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Permanent Keynesian Refutation Thread

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Gero:

Keynesianism was criticized at various points in Viception. Here is one point: “Keynesians emphasize spending. Austrians emphasize production. People earned money from previous production, their work. The Keynesian focus on total spending and total employment omits the production structure. The Keynesian belief in total spending as the basis for economic growth omits the role of capital investment which improves production which leads to higher living standards. If for a month most people in a city use the maximum credit on their credit cards to buy stuff, Keynesians easily confuse the temporary spending with economic growth because of their focus on total spending, not production, especially sustainable production. The Keynesian focus on totality leads to the devaluation of what is produced. An example is the Keynesian celebration of World War II spending that they claim ended the Great Depression for the United States. Keynesians focus little on if cars or tanks are produced as the long as total production rises. Excluding military production during World War II shows the U.S. civilian economy was still depressed. The Keynesian misdiagnosis of recession leads Keynesians to advocate government spending to support malinvestments which diverts resources from profitable businesses to unprofitable malinvestments continuing the unsustainable production structure. Malinvestment liquidation would lead to general falling prices allowing the factors of production, the resources used to make stuff, to adjust to sustainability. The Keynesian solution to recession will deepen and extend a recession possibly into a depression. Inflationary spending will stop the necessary fall in prices, stopping the production structure from correcting itself. The inflation will lead to more malinvestments that will have to be liquidated. An example is the U.S. housing bubble which was created from the inflation used to cushion the bursting U.S. dot-com bubble.”

 

 

Is there a pdf link to "viception". I see you've brought it up in a couple of posts and it seems intersting for a novel, but I don't really like reading books on the computer (I prefer my nook).

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Gero replied on Sun, Jul 25 2010 4:12 PM

I do not see any Portable Document Format on the website.

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No brainer...

Tax rebates, exemptions, etc. distort our choices. Instead of businesses making business choices based on the rate of return in the marketplace, they make choices based on the rate of return in the tax code.

In laymans terms... Instead of businesses making a product/service people want to buy in order to generate profit, they engage in activity the government subsidizes.

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krazy kaju:

The idea that government fiscal stimulus can increase actual aggregate demand is false. That money needs to either be borrowed, taxed, or printed. If it's borrowed, that's less money that the private economy may borrow. If it is taxed, that is less money that the private economy has. If it is printed, that is less value per dollar that the private economy has.

I am trying to understand the argument (such as the one presented above) that fiscal stimuli don't work. From my admittedly very limited understanding, it seems to me that a stimulus could increase aggregate demand. Isn't the Keynesian argument that government taxation and spending would force money removed from the economy through savings to be put back into the economy? Here's an example:

Say I'm a worker in a factory that produces widgets (what else?). The workers exchange widgets amongst themselves. One day my widget-producing machine breaks (recession). Now since I no longer have any widgets to trade, my demand for them falls and thus aggregate demand also falls. But let's say one of my coworkers has two widget-producing machines at his workstation. He can only use one machine at a time, and thus his second machine only serves as a back up (savings). The managers of the factory (government) decide to take my coworkers second machine (taxation) and give it to me (stimulus). Now it's true that this action hasn't created anything new--it has merely moved resources around. However, it reallocates unused resources to where they can be used to produce something that can be exchanged and thus increase aggregate demand to its previous levels.

Is that a correct representation of the Keynesian position? Do Austrians contest this analysis? The link to that video is dead, so I don't know if that had my answer.

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Fool on the Hill: I apologize in case this post doesn't come out formatted (apparently there's something incompatible between Firefox and this forum). I approach the topic of government spending in an article titled "Government Spending is Bad Economics" (can't format the link, but here it is: http://mises.org/daily/5123/Government-Spending-Is-Bad-Economics).
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james568 replied on Sat, Jul 16 2011 2:10 PM

And the dot com bubble resulted from the inflation created to get out of the savings and loan collapse. The savings and loan collapse was created by the inflation used to get us out of ... ad infinitum in Keynes economic theory. Keynesianism believes that the day of reckoning can be delayed forever.

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Thanks for pointing me to your article, Jonathan. So bringing this back to my analogy, within a factory's "economy" you think it would be more efficient to let employees negotiate over capital than for management to allot it for them? When my widget machine breaks, I should negotiate a loan for my coworkers widget machine? A factory run in this manner would be more efficient than a factory that employs top-down "stimulus"? Afterall, my coworkers machine was idle for a reason. It's not in his self-interest just to give it to me without obtaining something in return.

