply in the extreme short run.

Hazlitt, The Failure of the New Economics p. 18:

The big American
unions all have their ''economists" and "directors of
research," who are acutely aware of the monthly changes in
the official Consumer Price Index. As of January, 1958,
more than 4 million workers, moreover, mainly in the heavy
industries—steel, automobiles, railroads—had insisted on,
and secured, contracts providing for automatic wage increases
with increases in the cost of living. So while it is
true that unions will resist a fall in money wage-rates, even
if it is less than the fall in consumer prices, it is not true
that unions will acquiesce in stationary wage-rates when
consumer prices are rising.

p. 23:

From 1931 through 1939 both money wage-rates
and real wage-rates rose. Money wage-rates rose from
51 cents an hour in 1931 to 63 cents in 1939. In constant
(1954) prices, real wage-rates rose from 91 in 1931 to 122
in 1939.

I think that what you've said in the original post is correct in regard to what Keynes laid out in The General Theory (but again, the cornerstone of his thesis - the propensity to consume - is fallacious).  It doesn't, however, apply in all cases in the Keynesian paradigm which emphasises sticky prices, as you admitted in your last post.  It still can have a Broken Window Fallacy effect, and its effect on increasing overall employment more than would have existed otherwise only applies in the extreme short term.  What do you think?

I really like this thread, and it's good to be able to have such a discussion with intellectually honest users - debating trolls gets tiring after a while.  Also Neo, any chance of getting around to the 'Knowledge and Calculation' thread?

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Rcder replied on Fri, Aug 3 2012 6:07 AM

I understand the basic idea of Pareto Efficiency, but I'm not certain how it applies in the way you're using it here.

If sticky wages and correspondingly a higher level of unemployment are results of the market then forcing movements away from this scenario are Pareto inefficient because they would benefit one set of market agents over another.  For example, if deficit spending was achieved through monetization then this would penalize individuals trying to achieve a higher real cash balance.

At any rate, while you're perfectly right that it would be an outcome of individual behavior and decisions, but you could also make the argument that the entire scenario is a collective goods problem.

Why is it a problem if it's a voluntary scenario?  How can the economy be a good?

 

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Student replied on Fri, Aug 3 2012 1:31 PM
Aristippus: Is it necessarily the case under the Keynesian paradigm that there is a recession in all areas of production and not...any room for investment in any line of production

Neodoxy: No not as such...


Aristippus: In that case, wouldn't the Broken Window Fallacy still apply to a certain extent?

Neodoxy: Yes, but not to a great degree.

If I might interject... :) I agree with Neodoxy on everything until his last response. I would have said "No" or at least "Probably not".  

I think the essential insight of the BWF is about the importance of opportunity cost. In the typical BWF story, by devoting resources to fixing a broken window you are losing all the other things that could have been produced by those resources.

However, during a recession, you have many workers and other resources that would be sitting idle. By devoting those otherwise idle resources to fix the window, you can still produce everything you were producing before the window was broken plus a new window. This should be true regardless of whether all areas of production are "depressed" or only a handful of industries. The important thing is that you would be employing otherwise idle resources.

Of course, employing only otherwise idle resources is easier said than done. How do you know which resources are truly idle? What if there are few unemployed window smiths? How easy would it be for an unemployed brick layer to take a job fixing windows? Those are good questions. And imo they are solid reasons to tink that breaking people's windows is a piss poor way to restore emplyment. But as Neodoxy noted earlier, none of those things are essential parts of the original BWF problem. They also go unmentioned in the way BWF is typically used to critique to Keynesian economics (as here: http://www.youtube.com/watch?v=FMcGTZ6Mc_c).

So, in the end, I think Neodoxy's original point stands. Invoking the BWF in and of itself isn't a solid way to "refute" Keynesian policy perscriptions.

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So, in the end, I think Neodoxy's original point stands. Invoking the BWF in and of itself isn't a solid way to "refute" Keynesian policy perscriptions.

Well I think I can agree with that.  Bringing up the BWF as a core argument against stimulus in a recession isn't really relevant.  Even if the stimulus inhibits certain lines of production as in the case of the broken window, it is taken that the goal of restoring employment is more pertinent than is avoiding broken windows.  I just wanted to note that some windows can, in fact, still be broken in the process.

