This isn't the BWF, this is an argument against sticky wages, the long term effects of stimulus upon the production structure, and the impossibility of government omniscience. It is not the BWF. You even admitted my point in the bolded area.
What precisely do you think the BWF consists in, honestly? He iddn't even bring in "sticky wages". The long-term effects of the stimulus on the structure of production are, in essence, what the BWF is concerned with...
This loss would be irrelevant if the Keynesian assumption was true and stimulus would cause the economy to recover.
To whom precisely would it be "irrelevant"? In what terms do you measure an "economy" recovering and how do you balance this alleged recovery against the costs misallocations pose on the structure of production?
Re the "Says who?" I meant regarding the BWF magically becoming inapplicable during a recession. Why would it? Actions stop having unseen costs... because some resources lie idle?
Freedom of markets is positively correlated with the degree of evolution in any society...
How do you define an economy "recovering"? Simply getting those GDP numbers up or aligning production with consumption?
Jon,
I'm not going to restate all of my arguments on this thread just for you, please read through some of what has been said here first.
"He iddn't even bring in "sticky wages". The long-term effects of the stimulus on the structure of production are, in essence, what the BWF is concerned with..."
1. He was explaining why labor was idle, and therefore defending/criticizing the Keynesian idea of sticky wages
2. The BWF is not concerned with long run changes, it says nothing about the long term, it merely talks about short term changes in employment and wealth creation.
"To whom precisely would it be "irrelevant"?"
Everyone who benefited more from the economy recovering than having whatever it was destroyed.
"In what terms do you measure an "economy" recovering and how do you balance this alleged recovery against the costs misallocations pose on the structure of production?"
Problem of the limited nature of government knowledge and of the impossibility of comparing interhuman values.
"I meant regarding the BWF magically becoming inapplicable during a recession. Why would it? Actions stop having unseen costs... because some resources lie idle?"
Please see the end of my last post to Xarhx.
In short, however, if everyone was just sitting around idly and unemployed because no one was spending money and wages were too high then increasing demand would result in increasing unemployment and spending until eventually things were employed again. If resources are unemployed then using them in such a way that it will bring about a positive result, economic recovery, is one in which its use was not wasted. That's the argument in an amazingly oversimplified way.
EDIT
Wheylous,
I don't know, I'm not god. It would have have to be a measurement which took into account the employment of machinery and labor up until the point where employing them much more would start leading to a fairly vertical point on the AS curve.
Well, AS is vertical in the short term. Do you speak of long term? Because in the long term we don't have recessions. We have full employment.
Sorry if you've addressed this already, but you say
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.
What at all guarantees that the glazier's propensity to consume is higher than that of the baker?
Huh? No it's not, in the long run it's supposed to be vertical at full employment,
And I'd also like to point out (this is economics not you) that in the long run there theoretically is no AS, or rather AS is infinitely low approaching 0 on the Y and infinitely to the right approaching infinity on the X so long as we assume perpetual growth... But anyway...
Of course, I'm an idiot.
As to my propensity to consume question?
I think Neodoxy's still being strawmanned in this thread, partly due to confusions arising out of the original post, which I myself only finally clarified when he said this (emphasis is mine):
Once again we're working under Keynesian assumptions of no malinvestment. However, we are working under the admission that a recession is an undesirable state of affairs. By this admission any time spent within a recession is negative, and any time spent within it decreases, all else equal, the wellbeing of people at any one time, so long as the economy continues to progress. Think of it like two linear graphs representing living standard and they have the same slope but one is two units higher on the Y axis at any point on the X axis. Everyone would rather be at the point where real incomes are higher, or in the timeline where the recession was ended swiftly.
I really thought it needed to be repeated. To me it looks like most of the thread has been people talking past eachother.
In conclusion it doesn't matter for the Austrian that the BWF doesn't address Keynesianism, since ABCT, for example, does.
I think most people are just assuming he's arguing that part of Austrian Economics is wrong when he is merely arguing that the BWF doesn't address a specific aspect of Keynesianism while other parts of AE do (parts which he is not even addressing, as he said, such as malinvestment).
I think that the place to call him is not that the BWF isn't potent during unemployment but that the malinvestment created by government spending doesn't "fix" a recession as he claims it would. His claim is that government spending when below full employment can help "end" a recession. Well, if it's malinvested, then no.
...we're working under Keynesian assumptions of no malinvestment...
You must mean no malinvestments in the past, leading up to the recession. Because breaking a window in order to fix it, and digging a ditch in order to fill it, constitute malinvestments right there. And they bring with them all the bad news all mals do.
But maybe you mean that in the Keynesian world breaking a window [and all random destruction] is not a malinvestment, by definition, and has no bad effects, by definition. In which case Keynesianism is exposed as nonsense by that alone.
In which case Keynesianism is exposed as nonsense by that alone.
But that's the ABCT and not the BWF, correct?
Not exactly. The ABCT is concerned with how recessions are created. By Neo's rules of the game, that question is not to be asked. OK, we'll go with it.
The BWF points out that destruction, even when used to "create jobs", is not good for an economy, recession or no recession, because it destroys valuable resources. Even if destruction of resources is assumed not to have created a given recession, and Animal Spirits hoarding their wealth did it instead, it must be recognized that shooting yourself in the foot will not cure anything.
