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The Broken Window and the Recession

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xahrx replied on Mon, Aug 20 2012 12:40 PM


Similarly, Bastiat's alleged broken windows fallacy involves simply assuming that there's no such thing as genuinely idle resources or an "output gap." In that context, yes, it's a vibrant intuitive depiction of crowding out. But this doesn't counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do. In defense of Bastiat, at the time he was writing the modern industrial business cycle was a very new thing..[b]ut that's no excuse for people sitting around in 2012 to be pounding the table with an old book that's non-responsive to modern issues professing to be baffled why people don't find it more persuasive.
Actually this point has been dealt with several times here.  The source of the recession doesn't matter; the fact that there is no such thing as an 'idle' resource is what matters.  And, stimmulating the use of so called idle resources to some end by definition means it is not available for other ends.  And again, as has been stated earlier, unless you can somehow guarantee that the use of the resource and all the other resources it will interact with and affect will somehow not affect other resources and their availability (which it clearly will do...), and people's decisions about what other resources to use and in pursuit of what ends (which it clearly will do...), and that somehow the government will know the precise time and place to make the resource available for entrepreneurs to pull it back into private use (which it clearly can't do...), then the BWF applies.  In order for it not to apply, so called idle resources would not only have to be perfectly isolated from everything else when employed by the government, the market would still have to be somehow aware of their existence and value to know when to pull them out of 'idleness'.  To that point, no resource is ever idle, because even if it's not being put to immediate and obvious use by someone it still serves as a point of influence in people's judgements concerning the resources that are currently being employed.  Nothing is ever 'idle', nothing is ever 'fully employed.'  So, when you attempt to bring 'idle' resources back into use, you break windows.  What you're destroying is the information and eventual production their very availability would generate and make possible.
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He seems to think throwing the words "nominal shock" about changes something.

Freedom of markets is positively correlated with the degree of evolution in any society...

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RobinHood replied on Mon, Aug 20 2012 8:03 PM

Similarly, Bastiat's alleged broken windows fallacy involves simply assuming that there's no such thing as genuinely idle resources...

Genuinely idle resources. Let's put aside for the moment whether there is such a thing or not. We're going with Keynesian assumptions here.

...the viability of stimulus during a recession induced by nominal shocks,...

Remember, we are talking about two subjects here. One is Neo's and his sidekick Malachi's notion that actually nuking a city to devastation, or at least breaking widows by the hundreds of thousands, will end a recession. Even Yglesias didn't think, apparently, that he could defend that whopper. The BWF certainly reduces that argument to rubble. I mean, if he thought like Neo, he should have run with it. It is a much closer parallel to Bastiat's tale. A refutation of it a la Neo and Malachi would have really hit Bastiat where it hurts, which is the point of his whole blog. He should have written, "Actually breaking those stupid windows, the very thing Bastiat warned us not to do, is a good thing during a recession induced by nominal shocks. Have at it, Neo and Malachi. Nuke the city to save the world." But he didn't, because it is the height of absurdity to think destroying resources increases their amount.

Then we have a different subject. Does the BWF show that so-called stimulus packages are doomed to failure, because the money has to be taken away from the private sector, just as the broken window has to be replaced from a scarce pool of resources?

Yglesias doesn't think so, because some recessions are caused by a nominal shock, supposedly. Nominal shock is the latest buzz word for the Fed not inflating as much as it did in the past. Now indeed, when you have a zombie-like business [=one that left to its own devices is unprofitable and doomed to bankruptcy] that relies on constant free money from the govt to exist, when that money is not forthcoming, it will die. If there are many businesses like that, and you stop their supply of free money, you will get a recession as they all go bankrupt. We all agree to that picture.

And we all agree that if the govt goes right ahead and stimulates the zombie, it will be able to keep on keeping on, waddling around in a phony semblance of life. True. [Some call this "ending the recession". Austrians call it postponing the inevitable, at the same time increasing the human suffering that will happen eventually.]

Now, does that zombie feed on the private sector? Is it crowding out and starving the viable businesses? Of course it is. Does Mr Yglesias concede that the broken wondow fallacy is a vibrant intuitive depiction of  the zombie feeding on the living? Yes, he explicitly does. So what's not to like?  

What's not to like, say Mr Yglesias, is that the Keynesians and the monetarists have "points" that somehow prove Bastiat wrong. He does not mention what those points are, oddly enough. We are to take it on faith. Trust me, Bastiat is wrong. Nothing to see here.

In a run on sentence, Yglesias adds that "it involves assuming that no such recessions can occur even though they plainly do."

No. You weren't paying attention, Mr Yglesias. We agree that nominal supply shocks can bring on a recession. We are talking about possible cures for the recession. And the BWF shows quite clearly that they are ineffective.

The rest of his little rant has no new ideas.

Now some may argue that there is no crowding out, because the money was buried deep underground in the vaults of the wealthy, and would never have been used had not the govt taken it away from idle hands and spent it. Taking it away from the rich is not like breaking a window at all, because those silly rich are just letting that money go to waste, sitting there idly underground when we need it so badly to be spent. The rich don't need that money. They were not going to spend it anyway. We, the people, do need that money to save the economy, and so no windows are broken when we pass it from the lazy hands of the rich to the hungry hands of the economy.