Since the state is not constrained by revenue, it can effectively outbid potential competitors for whatever resources are necessary to complete the spending program. There is no need to economize dollars, because the state can borrow, tax, and simply create more in order to finance its purchases. Ultimately, this distorts the entire notion of scarcity, because government can acquire any economic good at any cost. The role of prices in aiding individuals in making their decisions when economizing means is effectively nullified, because, to the government, prices are almost irrelevant.

I think this point also applies to the internal workings of a factory. There is no pricing when the managers take my coworkers machine and give it to me. The bosses can simply boss people around.

Governments operate on the money of others — the source of government revenue is not profit but taxation — so there is no need to run a profit.

But if you confine business and government to their like domains (the country and the factory) profit and taxation are equivalent functions. The profit of a business is the products of its subjects (laborers) just as the taxation of a government is the products of its subjects (citizens). Similarly, there is no need for a business to run a profit to maintain its internal operations. Of course a business has external competitors, but so does a state! States do in fact operate on a market--with each other. They compete for resources, people, land, and dominance in the world.

Idle resources are means of production that are seemingly being left unused — an obvious example is an unemployed laborer. If these means of production are "idle", what harm is there in government employing these resources?...The correct answer to this question is the one that explains why the supposed problem of "idle resources" is actually not a problem at all, because resources are not purposelessly left idle.

Do Keynesians think that resources are purposelessly left idle? Individuals acting in their own interests can often not only harm others but also contribute to harming themsevlves. Have you ever heard of the "Tragedy of the Commons"? And I find it interesting that you argue that purposefully leaving workers unemployed is a good thing. A good thing for whom, might I ask? In an unequal society, resources are used to maintain privilege first and foremost and only secondarily used to further the growth of the economy. Michal Kalecki had an interesting analysis: http://mrzine.monthlyreview.org/2010/kalecki220510.html

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The point isn't decentralization for the sake of decentralization.  What economic theory is an explanation of real phenomena.  A very large chunk of economic theory deals with how resources are allocated in a market.  This doesn't imply that the more distributed property the better it's allocated.  Those who control more capital to do so because the profit and loss system has rewarded their success; it means that they are better than others at predicting changes in human preference, or at least better at servicing preferences.

So, ultimately, no, redistributing capital to the workers is not necessarily a means of improving the efficiency of the firm.  In the end, you can't compare a firm to the government.  The firm operates within the framework of the market process, government does not.  The firm is a product of the market process, the government is not.

I think this point also applies to the internal workings of a factory. There is no pricing when the managers take my coworkers machine and give it to me. The bosses can simply boss people around.

To a certain extent this may be true.  I suggest reading Klein's 2010 book on entrepreneurship (it's a collection of essays).  The size of a firm has limits.  These limits are dictated by the ability to calculate.  The less relevance price has in the allocation of resources the more inefficient the firm will be.

But, before reaching that limit firms very much are working within the pricinng process.  The cost of labor inputs and other producers' good inputs are all dictated by the market, unless the firm has vertically integrated and simply produces those inputs themselves (at that point, the price the firm will assume is prob. the cost of production).  Decentralization of the firm doesn't mean that the pricing process will decentralize with it.

But if you confine business and government to their like domains (the country and the factory) profit and taxation are equivalent functions.

No they are not.  The profit of the business comes from the consumer, not its laborers.  In any case, both sides of the exchange profit.  The consumer is surrendering money for the product because to that consumer the product has higher value than the sum of money spent on it.  This is not the case with government taxation.  When you pay a tax you are giving up something in exchange for nothing.

Do Keynesians think that resources are purposelessly left idle?

Keynesians believe that putting idle resources to work you are making the economy more productive.  But, my article shows why this concept is absurd.  The reason why these idle resources aren't being put to work is because given the circumstances these resources are worth more idle than they would be when put towards any other end.

Labor is a special case.  The problem with idle labor isn't a lack of money, rather an inability for the market to clear.  Austrians would argue that this rigidities are mostly artificial.  Furthermore, an Austrian would argue that an inflationary policy to lower real wages (as proposed by Keynes) would cause more harm to the economy than good (by distorting the pricing process).