To give a medical analogy, say we have a patient bleeding to death before us. Mises says he is bleeding from a knife slash. Keynes says he is bleeding from a magic spell. Keynes then says the cure is for the patient to have his neck slit open with a knife. Mises replies, "Maybe he's bleeding from black magic now as you claim, but if you slit his throat that's not going to cure him. He will then certainly bleed to death from the knife cut to his neck." Mises then suggests another cure, bandaging the bleeding area.
Aristippus:I think Neodoxy's still being strawmanned in this thread...
Alright triple response up in here!
@Wheylous
1. You're not an idiot
2. Government omnipotence will assure that the money will go to everyone with the highest MPC because the government is teh greatest!!!!111. But any way this is only the case if there is taxation to bring this about, in most Keynesian worlds there is either net hoarding by the government in good times, or there is credit expansion to finance government projects or to stimulate investment. If the money is printed out of midair the MPC is increased so long as everyone isn't hoarding it. Keynesians also assume that there's some base rate at which everyone spends (I think there's a name for it which I forget), but at any rate that's where the constant comes in when calculating the multiplier.
3. I am arguing that the BWF doesn't address recessionary Keynesianism, and any Keynesian who isn't a total idiot only advocates spending within depressions. I hope by now I've demonstrated that this is the case, because if not I might go crazy. Other arguments from AE tackle Keynesianism perfectly, but I've heard many people argue against Keynesian policy many times because "it's a broken window fallacy", but this is not the case in a deep recession. This is why I'm "not addressing them", because these aspects of keynesianism are flat out wrong, but you have to deal with them with something other than the usual BWF story or you will fail.
4. Once again, that is not to do with the BWF and therefore it is not my problem to respond to here and now! :D At any rate, I would think for a moment before calling government spending a malinvestment simply because that is not how it is usually defined by Austrians. Government spending may be wasteful, but it is not a malinvestment in the same way that others are. I think that this is an interesting and not entirely straightforward discussion topic, but not one that I'm interested in dealing with here (another thread perhaps?) because right now I feel like I'm knee-deep in misunderstanding with no way out.
@Aristippus
Congratulations sir! *Fanfare plays* You are the only person besides student to have apparently understood what I've been trying to say this whole f***ing time on this thread. Congratulations! You are incredible! :D
@RobinHood
Even if destruction of resources is assumed not to have created a given recession... it must be recognized that shooting yourself in the foot will not cure anything."
... Well that's really good to know
... That's really good to know. Also, Animal spirits mostly refers to entrepreneurs and the reason for the business cycle and investment patterns NOT hoarding. It makes sense to hoard if you just lost your job and many places are going out of business so you might be unemployed for a while. ROTHBARD ASSUMED THIS WOULD HAPPEN. I can't say the same for Mises and Hayek but I must assume that they did.
You're using the fallacies of intuition and false analogies to justify your position
No. I was using an analogy to help Aristipuss see what my position is, not to justify it.
The question of how the recession arose ISN'T a part of ABCT...
Maybe in Bizarro Austrian Economics, but in Earthly AE it is the very heart of ABCT.
Where in Bastiat's work, or indeed Hazlitt's surrounding the fallacy do they talk about malinvestment....
Let us get on the same page here. ABCT = Austrian Business Cycle Theory. It explains how recessions arise. Short short summary: Money printing leading to wasting of resources, aka malinvestment. BWF = Broken Window Fallacy. It explains how destruction of resources [the ultimate malinvestment] does not improve an economy. Short short summary: An economy is better off if there are more available resources, not less.
Now malinvestment usually means resources wasted in a particular way, by someone wasting them in wasteful production. But sheer destruction of resources, like nuking a city or breaking a window, is even more wasteful than using it for wasteful production. It thus was not called "malinvestment" by Bastiat and Hazlitt, but the problems malinvestment creates are created even more powerfully by sheer destruction. Thus it is perfectly correct to call breaking windows and nuking cities and digging ditches only to refill them the ultimate malinvestment.
Hazlitt never related the two because there is no relationship, he used properly constructed arguments against Keynesianism revolving around flaws within the system and ABCT, not the BWF.
Aww, now you are making me go ahead and do research. What did Hazlitt say about digging ditches and refilling them, I wonder?
From Failure of the New Economics:
The “contribution” of Keynes that his disciples most often insist upon as valid and “permanent” is the substitution of “full employment” as the goal of economic activity rather than the “maximum production” of the classical economists.
Well lo and behold. Look what he's saying. The goal of economic activity is "maximum production", not "full employment" as Keynes thought. Go to Chapter 26 to see why Hazlitt thinks Keynes is wrong. So, armed with this knowledge, let us look at breaking windows and nuking cities and filling freshly dug ditches. Do these labors maximize production? No, they do not, because they WASTE RESOURCES that could have been used in "maximizing production".
Let's see what else Hazlitt has to say about this fascinating topic:
Edwin Nourse, in the article from which I have previously quoted, declares that: “Ideally full employment would be such as promotes continuous maximization of production and real purchasing power for the people.” But this definition recognizes that full employment is desirable, not as an end in itself, but only as a means to much broader ends. Even the “maximization of production” must be understood, not in the sense of the mere piling up of physical things, but in the sense of the maximization of consumer satisfactions.
Let us put on our thinking caps. If I break someones window and then charge him money to fix it, have I maximized consumer satisfaction? If I dig a ditch and refill it, have I maximized consumer satisfaction? If I nuke a city, have I maximized consumer satisfaction? Let me help you along here. The answer to all three questions is "No, I have not."