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"I think the essential insight of the BWF is about the importance of opportunity cost."

I really am starting to wonder if I've missed a better version of the BWF than those of Bastiat and Hazlitt, because in their writings, the essential insight seems to be that you cannot create wealth by destroying it.  That stimulus, and indeed most Keynesian policy, destroys wealth in an attempt to create it is not even in question

And as I pointed out before, there's no reason to believe the Keynesian assumption that, in a recession, a policy that creates spending in one place will in turn snowball into all manner of spending in the market; the mere fact of being the recipient of such spending does not necessarily mean that they, too, will become a spender.  The only way such policies could be assured of anything approaching success is, well, to continually destroy so people will continually spend.  Are we really wealthier at the end?

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Neodoxy replied on Sun, Aug 5 2012 7:15 PM

Aristippus

"Hmm, perhaps some amendments to the original argument are in order, then?"

I don't think it's worth mentioning, just as, for instance, perhaps after having his window broken the store owner some sort of revelation about how great his life really is because most of his windows weren't broken which he wouldn't have otherwise had. It's a possibility, but not really likely and not incredibly relevant.

Unions are important but somewhat different than what we are talking about. It really is impressive exactly how much mass unionism really changes the labor market. We've been talking about a "normal" decentralized labor market. While unions have the power and will to restrict the supply of labor while under non-unionized circumstances this does not exist. Indeed as we know the reason for sticky wages is often specifically that people don't really realize that real wages in relation to monetary wages have risen, or that they are not fully able to adapt to this fact.

Also, when you say that the marginal propensity to consume is fallacious, you're talking about the idea that there is some uniform rate at which each individual will receive and spend money, correct? Not that the basic idea of the multiplier?

And I agree that it's good to really get down to talking about real economics for a change. I'll get around to responding to the knowledge and calculation thread, I'm sorry I've put it off so long but it partially just really has me stumped (it would be nice if Mises would explain something instead of just stating fact and then waiting for his reader to catch up.) and at the same time it's going to require some reading. His thoughts in his original paper on calculation actually seem to me to be contradictory to what he said about market socialism in Human Action.

Rcder,

I have to concede that from a Pareto point of view it would be inefficient, but by the same token decreasing spending, or indeed most government or individual actions would be pareto inefficient. It's also important to note that the vast majority of people would, both in the short and long term, gain from government intervention to end a recession. I realize that you can't compare values, but nonetheless the fact is that very few people gain from the continuation of a recession. Even people who are seeking a higher real cash balance are likely to be better off when profits are higher, real output is increasing, rents are higher, it's easier for them to find employment at increasing real wages, and the interest rate has increased. In other words most of the ways that people receive an income has become more lucrative in the post-recession world.

Implying that voluntary human action cannot end in some sort of a bad situation is to imply two things. Firstly it implies that humans are omniscient in relation to achieving their ends, secondly it denies methodological individualism. I assume that you are familiar with the basics of the collective goods problem. The economy can be conceived of as a good for the whole of society, or indeed for any individual. While the economy is inevitably a process, the fact is that everyone benefits from living within society and in a healthy economy. This is division of labor, Misesian model 101. Even if you don't want to conceive of the market as a good, do you deny that almost everyone would prefer a growing, rather than recessing economy?

@Student

Excellently put. You've stated my basic point much more eloquently and simply than I have, and simply relating the whole matter to a problem of opportunity cost infinitely refines the issue.

You also hit on my basic reason for making this thread, which is that many times Austrians will use BWF against stimulus and Keynesianism when it simply does not apply for the reasons shown here.

@myhumangetsme

Have you read the entirety of Bastiat's writings based around the work?

Also, you did not in any way reply to my point. People must spend some money and the more money they have then the less they need to save any amount of it, and therefore an increase in general spending will result in an "economic snowball". Please address/read up on the multiplier and respond to my previous response to you if you wish to continue making this assertion

 

 

 

 

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Also, when you say that the marginal propensity to consume is fallacious, you're talking about the idea that there is some uniform rate at which each individual will receive and spend money, correct?

Yeah, that's it.

His thoughts in his original paper on calculation actually seem to me to be contradictory to what he said about market socialism in Human Action.

I'll look into this too.

It's also important to note that the vast majority of people would, both in the short and long term, gain from government intervention to end a recession.