Have you ever heard of the "Tragedy of the Commons"?

What does this have to do with anything?  Tragedy of the commons is explicitely a problem of "public property".

And I find it interesting that you argue that purposefully leaving workers unemployed is a good thing.

You are the owner of your own labor.

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So, ultimately, no, redistributing capital to the workers is not necessarily a means of improving the efficiency of the firm.  In the end, you can't compare a firm to the government.  The firm operates within the framework of the market process, government does not.  The firm is a product of the market process, the government is not.

Is a landlord part of the market process? If yes, then why not a government?

But, before reaching that limit firms very much are working within the pricinng process.  The cost of labor inputs and other producers' good inputs are all dictated by the market, unless the firm has vertically integrated and simply produces those inputs themselves (at that point, the price the firm will assume is prob. the cost of production).  Decentralization of the firm doesn't mean that the pricing process will decentralize with it.

Governments hire labor, trade with other nations, and borrow money. Are these inputs not determined by markets and pricing?

No they are not.  The profit of the business comes from the consumer, not its laborers.  In any case, both sides of the exchange profit.  The consumer is surrendering money for the product because to that consumer the product has higher value than the sum of money spent on it.  This is not the case with government taxation.  When you pay a tax you are giving up something in exchange for nothing.

A business appropriates the goods its laborers produce and exchanges it with a consumer (of goods) for money. A government appropriates the money its citizens produce and exchanges it with a consumer (of money) for goods. So by your definition, taxation is merely unsold products and the goods the government receives by exchanging them is analogous to profit. Perhaps, a better analogy would be between a landlord and a government. Clearly both appropriate money from their subjects. Does a tenant get anything in exchange for paying rent? If yes, then it follows that a citizen also gets something in exchange for paying taxes, and your last sentence is false.

Keynesians believe that putting idle resources to work you are making the economy more productive.  But, my article shows why this concept is absurd.  The reason why these idle resources aren't being put to work is because given the circumstances these resources are worth more idle than they would be when put towards any other end.

They are worth more idle to the owners of them. I'm sure an unemployed, hungry laborer who sees an idle farm doesn't think the farm is worth more idle. I assume Keynesians are interested in improving society as whole (whatever they think that means) than merely improving the condition of land owners.

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Is a landlord part of the market process? If yes, then why not a government?

I don't understand the similarity between the two.  Why are you making the comparison?  If the government worked within the market process then it couldn't serve its function.  It's the ability to overstep the market process that gives government the ability to do what it does; government doesn't have to economize.  Government services aren't economical or profitable -- they are justified on different grounds (usually, moral grounds).  If government was constrained by the market process then it would no longer be government.

Governments hire labor, trade with other nations, and borrow money. Are these inputs not determined by markets and pricing?

Again, the government does not economize.  It rations.

A business appropriates the goods its laborers produce and exchanges it with a consumer (of goods) for money.

Um, no it does not.  The goods that the laborers (and capital goods) produce are not owned by the laborers, but by the employer.  There is no apropriation.

So by your definition, taxation is merely unsold products and the goods the government receives by exchanging them is analogous to profit.

I'm sorry, I can't make any sense of this sentence.

Clearly both appropriate money from their subjects.

This is absurd.  A landlord sells a service.  The consumer buys the service by economizing.  The taxpayer doesn't have the choice, nor is the taxpayer buying anything.  The taxpayer is being forced to pay a fee for nothing.

Does a tenant get anything in exchange for paying rent? If yes, then it follows that a citizen also gets something in exchange for paying taxes, and your last sentence is false.

What do you get in return for paying taxes?  You might get something in the future (a government service), but taxes are oftentimes disproportional.  Depending on your income, you are paying for what other people are benefiting from.  But, all of this really misses the point of the microfoundation of economization and the market process.

They are worth more idle to the owners of them.

You need to start thinking within the framework of economization and the market process.  Re-read the article I linked to.

I assume Keynesians are interested in improving society as whole (whatever they think that means) than merely improving the condition of land owners.

But, redistribution doesn't lead to the improvement of society as a whole.  Society, as we know it, has been built on the principle of economization, which requires the private ownership of goods.  The government disrupts this process of economization.  Economization allows for the tendency of the best use of the economic goods in question.  By redistributing these resources that tendency is sidestepped.