And guess what? Our old friend the BWF notes this very fact. Destruction of property has not maximized any consumer's satisfaction, the BWF tells us. It has, on the contrary, decreased consumer satisfaction by breaking their stupid window! That is the whole point of the BWF. Look at the broken window, not the "job creation".
More Hazlitt:
The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck. It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions.
All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans. Translated into national terms, this first principle means that our real objective is to maximize production...
Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods (which are both a cause and a consequence of a shortage of capital) and not unemployment. Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved. The slave labor in Russia had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment....
You see where Hazlitt is going with this. Keynes is wrong because he is barking up the wrong tree. Forget about creating jobs. Think instead about maximizing production. EXACTLY what the BWF is all about.
If resources are idle and only destruction can bring them to be used, then destruction could be warranted so long as the destruction lead to greater growth than there was destruction.
This might be the most foolish thing ever written in these forums, and that is saying something. Because destruction of perfectly usefull and serviceable things cannot possibly bring "greater growth". Do the math. If I have 1,000 units of resources to to help me grow, but I then have to waste 10 of them to fix a window some idiot broke for no reason, then I have only 990 units of resources to help me grow. Less units available to grow with means less growth.
It's not rocket science.
ROTHBARD ASSUMED THIS WOULD HAPPEN, he assumed a model in which hoarding resulted due to the bust.
No need to yell. In any case, do not confuse hoarding due to the bust with hoarding which, [according to Keynes only], causes the bust.
Let me help you out here. One happens BEFORE the bust. The other happens AFTER. One is a "cause" of the bust, according to Keynes. The other is a "result" of the bust. They are not the same, you see.
Aristippus:In conclusion it doesn't matter for the Austrian that the BWF doesn't address Keynesianism, since ABCT, for example, does.
But if the BWF can be related to the ABCT, then what?
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Neodoxy: Once again we're working under Keynesian assumptions of no malinvestment.
Are you sure that's the only assumptions you're working under? Because the malinvestments Keynesians assume do not exist are those very same windows they also assume are never broken.
Neodoxy:However, we are working under the admission that a recession is an undesirable state of affairs.
Who's admission? Yours?
The recession is the recovery. I think the recovery is very desirable.
Neodoxy: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.
...and as suspected, more Keynesian assumptions - Now, it is money that creates demand and not supply. So now we also reject Says law and not just the malinvestments cause recession argument.
Hmm, I think Neodoxy's point is that using the BWF per se won't work as an argument against Keynesians who argue in favor of economic stimulus during recessions, in the sense of convincing them otherwise, because they don't see the preceding economic boom as breaking any windows (metaphorically speaking). That is, it won't convince them that involuntary unemployment, reduced investment and spending, etc. during recessions aren't bad things in and of themselves.
Autolykos:Hmm, I think Neodoxy's point is that using the BWF per se won't work as an argument against Keynesians......
Neodoxy assumes that money creates demand. see above. So obviously, the lesson of the Brolen Window Fallacy is lost under such assumptions. I get his point. He's just wrong.
More or less. I don't really see malinvestment to be inherently associated with the BWF but a seperate consideration of government spending which would then apply itself to the BWF. At any rate the utilization of the BWF under Keynesian assumptions of government capability does not work. Thank you for showing the intiative to understand :)
but its already been elucidated that windows are not only broken in a boom phase. They are broken also by the act of government stimulus spending. If I squander scarce capital on boondoggle projects, and interfer with the market process of discovery which would have meant entrepreuners deciding how to utilise the scarce capital in the most economic fashion (economic calculation anyone?)
how is that not breaking a window?! and therefore how does the BFW not pose an argument against keynesian stimulous.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Neodoxy:I don't really see malinvestment to be inherently associated with the BWF but a seperate consideration of government spending which would then apply itself to the BWF.
Is this your actual position, or is this part of you playing the Devil's advocate in this thread? I'd appreciate some clarification here before responding further to it.
Neodoxy:At any rate the utilization of the BWF under Keynesian assumptions of government capability does not work.
"Does not work" in the sense of the BWF per se failing to convince Keynesians that they're wrong, because it doesn't address other, more fundamental, assumptions they make.
Neodoxy:Thank you for showing the intiative to understand :)
You're welcome. I do think it's important to understand where people are really coming from.
nirgrahamUK:but its already been elucidated that windows are not only broken in a boom phase. They are broken also by the act of government stimulus spending. If I squander scarce capital on boondoggle projects, and interfer with the market process of discovery which would have meant entrepreuners deciding how to utilise the scarce capital in the most economic fashion (economic calculation anyone?) how is that not breaking a window?! and therefore how does the BFW not pose an argument against keynesian stimulous.
Following Neodoxy, I believe that Keynesians would say that government stimulus spending doesn't break metaphorical windows inasmuch as it utilizes resources that were heretofore standing idle. Does that make sense?
This will expose a faulty concept of 'idle', this goes back to the question I asked up the thread. When Keynesians think about 'idle' resources, do they think that they have no owners, do they think that the owners have no reservation demand. the question is challenging whether Keynesians have a proper economic concept of 'idle' and not just a man in the street, common sense, i don't see anyone using it and what I would call productive ways therefore its 'idle'.
This is a similar defect of keynesian thinking that comes up when you consider the paradox of thrift, and what they say about 'hoarding' cash, pretty much just ignorantly not acknowledging the real *beneficial* reasons people choose to hold real cash balances. holding cash balances is not a dead weight loss to society...
"No. I was using an analogy to help Aristipuss see what my position is, not to justify it."
Ah, sorry if I was looking for some justification for your position.
