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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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Top 500 Contributor
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Andris Birkmanis:

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

Redistribution reduces value for the owners, thus destructs wealth.

But in macro terms, the broken window in the form of wealth being lost is lost only considered a loss to the baker, but not as though wealth in the form of gold were thrown over a cliff, right? Sounds silly to ask it this way, but basically I'm asking how taxes vs. destroyed property affect the growth of the entire economy. The window is only valued by the baker whereas gold is presumably valued by many more people in society. Thus this value differntiation would account for a difference in lost wealth via the broken window vs. taxes since one form of wealth ceases to exist altogether (presuming nobody wants broken glass) whereas the other lost form of wealth via taxes simply redistributes the wealth but doesn't destroy it. In this case, could I make the case that taxes are less harmful to both individuals and society than destroyed property? Or another question would be to question if wealth lost via taxation equals wealth lost via destruction of valued property.

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Besides short-term effects (dissatisfied baker), taxation reduces incentive to improve life.

Less saving, less investment, and less entrepreneurship result. Stagnation follows.

The Voluntaryist Reader - read, comment, post your own.
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"1. USSR expanded the quantity of the factors of production with their five-year plans just fine. Production of what?"

Do you deny that the Soviet economy ever grew? The factors have to be increased in such a way that more, or any, of a particular good can be produced.

"2. 'Better' according to whom?"

Either the consumers or a more objective measure in terms of producing the same/a greater quantity of goods using the same quantity of productive factors or cheaper productive factors. This leads to what is known as "efficiency"

"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"?"

From the viewpoint of the tyrant; of course it would be.

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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Governments forcefully redirect (steal) resources from their owners, and also waste a good deal of the amount they take. If it were merely pure wealth transfers it'd just be theft. The waste that they exhibit is what makes it doubly bad.

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

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