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I don't understand the similarity between the two.  Why are you making the comparison?  If the government worked within the market process then it couldn't serve its function.  It's the ability to overstep the market process that gives government the ability to do what it does; government doesn't have to economize.  Government services aren't economical or profitable -- they are justified on different grounds (usually, moral grounds).  If government was constrained by the market process then it would no longer be government.

A landlord and a government both control a given territory. For someone to reside in the territory, he or she must pay a fee. In the case the landlord, this fee is called rent. In the case of the government, this fee is called taxation. A person can move from one apartment to another, thus market forces can determine rent. A person can move from one city to another, thus market forces can determine taxation. I am a making the comparison because I am trying to show that economics function the same within both what we call a private and public system.

Again, the government does not economize.  It rations.

Forgive me if I'm not understanding your terms. Would it be correct to say New York City rations within the city just as a factory rations within the factory? Is the rent a landlord charges an economization? If so, wouldn't the taxation New York charges also function as an economization?

Um, no it does not.  The goods that the laborers (and capital goods) produce are not owned by the laborers, but by the employer.  There is no apropriation.

I mean to use the word appropriation in a purely descriptive value-free sense. We are discussing economics, not morality. Surely the laborers create the goods and are the first to possess them, so there must be a process for where they had them over to the "owners." Similarly, citizens produce money which they hand over to the government. How is this different in economic terms?

I'm sorry, I can't make any sense of this sentence.

Workers produce x (goods)

Citizens produce y (money)

Business exchanges x (goods) for y (money)

Government exchanges y (money) for x (goods)

Business gives workers y - z (z=whatever the business retains [profits])

Government gives citizens x - w (w=whatever the government retains)

Both x and y perform the same function in each step. Does this make sense?

This is absurd.  A landlord sells a service.  The consumer buys the service by economizing.  The taxpayer doesn't have the choice, nor is the taxpayer buying anything.  The taxpayer is being forced to pay a fee for nothing.

What service does a landlord sell? Letting someone inhabit a given area? That's the same service that a government performs. A person can chooses to move to an apartment in the same way he chooses to move to a city. We can debate the moral equivalence of the two, but I don't see why you won't concede that they are economically comparable.

What do you get in return for paying taxes?  You might get something in the future (a government service), but taxes are oftentimes disproportional.  Depending on your income, you are paying for what other people are benefiting from.  But, all of this really misses the point of the microfoundation of economization and the market process.

Rent is oftentimes disproportional. For example, I was able to negotiate a lower rate than what the other people in my building are getting. So I'm getting the same service for a lower price. Wages for the same job can be disproportional. For example, union workers might get paid more than equivalent nonunion workers. Does this mean these things aren't "economized"?

But, redistribution doesn't lead to the improvement of society as a whole.  Society, as we know it, has been built on the principle of economization, which requires the private ownership of goods.  The government disrupts this process of economization.  Economization allows for the tendency of the best use of the economic goods in question.  By redistributing these resources that tendency is sidestepped.

In my factory example, when the managers barge in to take the widget machine from my coworker and give it to me, isn't that disrupting economization? Why do they step in if they don't think it will improve the business as a whole (or their profits at least)?

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Let me reiterate my point. Economics is supposed to be a predicative science. Austrians and Keynesians make different predicative claims.  I want to examine the consistency of their predicative claims. I am interested in two areas: the factory economy as depicted in my example and the national economy. I gather each's schools predictions to be thus:

Keynesian predictions

A. A factory economy will be more productive if idle resources are rationed from the top down.

B. A national economy will be more productive if idle resources are rationed from the top down.

Austrian predictions

A. A factory economy will be more productive if idle resources are rationed from the top down.

B. A national economy will be less productive if idle resources are rationed from the top down.

It seems to me that the Keynesian is consistent whereas the Austrian is not. I am wondering what differentiates A from B in a way that would affect an Austrian's predictions. Or is the above not an accurate representation of what Austrians predict?

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Let me see if I understand you correctly.

The factory example is this: One of the machines breaks down. The factory owner notices this, and puts the now idle worker, who used to work the machine, at work at another machine, which was idle until now for some reason. Result:increased production, a good thing.

Similarly, the govt sees idle workers in an economy and puts them to work at an idle factory. Result:increased production, a good thing.