Could you elaborate on this further? Do you think that prices are that 'sticky'? What of the malinvestments?  Also, even if this were the case from the point of view of economics, such intervention would still be undesirable from a political point of view due to the precedent of intervention it sets.

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Have you read the entirety of Bastiat's writings based around the work?
 

That's not relevant, unless you meant from the beginning to base your argument around BWF and "the entirety of Bastiat's writings based around the work," which it appears clear to me that you did not.  So I would rather confine the discussion to the parameters you initially set forth.

So, are you saying that the point of the BWF was not, in the broader perspective, that you cannot create wealth by destroying wealth?
 

Also, you did not in any way reply to my point.

 

1) You didn't have a point, you had follow-up questions, 2) your follow-up questions seemed to involve me going to the trouble of disproving something you had yet to prove with regards to your conclusion.  I don't need to make your arguments for you, I trust you can do it.

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Neodoxy replied on Mon, Aug 6 2012 12:35 AM

@myhumangetsme

I was responding to the question that you asked. I believe that's one way of stating it, but it's equally true to state that the point is that the creation of additional demand does not create additional wealth. 

"1) You didn't have a point, you had follow-up questions"

Are you denying the multiplier effect and the circular flow diagram? And yes, there is a very good reason to believe that money circulation to one person creates eventual demand to a host of other areas. If this wasn't the case money would be useless. It's inherent in its nature that the acquisition of money is meant for future consumption.

That's a single relevant question and a point.

"2) your follow-up questions seemed to involve me going to the trouble of disproving something you had yet to prove with regards to your conclusion.  I don't need to make your arguments for you, I trust you can do it."

I'm not going to argue in favor of Keynesianism when you should know them anyway. The basic ideas are very simple and I don't understand why you're arguing against something you haven't heard about and the multiplier and circular flow diagram are about as simple as economic concepts get. You're also not exactly responding to what I am saying to you, so either respond to some of these things or don't bother responding at all.

Aristippus,

"Could you elaborate on this further?"

I'm sorry but I don't see what within what you quoted requires elaboration. I think it's clear that practically everyone in society would gain from the end of a recession. As I stated nearly all incomes would rise. There might be some people, perhaps bankruptcy lawyers and managers who like treating their employees like crap might lose from the recession, but the vast majority will gain because their incomes rise and conditions improve in every way. Therefore, if the government could end the recession, then ceteris paribus (used in a way that it usually isn't) most people will be better off. You could say the same thing about the institution of the private property system. A handful of people would gain from "anarchy" but the overwhelming masses would lose.

You're perfectly right that in the real world this would probably be negative because it may lead to further government intervention (in which case it would almost certainly be economically inefficient) but more importantly in the real world who knows whether or not the government could actually achieve this end at all.

And once again, I do not believe that prices are "that sticky", or insofar as they are it's because of government action either through stimulus, the federal reserve, and past precedent of a steadily increasing price level, I'm just dealing from the Keynesian paradigm as far as people will push me out there :P

"I'll look into this too"

Within the section he literally states that a large problem with market socialism is that socialism was always an excuse to plan outside of market demand and to impose the will of dictators and those in control of the state, but how could this be the case if he assumes the prices of consumer goods in his discussion of socialism! If socialists could calculate and there were consumer prices then they would have to do it in accordance to those consumer prices, in which case it is not "planning from the top socialism" at all and merely the dictates of the socialist market! This would mean that his statement that socialism was simply used in the way stated above was bunk from the get go... Mind f***

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...but it's equally true to state that the point is that the creation of additional demand does not create additional wealth.

The point of the BWF is the means by which "additional" demand is (supposed to be) created, which is through the destruction of wealth.  So no, it is not equally true to state that.

 

I'm not going to argue in favor of Keynesianism when you should know them anyway.

Well what exactly am I supposed to be denying about the multiplier effect or circular flow diagrams?  That these theories exist?  That they're valid?  What exactly are you looking for in your world of ambiguous phrasing?

You haven't proven that either the multiplier effect or circular flow diagrams have any relevance to your argument that the BWF does not by itself refute the Keynesian paradigm, so again, you're asking me to disprove something you haven't bothered to prove in the first place, and I am not willing to accept them as self-evident to appease your ego.  If you believe their relevance to be so self-evident, you can troubled to write it down and prove it.

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