Yes, that's a nice fairy tale. Trouble is, there is no hoarded money, as Hazlitt has proven about the Great Depression. Certainly it is true nowadays, with the debt in the private and public sector higher than it has ever been. And those businesses with trillions of dollars in their vaults owe three dollars for every one that they have in the safe.

Can the broken window fallacy prove there is no hoarded money? No, just as it cannot prove that bananas grow in South America. The BWF is not about empirical real world facts. That is not what the BWF is about. After we settle the realities of the situation, that there is no hoarding, then the BWF shows, as Mr Yglesias admits freely, that stimulus is a recipe for disaster.

Now, even under conditions of hoarding,  stimulus is unnecessary, as argued by Rothbard. The existing supply of money circulating, by the laws of supply and demand, will increase in purchasing power. Any non zombie companies will thrive in real terms, if they lower prices enough to draw in customers.

In addition, if hoarding ever does happen, it will happen for a reason. It will be peoples way of saying, "We don't want to buy what you have to offer. Make something different. Change what is being produced to something we want. Change investment opportunities to more attractive ones." In other words, the market is speaking. "You have created a zombie economy", it is telling us. Stimulus is trying to forcefully shut up the market and force to take what is being offered, no matter how bad.

And that, too, is a BWF happening before our eyes. although unseen. The possible different outputs of the economy, the ones people actually want, are being "destroyed" in the sense of the means of making them being destroyed to keep alive the current unwanted zombie economy.


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xahrx replied on Tue, Aug 21 2012 9:10 AM

Key point there is the hoarding.  To the extent 'the rich' hoard money, it affects their decisions of how to use the money they don't hoard.  So on a macro level money will simply increase or decrease in value relative to demand, but on the micro or personal level each individual's assessment of how much wealth they have to invest or spend is influenced by their demand for wealth in reserve, and likewise each entrepreneur's decision of how to use their current labor and what new labor to aquire will be influenced by how much labor is in reserve.  Now, I can understand thus being complicated by people's empathy with people who are 'in reserve' and this unemployed, and further complicated by decades of BS telling them that consumer spending is the key to a healthy economy.  But the whole point of the Austrian perspective, at least in economics, is to stay positive as opposed to normative, and to point out that claim is actually false at worst, and at best does not communicate the full nature of the process.

As to the Keynesian assumption of whether or not a resource can be idle, even assuming it is possible for it to enter that state, bringing it out of idleness does just that; brings it out of idleness, and out of isolation.  This to me goes to the heart of Keynesianism because you really have to have a compartmentalized, algebraic view of the economy as a set of isolated variables to even accept the idea that a resource can be isolated as such.  Almost as if the 'idle' resources were the only variables on the left side of an equals sign, and somehow everything else could change in relation to them without they themselves also changing.  Reality just does not work that way.

"I was just in the bathroom getting ready to leave the house, if you must know, and a sudden wave of admiration for the cotton swab came over me." - Anonymous
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xahrx replied on Wed, Jan 30 2013 3:40 PM

Kicked to the top for Neodoxy, you talking about this thread on the other forum?

"I was just in the bathroom getting ready to leave the house, if you must know, and a sudden wave of admiration for the cotton swab came over me." - Anonymous
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Neodoxy replied on Wed, Jan 30 2013 7:44 PM

Oh boy. I really missed this thread.


Anyway, yes I've been referencing it. This I intend to readdress this general topic sometime in the fairly near future, except this time the argument will be... HARDER! BETTER! FASTER! STRONGER! Drinks will be served alongside caviar and fugu because of how extreme the NEW and IMPROVED thread will be. 

The new thread will be more realistic, more interesting, more condensed, more broaderer, deal with higher level Keynesian and Austrian theory, and  it will be more critical of parts of both theories

Babies will cry and all the beasts of the earth will shudder as this thread is born. The stars themselves will align as the flamewars commence and Keynes and Hayek themselves will rise from the grave to engage in the debate. Brace yourselves, Neodoxy's recession thread is coming.

So yes, this topic will be returned to. But at the moment, I just hope that this thread dies and is buried forever, hopefully to be replaced by a purer and higher quality successor

Unfortunately for any interested parties you're going to have to sit tight until I'm done with this quarter because I'm pretty bogged down with work over here.

Also, who here is the user "CDB" from the Liberty HQ forums? DD5? Xarhrx? Someone else?

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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xahrx replied on Fri, Feb 1 2013 8:10 AM

CDB = me, xahrx.  CDB is the name I use on almost every internet forum I'm a part of.  If it's available when I register, I grab it.  I registered here a long time ago though, I'm not sure if CDB was taken then or if I just hadn't used that name yet.  xahrx was the domain name of a website  I had registered for a while but let drop back in the old days of the interwebs, early and mid 90s.  I got it mainly for the associated email account and because I wanted to practice my html and start my own blog, though that's not what it was called then.  I've been yelling at people on the internet for being wrong! since it started.

CDB stands for Crazy Dutch Bastard, which is a nick name I've gotten from some friends that sort of stuck.

"I was just in the bathroom getting ready to leave the house, if you must know, and a sudden wave of admiration for the cotton swab came over me." - Anonymous
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