If that is your thinking, I see a flaw. The factory owner will only put the idle worker to work at the idle machine if he thinks it will make him money. He assumes making widgets is what people want, and his whole gfactory is built on that assumption. Indeed, until now, his assumption seemed correct, since until that first machine broke down he was making widgets with it and selling them at a profit. [Moreover, should he be wrong, he will be the one losing money, so he is very careful and thinks twice before deciding who will work at what].

The govt, however, will put the idle worker to work at the idle machine whether it is profitable or not. It is interested in the worker having a job, not in the job being productive and profitable for the one paying the salaries.

These two different goals have different effects on the continued wealth of the country. The factory owner wants to make money. That's all he cares about. He doesn't care at all about the worker having a job per se. But how does the factory owner make money? In one way only, by making things people want. Thus the factory owners goal is increasing the wealth [=useful goods and services] of the nation. Thus the worker, too, only has a job if that job is part of the process of increasing the wealth of the nation. When the factory owner calls the shots, only productive jobs are tolerated.

The govt, on the other hand, as it announces clearly, is interested only in "creating jobs", be they productive jobs or parasitic jobs [=jobs where the worker draws a salary, but is not productive of things people want, i.e. does not increase the wealth of the nation]. When the worker is idle and the resources are idle, there is always a reason. The reason is that the worker was at work doing something that is no longer wanted by the nation. Thus he was fired. The resources are idle now because there is no demand for what they produce. Thus the govt created job is a parasitic job, drawing money and resources from the economy without producing anything useful.

What is needed here is flexibility, a natural state of things in a free market, but destroyed by govt intereference, i.e taxes and regulations and imposition of union laws. These things prevent the resources and the worker from being given a new use, making something that is useful and wanted bythe nation.

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That is a pretty good post.

Result:increased production, a good thing.

Similarly, the govt sees idle workers in an economy and puts them to work at an idle factory. Result:increased production, a good thing.

I think you understand my point pretty well except for one thing. I don't mean to imply that increased productivity is a good thing. Certainly many Keynesians feel this is a good thing, but that opinion seems quite different from their predictive claims. It seems to me that you can accept Keynes's descriptive claims without advocating government intervention. Opposing the use of nuclear weapons does not mean that you have reject a physicist's description of how a nuclear weapon works. Now if we can describe different types of productivity, then we can perhaps refute certain Keynesian claims or at least expand on them to create something more useful.

The factory owner will only put the idle worker to work at the idle machine if he thinks it will make him money. He assumes making widgets is what people want, and his whole gfactory is built on that assumption. Indeed, until now, his assumption seemed correct, since until that first machine broke down he was making widgets with it and selling them at a profit. [Moreover, should he be wrong, he will be the one losing money, so he is very careful and thinks twice before deciding who will work at what].

I agree with this.

The govt, however, will put the idle worker to work at the idle machine whether it is profitable or not. It is interested in the worker having a job, not in the job being productive and profitable for the one paying the salaries.

I disagree with the notion that the government does not have anything to gain or lose itself. Politicians are interested in gaining and maintaining positions of power. Additionally, the decisions politicians make while in office affect their profits after they leave. Many go on to receive high paying positions in the business world. A decision that harms the interests of a politician's customers (i.e. campaign donors and future employers) would be unprofitable for the politician, and thus he would not pursue it anymore than the factory owner would.

These two different goals have different effects on the continued wealth of the country. The factory owner wants to make money. That's all he cares about. He doesn't care at all about the worker having a job per se. But how does the factory owner make money? In one way only, by making things people want. Thus the factory owners goal is increasing the wealth [=useful goods and services] of the nation. Thus the worker, too, only has a job if that job is part of the process of increasing the wealth of the nation. When the factory owner calls the shots, only productive jobs are tolerated.

How does a politician get elected without making decisions that people want? I really don't see the motivations of the factory owner and the politician to be fundamentally different. You also have to remember that a state is a competitor among other states. The decisions that the government makes affects the prosperity of the nation versus that of other nations. Look at China and Japan. They have large trade surpluses largely due to government intervention. If the industrialization of a nation can be considered akin to the profitability of a business, then a strong argument can be made that governments are motivated by profit-like goals.

