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Broken Window Fallacy, or How Exactly Does an Economy Grow?

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thetabularasa posted on Wed, Nov 28 2012 8:50 PM

How does an economy grow? Perhaps a more specific question might be what is wealth and how is it increased?

I was considering the Broken Window Fallacy, where destroyed property certainly impedes wealth by requiring the individual whose property was immorally broken to spend his money to replace maintenance costs (in terms of the original piece of property). In terms of taxation, though, it seems immoral part comes in the adulterated or (perhaps) the artificial route of the market. Instead of (e.g.) the Baker directly giving his wealth to the shoemaker who in turn gives it to the suitmaker, etc, say he is taxed and no window is in the picture; in this latter scenario, he would have to postpone purchasing the shoemaker's shoes and instead replace the gap in his wealth; but (and this is the part I need help understanding) the Baker's wealth is not lost in terms of absolute existence. If, for instance, a window breaks, yet, the wealth is lost since he purchased the window and it is completely useless (hence its ability to be traded has ended); but in the case of merely being taxed, the money accrued by the government is not destroyed but merely redistributed.

So in understanding the Broken Window Fallacy, is it that destruction of property is immoral because it equals a destruction of wealth whereas taxed wealth is immoral because it artificially redirects or delays wealth due to its redistribution? In other words, do taxes equal destroyed property? I can't see how, and I suppose the two arguments one could use agains taxation would be as follows: 1) it is immoral as it counts as theft, and 2) it unnaturally redirects markets, where the shoemaker might have received the money and possibly sooner whereas instead the government official who reaped the benefits of the taxed wealth used the wealth to purchase a suit, thereby artificially redirecting the money.

Stemming from this, how exactly does an economy grow? It seems that if currency can be added to by way of goldmining or saving money (causing deflation in that the market prices lower due to less money being circulated) that there is, at least in the long term, no effect ending in growth to the economy. So how exactly does any economy, or perhaps wealth, grow?

Any flaws in my approach?

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is it that destruction of property is immoral because it equals a destruction of wealth whereas taxed wealth is immoral because it artificially redirects or delays wealth due to its redistribution? In other words, do taxes equal destroyed property

Economics has nothing to do with saying whether something is moral or not. If it ever touches on morals, it is to explore the economic institutions that would arise if the morals are followed in a given society.

Hence, the BWF says nothing about the immorality of taxation. (Edit: and neither does any part of Austrian Economics)

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z1235 replied on Wed, Nov 28 2012 9:33 PM

Economy doesn't "grow" and there is no need for it to "grow". The "need" for (GDP ) "growth" is Keynesian propaganda. There never is an economy of size 10 at time T which then "grows" into an economy of size 11 at time T+1 because no aggregating unit exist by which to do such calculation. Values are subjective and are not amenable to aggregation. The only thing we know as a given is that voluntary actions and interactions increase the satisfaction ("wealth") of everyone involved while initiation of aggression most certainly makes some parties worse off in the short run and pretty much everyone else (but a very small parasitic minority) in the long run. Hence, the only sure way to maximize "wealth" (i.e. increase satisfaction) is by maximizing voluntary interactions and by minimizing initiation of aggression. 

 

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How does an economy grow? We get better at producing the stuff we need. We use fewer resources and less time and effort and produce more. The perfect economy would be to have a machine that produces whatever we want at the push of a button, so we can spend less time surviving and more time living.

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Neodoxy replied on Wed, Nov 28 2012 10:30 PM

The BWF is a parable which seeks to prove a point. It shows that, when the factors of production are generally employed, that spending cannot increase wealth. If you hire a hundred people to build buildings then that's a hundred people who won't be in other professions. Since the market has a definite tendency to already allocate the productive factors into their most valuable positions, any spending by the government will likely decrease real growth and provision of consumer desire's

You're taking the BWF too literally.