"Maybe in Bizarro Austrian Economics, but in Earthly AE it is the very heart of ABCT."
I'm sorry for the typo, I meant BWF
"Let us get on the same page here. ABCT = Austrian Business Cycle Theory. It explains how recessions arise. Short short summary: Money printing leading to wasting of resources, aka malinvestment."
Correct.
"BWF = Broken Window Fallacy. It explains how destruction of resources [the ultimate malinvestment] does not improve an economy. Short short summary: An economy is better off if there are more available resources, not less."
I'd argue that it comes down to the fact that an increase in demand does not increas human wellbeing because it takes resources from areas of useful consumer use to poor government use, but these more or less come down to the same thing.
"Thus it is perfectly correct to call breaking windows and nuking cities and digging ditches only to refill them the ultimate malinvestment."
But there's no reason to label it malinvestment when it's an entirely different phenomenon. I'm not saying it is not wasteful, but it is not capital intensive investment brought about by entrepreneurs which is then brought to a sudden halt with a sudden rise in the interest rate.
"This might be the most foolish thing ever written in these forums"
.... Seriously bro? WTF? This might have been warranted if it followed any sort of definitive post, something that indicated you'd read more than one of my posts, something which indicated that you knew what Keynesian economics was in the first place...
1. I've been on these forums, user or lurker for 3 years and I have a thousand posts. I wouldn't bring this up, but you're new here with a handful of posts, how the hell do you know what the most foolish thing o these forums are?
2. I know Austrian economics, I've read every passage you quoted up there and I understand the purpose of production, the question is whether or not you understand Kenyesian economics. Now let's post something I've already posted here
Now that's the aggregate supply curve. Now if you see that horizontal line, that's what they believe economic yield looks like. Now, if the corresponding curve, called the aggregate demand curve, falls low on the AS curve, that leads to low output, or, as they call it real GDP. Now if government spending propels the AD curve forward then it hits a higher point on the X axis. Now, this won't be by government spending, or indeed primarily by government spending, it will rather be because of consumer spending, this is called the multiplier, because people get money to eventually spend it they do just that. So when they get the money, they spend it on something else, and that person spends it on something else, and so on. This causes, what do you know? Greater output for consumers! Oh my god! Hazlitt's a god damn Keynesian!
3. So let's compare your own story, with the Keynesian one. Let's say that there's widespread unemployment and idle goods which are idle in year 1, the recession year. If the Keynesians are right and prices are very sticky, things won't really start getting better until year 5. We use 10 macroeconomic resource points to rebuild a macroeconomic window, this gives people more money to spend which they then do, and then the multiplier kicks in and spending has increased so people start producing more. By the end of year 2 there has been decent growth and we end the year with 1010 macroeconomic resource points because now production has kicked up again, new capital is being produced, and more importantly old capital is actually being used instead of lying idle. It's not until 3 years later that the economy picks up in the non-stimulus world, and what do you know? They have wasted one of the most valuable resources of all, time, so the stimulus world is perpetually better off, in real goods.
So what exactly were you critiquing?... The insane notions of certain Keynesians who took Keynes' words out of where they actually applied by his own theory and started the macroeconomic fetish of government spending in peacetime? Yes. Congratulations. Now if we could get to my point that would be great. I mean after all, it's not rocket science.
See, there are plenty of very intelligent people on this site, more so then I've seen just about anywhere else, but there are some people here and on the internet associated with these beliefs (well any belief system) who can't come out of their own little model and conception of the universe for five seconds and actually deal with what anyone else is saying. They strawman, misunderstand, and focus on intuition and superficial factors, such as doing exactly the thing that Hazlitt and Mises most warned against, which is just looking at the short term effects of an action instead of the long term and unseen ones. You're looking at the seen, the destruction of a window and crying wolf. You're not looking at the unseen effects, putting people back to work and causing unused resources to be used. There may be a thousand holes in Keynesian theory, just like "Swiss Cheese", but no one of these holes is the BWF unless you incorporate another one of the very good arguments against Keynesianism or some factors of the real world such as the negative effects of credit expansion and government ignorance.
You are exactly the kind of person I'm talking about in my truth thread. Now either address something that I'm saying or just stop posting and wasting my time with crap that's either irrelevant or I've already addressed.
The Keynesian notion of idle or what you know refer to as unused resource is deficient, this is yet another reason their Keynesian prescription of stimulus is flawed. Their reliance on this deficient notion once exposed and corrected for I expect would require them to accept the BFW critique
NirgrahamUK,
1. I'm so nitpicking here but I just find it misleading to call government spending malinvestment as such because it's perfectly fine investment for the most part from the point of view of the firm. It could be a wasteful investment, yes, but it works out from the firms point of view. It's not breaking a window as such, every inhibiting factor to recovery is not a broken window, although it might lead to the creation of one, E.G lost resources.
2. At any rate surely you can see that you're bringing in
A. Reasons for reserve demand
B. The nature of government investment
C. Economic calculation
D. The free market recovery process
None of these things are the natural broken window fallacy
3. That's a very good explanation of idle resources, but it is a far cry from Bastiat's orginal concern and you have to go into many more market mechanisms, which makes the question why is it that you're relating it back to the BWF at all?
Atolykos
1. The quoted section is my position but it's probably not what you think (see above in this post)
2. "Does not work" in the sense of the BWF per se failing to convince Keynesians that they're wrong, because it doesn't address other, more fundamental, assumptions they make.
Great explanation
3. :)
4. "Following Neodoxy, I believe that Keynesians would say that government stimulus spending doesn't break metaphorical windows inasmuch as it utilizes resources that were heretofore standing idle. Does that make sense?"
That's right, Keynesians don't in any way associate government spending with mal, or wasteful investment, and the fact is that if they're assumptions are right, then all stimulus spending does is lead to an increase in favorable consumer spending.
If only indirectly.
I don't think it specifies a time frame reference at all. It does apply to short term unforeseen (or even foreseeable) consequences but in a structure as complex as the economy why think that these will be purely short term?
And how do you quantify their benefit so as to aver that it outweighs the benefit of those who are harmed, or the harm done by the unseen consequences of the "stimulating"?
It's a problem with the whole "LETS FIX IT" cheerleading altogether.
In short, however, if everyone was just sitting around idly and unemployed because no one was spending money
That isn't why people sit around unemployed to begin with. People produce with a view to consuming. if either of production or consumption are being restricted due to uncertainty in the market (be it in the form of government regulations, fear of worse to come etc.), stealing from others to "spend" isn't going to fix it. Nor is going further into debt. Nor is injecting yet more funny money into the economy, that will simply flow into interest-sensitive projects. As the recent extraordinary stimulus has shown, even then the money won't necessarily be put to use. Now the government is in a situation where it is afraid of what will occur if the banks -do- put it to use.
and wages were too high
Then get rid of artificial rigidities in the labour markets.
then increasing demand would result in increasing unemployment and spending until eventually things were employed again.
There is absolutely no guarantee that yet further malinvestments won't be spawned from deploying resources (or shall I say, fabricating) in this manner. So what will happen when these further malinvestments require liquidation after the next boom has run its course? The whole assumption of "idle" resources is predicated on them being relatively fluid between industries, and does not really apply if the resource in question is relatively/highly specific to producing a particular type of good. So rather than putting "idle" resources to use, any money spent may flow into sectors already experiencing high demand. None of this will necessarily happen, yet there is absolutely no reason to think that "Idle resources" are somehow going to be resolved by spilling yet more toxic funds into the system.
Even if I were charitable and assumed that there were no malinvestments (and I have no reason to grant this idiotic assumption, sorry), you would still find yourself up against the problem of the specificity of the idle resources. You would still run up against the problem of magicking more resources into the economy than really exist, so that when demand picks up, it does so disproportionately relative to the real resources available in the economy (and this is why the assumption of no malinvestments is rubbish; call it "overinvestment" if you like, it makes no difference.)
If resources are unemployed then using them in such a way that it will bring about a positive result, economic recovery, is one in which its use was not wasted. That's the argument in an amazingly oversimplified way.
Positive in your opinion. The whole point is that this spending/borrowing etc. will have further consequences than the benefits it will bring to some people.
The BWF encapsulates a number of arguments against Keynesianism. It is a conceptual shorthand. We're not going to stop using it.
Except it doesn't work that way. There isn't some pool of "idle" resources that are just sitting there ready to be transfused into any available industry. Moreover, when the economy does pick up these resources - in the event that they ARE utilised - will now be tied up in other uses and not necessarily ones sanctioned by the market. The only way the Keynesian argument can work is to assume the benefactors gain more than those who lose control of the "idle" resources (and they are idle by their own preference). I mean it is correct to say that the BWF isn't the ONLY argument against Keynesian stimulus moonshine. So what though? I am not going to grant them blatantly false assumptions. Furthermore, the argument I just outlined is pretty much what the BWF consists in: pointing out that for all the supposed "benefits" of a stimulus, there are unseen, often unpredictable costs, which are not easily comparable (particularly since individual utilities are not interpersonally comparable.) If you want to assume government omniscience future and present, fine.
Neodoxy:None of these things are the natural broken window fallacy
You do understand that the "broken window" is a methaphor, right?
Government robs Tom of $50 and spends it on John. Idle John if you like.
1. The crowd sees how the $50 benefits John and concludes that the robbery is not all that bad. It has created work for John.
2. Tom is left with $50 less in his pocket. $50 which he would have spent on a new suit from Bob. Bob is forgotten of course. The crowd does not see Bob.
Tom is the baker and John is the Glazier. Bob is the tailor. The government is the Hoodlum that instead of breaking a real window simply committs robbery.
Student: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.
There's so much wrong with Neodoxy and Student's arguments that I can't really go through all of them point-by-point, but I will deal with the major theoretical error that they are guilty of, namely the argument that the phenomena of idle resources makes government expenditure potentially warranted and efficient. Let me start out by saying that this is, at least conceivably, true. The government may borrow from the loanable funds market and take resources away from the private economy which would have remained idle for some period of time, and it may, by sheer chance, direct those resources towards warranted and truly efficient employments. This may occur the same way that I may, again, at least conceivably, hit a bull’s eye with a dart, blind-folded, from 50 meters. We should expect the likelihood of the latter scenario to be somewhere near the likelihood of the former scenario primarily because of calculation issues associated with government economic intrusion and other issues raised by the Public Choice School.
There are a few points, though, that I would like to highlight which I feel are being ignored by both Student and Neodoxy and which are relevant:
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Okay, I'm going to have to limit the number of responses I post and I'm going to have to keep them brief because I don't have time to respond thoroughly to every single response. I'm going to focus on the posts of the highest quality, there's too much stuff here to respond to crap which has almost always already been dealt with.