As for how does an economy grow:

1. An expansion in the quantity of the factors of production

2. A better utilization of the factors employed.

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z1235 replied on Thu, Nov 29 2012 5:01 AM

Neodoxy,

1. USSR expanded the quantity of the factors of production with their five-year plans just fine. Production of what?

2. "Better" according to whom?

If a tyrant enslaved us all and ordered us -- for the next 20yrs -- to produce machines and tools which we would use to build a giant pyramid as his burial grounds, would our economy be "growing"?

 

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Yes, I understand the BWF, perhaps I am looking too literally at it to determine how taxes differ from destruction of property. I suppose that's my question:

How do taxes differ from destruction of property (e.g., a broken window)?

It seems to me that taxes simply delay market development, whereas the broken window both delays market development and requires replacement of the destroyed window, thus costing more in the end.

So my point is that taxes and destroyed property are both theft, but destroyed property is more expensive than mere taxation, so it seems.

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Answered (Not Verified) z1235 replied on Thu, Nov 29 2012 6:24 AM
Suggested by Jon Irenicus

Theft, taxes, and any other type of initiation of aggression are destruction of property. To the extent that property and wealth could be quantified/aggregated, any forceful change of ownership represents destruction of property and a decrease in wealth. Enslaving the builders of the tools/machines needed for the tyrant's pyramid represents destruction of property and decrease in wealth -- the wealth lost by denying the slaves' their ability to satisfy wants of their own.

Property and wealth do not (can not) exist outside the subjective valuations (valued ends) of their legitimate owners. 

 

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z1235:

Theft, taxes, and any other type of initiation of aggression are destruction of property. To the extent that property and wealth could be quantified/aggregated, any forceful change of ownership represents destruction of property and a decrease in wealth. Enslaving the builders of the tools/machines needed for the tyrant's pyramid represents destruction of property and decrease in wealth -- the wealth lost by denying the slaves' their ability to satisfy wants of their own.

Property and wealth do not (can not) exist outside the subjective valuations (valued ends) of their legitimate owners. 

In a macroeconomic sense, though, it seems that taxation has a different effect than a broken window. One is redistribution of wealth while the other is destruction of wealth. Right? This difference has to account for something, I imagine, but I can't place my finger on it.

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One is redistribution of wealth while the other is destruction of wealth.

Redistribution reduces value for the owners, thus destructs wealth.

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z1235 replied on Thu, Nov 29 2012 7:33 AM

thetabularasa:

In a macroeconomic sense, though, it seems that taxation has a different effect than a broken window. One is redistribution of wealth while the other is destruction of wealth. Right? This difference has to account for something, I imagine, but I can't place my finger on it.

You are not reading what I wrote twice. Wealth does not (can not) exist without the subjective valuation of its just owner -- it exists in the eye of the owner, so to speak. If the shop owner broke his own window in order to replace it with a better one, or to leave the shop windowless, no wealth has been destroyed. If a thief stole $1000 from the shop owner, wealth has been destroyed. The fact that some window has been broken is not sufficient information to determine if wealth has been destroyed. The fact that the stolen $1000 still exist in someone's hands (i.e. have not been destroyed) is also not sufficient information to determine if wealth has been destroyed.  

 

 

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z1235:

thetabularasa:

In a macroeconomic sense, though, it seems that taxation has a different effect than a broken window. One is redistribution of wealth while the other is destruction of wealth. Right? This difference has to account for something, I imagine, but I can't place my finger on it.

You are not reading what I wrote twice. Wealth does not (can not) exist without the subjective valuation of its just owner -- it exists in the eye of the owner, so to speak. If the shop owner broke his own window in order to replace it with a better one, or to leave the shop windowless, no wealth has been destroyed. If a thief stole $1000 from the shop owner, wealth has been destroyed. The fact that some window has been broken is not sufficient information to determine if wealth has been destroyed. The fact that the stolen $1000 still exist in someone's hands (i.e. have not been destroyed) is also not sufficient information to determine if wealth has been destroyed.  

Presuming the broken window was valued as wealth by the Baker, how does it differ from taxation?

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