1. While the BWF does not specify time, the furthest Bastiat/Hazlitt goes is to say that people will be permanently worse off because of wasted time
2. I don't know how many times I have to say this, I'm dealing in the Keynesian dreamworld, the idea that the government cannot compare interpersonal utility is not a case of the BWF, but it can be used to make a stunningly different, and more equally relevant argument.
3. I'm supposing direct stimulus funded through an expansion in the effective money supply, either indirectly (government loans) or directly (direct money printing or as Keynes supports a surplus which is taken out of circulation from tax revenues beforehand). You cannot deny that this spending will increase AD and put people back to work. If this causes uncertainty then this is a different argument entirely.
4. In Keynesian models wages are sticky on their own with or without interventionism
5. Most of the rest of the arguments you make are against other Keynesian assumptions and they do NOT have to do directly with the BWF. It is not shorthand, why would it be? There was no longhand explanation of what you're arguing against back then. In Bastiat's time there was no conception of malinvestment, and the fact that you've had to go so far out of your way to connect the BWF is proof of the fact that this doesn't fit the original parable. Nothing of what you said fits unless you assume a fair number of things, most of them to do with the reason that wages are rigid, in the first place.
Esuric,
1. The way that Keynesians explain idle resources is not so much uncertainty as rigidity of prices, although uncertainty helps. Even if firms know exactly the state of future affairs, there will be unemployment if prices are too high.
2. This is a problem of the ignorance of the state and how the government cannot help but commit the problems expressed within the BWF, insofar as what you are saying applies, the more the BWF applies within a recession, but this does not match the Keynesian idea of a vast number of idle resources where at least most of what they are hiring is unemployed, and if there is credit expansion at the time then theoretically the rate of interest could simply return to its market rate.
3. If resources are idle then you're not shifting them from one stage of production to another, as you know Investment is a part of the AD calculation by Keynesians, rather what you are doing is simply increasing where AD hits on AS.
4. Then that is an argument against Keynesian economics, and a good one, not for the BWF. With this said this should, in the Keynesian world, fix the problem of wage rigidity because if the value of labor warrants that wage, then even at the rigid price it is justified as a result of an increase in consumer spending.
Esuric, not to be rude, but I think if you spent as much time reading the thread as you did writing that post you would see there is not much distance between you and Neodoxy.
Compare what you say here...
Let me start out by saying that this is, at least conceivably, true. The government may borrow from the loanable funds market and take resources away from the private economy which would have remained idle for some period of time, and it may, by sheer chance, direct those resources towards warranted and truly efficient employments. This may occur the same way that I may, again, at least conceivably, hit a bull’s eye with a dart, blind-folded, from 50 meters.
with what Neodoxy says here (from the FIRST page)...
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. ... 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
I am struggling to find a major difference. And broadly I don't disagree with this sentiment.
As for your specific bullet points....
There isn't a pool of idle resources from which the government can merely pick and choose from: I raise this exact point later in the very same post YOU QUOTED! Here is what I said. "Of course, employing only otherwise idle resources is easier said than done. How do you know which resources are truly idle?" Neodoxy probably raised this point himself at one point or another.
As for your other three bullet points....
Idle resources/excess capacity is an inevitable result of uncertainty, and is, in fact, a relatively efficient condition (if we accept that we cannot eliminate uncertainty):
Increasing aggregate demand for aggregate demand’s sake is inefficient:
Government expenditure creates rigidity:
These are basically saying "I disagree with the way the Keynesians explain business cycles. Here is how Austrians would explain it. yada yada yada capital structure" And that is fine, but it is totally unrelated to the ENTIRE point of the thread. If I were Neodoxy, I would probably say "that's great, but what does this have to do with using the Broken Window Fallacy to critique Keynesianism?"
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Now, I have personally said everything I can in this thread. I probably wouldn't have responded to your post if I didn't like talking to you so much Esuric. But honestly, my entire post was just repeating something either I or Neodoxy said on page 1. That should not really be necessary. But since it is, there is really reason to continue posting in this thread.
Ambition is a dream with a V8 engine - Elvis Presley
Now if government spending propels the AD curve forward then it hits a higher point on the X axis.
There's your mistake, right there.Measuring GDP growth is of very limited usefullness to begin with [as is well known], but totally useless in the situation you describe, because the country's initial condition has changed, and GDP ignores that, just as you are doing.
To bring this point out in a way everyone can understand, let us imagine a wealthy country full of all Earthly delights and gadgets. The people work and produce 1,000 new gizmos a year. Some resources, for mysterious reasons, [let us grant because of hoarding for the sake of argument], are not being used. Enter Mr. Maynard and solves the problem, He nukes the whole country until nothing is left of it but those idle resources. Everything else has been pulverized into dust.
Naturally, the people go out and start rebuilding. They use up all those idle resources, all right. Everyone has a job, finding some primitive food and building a hovel to live in. Their standard of living is that of the caveman. "I did it," says Maynard proudly. "GDP has doubled this year."
Do I need to point out the flaw in Mr. Maynard's reasoning?
Bottom line, increasing production just to get back to square one is not what we are after, GDP or no GDP. I give you the BWF.
Neodoxy:I don't know how many times I have to say this, I'm dealing in the Keynesian dreamworld, the idea that the government cannot compare interpersonal utility is not a case of the BWF, but it can be used to make a stunningly different, and more equally relevant argument.
faber est suae quisque fortunae
It's more or less assumed that you can compare utility in most Neo-Classical models, or that you can tell this through monetary calculation. At any rate, even if we assume that you can't then we end up in a state of affairs where practically everyone is better off, which would be justification that most people would accept.
Neodoxy: The way that Keynesians explain idle resources is not so much uncertainty as rigidity of prices, although uncertainty helps. Even if firms know exactly the state of future affairs, there will be unemployment if prices are too high.
No. Keynesians attribute the existence of idle resources to insufficient aggregate demand for final goods and services (because they misunderstand capital and the mechanisms that transform savings into investment), price rigidity (especially in the labor market) and uncertainty (especially in the loanable funds market where, according to the Keynesians, uncertainty prevents a recovery in investment even if interest rates fall to 0%).
My point, again, is this: even if the government could somehow identify all of the temporarily idle resources and then withdraw them from the private economy, in order to employ them in other endeavors, it would yield extreme rigidity in the private economy. It would render firms incapable of dealing with continuously changing real conditions. Those that incorrectly anticipated future conditions would be forced to accept inflated losses when they could have just increased their capacity.
So you haven’t really responded to this point at all.
Neodoxy: This is a problem of the ignorance of the state and how the government cannot help but commit the problems expressed within the BWF, insofar as what you are saying applies, the more the BWF applies within a recession, but this does not match the Keynesian idea of a vast number of idle resources where at least most of what they are hiring is unemployed, and if there is credit expansion at the time then theoretically the rate of interest could simply return to its market rate.
This is a major problem that you and Student seem to agree on. I just wanted to highlight how ridiculous this notion actually was, namely the idea that the government could somehow identify idle resources and ‘drain’ them from the economy. There simply is no way for the government to do this.
Neodoxy: If resources are idle then you're not shifting them from one stage of production to another, as you know Investment is a part of the AD calculation by Keynesians, rather what you are doing is simply increasing where AD hits on AS.
Correct, but the crux of this point is that increasing the aggregate demand for final goods and services is not, in itself, efficient. In fact, it’s just an arbitrary redistribution which alters methods of production. Also, investment is part of the Keynesian AD calculation because it is considered to be a function of consumption (the acceleration principle). The demand for capital goods is assumed to vary in the same direction as the demand for consumers’ goods but in an exaggerated degree (multiplier), according to the traditional Keynesian paradigm.
Student: Idle resources/excess capacity is an inevitable result of uncertainty, and is, in fact, a relatively efficient condition (if we accept that we cannot eliminate uncertainty): Increasing aggregate demand for aggregate demand’s sake is inefficient: Government expenditure creates rigidity: These are basically saying "I disagree with the way the Keynesians explain business cycles. Here is how Austrians would explain it. yada yada yada capital structure" And that is fine, but it is totally unrelated to the ENTIRE point of the thread.
These are basically saying "I disagree with the way the Keynesians explain business cycles. Here is how Austrians would explain it. yada yada yada capital structure" And that is fine, but it is totally unrelated to the ENTIRE point of the thread.
It’s not unrelated to the point of the thread at all; in fact, they are theoretical refutations of arguments being presented (implicitly or explicitly) by you and Neodoxy which are paramount to the Keynesian paradigm. Also, the second and fourth points aren’t really “Austrian” per se, and you haven’t really responded to them in anyway. You’ve just rejected them, and are implicitly accusing me of being dogmatic.
The third point (Increasing aggregate demand for aggregate demand’s sake is inefficient) is very technical and is basically the crux of the Austrian rejection of Anglo-American economics (of which the Keynesian paradigm is merely one subset). So in that sense, you are right, but it is something that you have never bothered to familiarize yourself with nor is it something that you have ever bothered to actually respond to and/or refute. Again, you just dismiss it.
[******] I just want to make it clear that the broken windows parable is not meant to be a complete refutation of the Keynesian paradigm. In fact, it predates it. Refutations of the Keynesian framework are provided by various anti-Keynesian economists such as Friedman (who managed to show, using the very same frame-work that Keynes was using [income-expenditure model], that expansionary fiscal policy doesn’t work), Hutt, Hayek, etc.
Either way, the parable merely shows that even if you ignore all of the problems associated with government interventionism (the calculation, public-choice issues, etc) the window repairman, who is sentenced to continuously repair the window that some little shit constantly breaks, could be employed doing something else, something more productive (at the very least).
I don't think you know what you're arguing against. That is to say that I believe you are criticizing Keynesianism quite well, but I don't think that you understand what I am trying to say. I also don't understand why it is that you didn't respond to the most important part of Student's post, which was my admission earlier in the thread that the government was incapable of performing positive stimulus because it has limited knowledge and on top of that a perverse incentive structure which is all around incapable of relieving a recession. Even if we admit all of the objections to Keynesianism the nature of government itself will fail.
At any rate, you basically reiterate the entire purpose of this thread right here:
"I just want to make it clear that the broken windows parable is not meant to be a complete refutation of the Keynesian paradigm. In fact, it predates it. Refutations of the Keynesian framework are provided by various anti-Keynesian economists such as Friedman (who managed to show, using the very same frame-work that Keynes was using [income-expenditure model], that expansionary fiscal policy doesn’t work), Hutt, Hayek, etc."
People need to start using arguments such as the ones which you have just used, and stop using the broken window fallacy, because, as you have just noted above, it cannot apply and stand by itself since it is an argument separate of the entire debate by its very origin.
That is all I've been attempting to prove within this entire thread. No more, no less.
I also have a question concerning this statement:
"it would yield extreme rigidity in the private economy. It would render firms incapable of dealing with continuously changing real conditions. Those that incorrectly anticipated future conditions would be forced to accept inflated losses when they could have just increased their capacity."
Is this still true if the Keynesian multiplier occures? If AD does indeed increase and prices return more or less to their old levels then why would it matter if prices were more inflexible? Or is this only true in those areas which increase price the most (those which were already employed)? Or are you talking about long term conditions if spending continues?
It occurs to me that several different things are being talked about here.
1. Given all the conditions Keynesian posit about a recession ["insufficient AD", "sticky prices", "hoarding"], will actually going around breaking windows end the recession, which is defined to be an existence of idle resources?
2. Does the BWF prove that other Keynsian solutions, such as digging and undigging ditches, forced dishoarding, massive govt spending or money printing etc. cannot possibly work, given an all wise, saintly govt enforcer of these programs ?
3. Is the BWF, that assumes breaking useful things is bad for the economy, simply false under Keynesian assumptions? Do the Keynesian assumptions contain some magical element that makes the employment of idle resources in fixing what has been broken something more than just going back to square one and using up resources to do it?
4. If someone is unemployed, is it good for the economy as a whole [not for him personally] to break something so that he can be employed fixing it?
In addition, there are several versions of the BWF being tossed around.
Version A. Actually breaking useful things will never get you any improvement in an economy. All the seeming benefits are cancelled by the losses involved.
Version B. In a wider sense, the BWF is an example and a partial [?] proof of the principle that increasing the pool of goods and services is the goal, not increasing employment or velocity of money. Any decrease in the pool, even if it increases employment and velocity of money at the same time, is not an improvement in any way to the economy, quite the opposite. Also, anything that leaves the pool unchanged, even if employment is increased as well as velocity of money, has not improved the economy.
Version C. In an even wider sense, the BWF is an illustration of the principle of examining that which is not seen, and weighing it against that which is seen.
Note that each version is more powerful than the preceding.
I think a yes to 1. is absurd. I have explained why earlier. Version A of the BWF is sufficent to show this. Hazlitt makes this argument in Economics in One Lesson.
I also think that a yes to 2. is correct. Version B suffices for this one. Hazlitt makes this argument in Failure of the New Economics.
The answer to 3. is no, of course. Version A suffices.
The answer to 4. is also no, of course.
There are larger questions here as well. Is the multiplier effect real? In the sense that A buying something from B gives B money to spend, yes. So that AD is increased by A's spending and by B's spending, to the superficial mind. But as Hazlitt pointed out [in FOTNE], that is an illusion. Because how did B ever get something to sell to A in the first place? Only by previously being productive. His ability to demand, to buy stuff, is already there, because he has something to barter with to get what he wants. This is known as Say's Law, which is the ultimate refutation of the whole Keynesian system, and that's why Keynes so hated Say's Law.
By Say's Law, in which AD is the result of AS, then destruction must reduce AS and AD at the same time. This idea may be called a cousin to the BWF.
There is the question of the effects of hoarding on the economy. We will put aside for the moment Hazlitt's research that shows that empirically, hoarding does not exist except in the most trivial of quantities, insufficient to influence an economy. We will also put aside for the moment Rothbard's argument that hoarding will increase the purchasing power of the unhoarded money. Thus no decrease in AD occurs from hoarding. these potent arguments, enough by themselves to disprove Keynes, do not seem to be related to the BWF, [unless we consider Rothbard's observation an instance of Version 4 of the BWF].
There is the question posed by von Mises, to wit, can an economy be improved by strictly monetary means, meaning shuffling around the distribution of cash in some way? Mises concluded that of course not, and that those who think otherwise are Monetary Cranks. This too, can only be called the BWF by in very widest sense of Version 4.
There is the question whether increasing AD will result in increased AS. According to Say's Law, the answer is a resounding, "Of course not." You cannot increase AD unless you increase AS first.
There are those who may argue that there are psychological forces at work here, not economic ones. Until the supplier sees there will be a demand for his product, he will not supply. By increasing AD in the sense of taking the money out of the hands of hoarders and spending it, the supplier wakes up and gets to work. This is of course absurd. People want to make money always, and will look around to see what is demanded right now, and produce as much as they can to supply it. Of course, the BWF is not about psychology, so is inapplicable here.
There are those who may argue that suppliers cannot afford the high, sticky wages that have to paid to increase supply. By forcing dishoarding, more money is out there pursuing goods, which means the supplier can charge a high enough price to make a profit even with the high sticky wage he is forced to pay. But this is just another way of lowering those high sticky wages in real terms, by creating price inflation [=horrific loss] for all so that a comparative handful of workers can get their high sticky wages. The BWF in the second sense, and certainly in the third, thus refute this line of reasoning.
Stop right here, no I am not, I'm arguing that if the Keynesian assumptions are true, then the BWF necessarily doesn't apply.
You have not used the idea that if labor was unemployed because consumer spending is not high enough while prices are sticky and will not recover in any reasonable time, that hiring by the state hiring the idle labor and resources, for no valuable long term purpose, in society the recession will cause those people who were hired, who were employed in another activity, to be diverted from the productive to unproductive.
You have not used the idea that if labor was unemployed because consumer spending is not high enough...
...while prices are sticky and will not recover in any reasonable time,...
...that hiring by the state hiring the idle labor and resources, for no valuable long term purpose...
...in society the recession will cause those people who were hired, who were employed in another activity, to be diverted from the productive to unproductive.
BWF focuses upon full employment or certain patterns of government spending, not an omniscient government and the Keynesian assumptions.