The govt, on the other hand, as it announces clearly, is interested only in "creating jobs", be they productive jobs or parasitic jobs [=jobs where the worker draws a salary, but is not productive of things people want, i.e. does not increase the wealth of the nation]. When the worker is idle and the resources are idle, there is always a reason. The reason is that the worker was at work doing something that is no longer wanted by the nation. Thus he was fired. The resources are idle now because there is no demand for what they produce. Thus the govt created job is a parasitic job, drawing money and resources from the economy without producing anything useful.

What the government says is just PR. Businesses say the same type of things all the time. For example, when I received a raise, my boss told me not to tell my coworkers because it might "hurt their feelings." While it might be true that my company doesn't want to hurt people's feelings, and while it might be true that the government is interested in creating jobs, it does not follow that there is no other motivation behind these words. My company seeks to avoid hurting the feelings of its employees because it might lead to decreased productivity and thus decreased profits. I don't see why we should assume any differently about government officials.

What is needed here is flexibility, a natural state of things in a free market, but destroyed by govt intereference, i.e taxes and regulations and imposition of union laws. These things prevent the resources and the worker from being given a new use, making something that is useful and wanted bythe nation.

So was I wrong about the predictions that Austrians make? It sounds like you would concede that state allocation of idle resources does increase productivity, but that the increased productivity doesn't provide desired good and services. Is that correct? I'm really trying to figure out where Austrians and Keynesians differ on a descriptive level.

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the politicians main interest is in getting re-elected. He does this by divvying out money and favors to those who got him elected. Unlike a businessman, who is interested in the long term existence of his business, wanting it to grow and prosper, the politician is interested in milking what exists. Apres moi le deluge is his motto, if he even thinks about it at all. He probably assumes that a whole country to milk is such a huge thing it can never be sucked dry no matter what he does.

Certainly with sycophantic economists telling him that every penny he spends is a great boon to the world, no matter what he spends it on or where the penny came from, he has no intention of ever changing anything. When disaster occurs, like a recession etc, his experts tell him what is needed is for him to divvy out even more money to his friends, to stimulate the economy. 

It sounds like you would concede that state allocation of idle resources does increase productivity, but that the increased productivity doesn't provide desired good and services.

A good real life example is the Chevy Volt. No private company in the world would ever dream of making one. But the govt run GM company does, even though they admit it is overpriced and no one will buy it [except govt offices, who dont use their own money, but the taxpayers]. So yes, of course, if money is spent producing something, it gets produced, albeit in a wasteful manner. But it comes at the expense of something more important not getting produced.

An examination of every govt run business in any country shows that they always lose money, for some odd reason. And the more the govt owns, the poorer the country, with Soviet Russia the ultimate example.

From what you write, I am guessing you would benefit from reading more widely about AE. You could go with the Mises Daily articles for particular topics, or find one of JJ's reading lists, going from beginner's to advanced books. [And of course there is always Smiling Dave's Blog site, always presenting random good stuff in simple language].

 

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the politicians main interest is in getting re-elected.

The CEO's* main interest is in keeping his job and the benefits that go with it.

*A CEO is more analogous to a politician (particularly the president) than an owner is since they both make decisions on behalf of the supposed owners. So that's what I'll stick with.

He does this by divvying out money and favors to those who got him elected.

A CEO does this by divvying out money and favors to those who hired him.

Unlike a businessman, who is interested in the long term existence of his business, wanting it to grow and prosper, the politician is interested in milking what exists. Apres moi le deluge is his motto, if he even thinks about it at all. He probably assumes that a whole country to milk is such a huge thing it can never be sucked dry no matter what he does.

I disagree. A CEO is interested in milking what already exists within a company (its labor and capital). If hired businessman are really looking out for the company in the long term, then how do you explain things like Enron and the recent banking crisis? Surely CEO's are capable of milking their companies for their own interest.

Certainly with sycophantic economists telling him that every penny he spends is a great boon to the world, no matter what he spends it on or where the penny came from, he has no intention of ever changing anything. When disaster occurs, like a recession etc, his experts tell him what is needed is for him to divvy out even more money to his friends, to stimulate the economy.

And when a disaster strikes a company, a CEO tries to divvy money out to his friends. Just look at all of the bonuses given in companies that received bailouts. If not his friends, then the people who got him there (i.e. the company owners, or campaign contributors in the case of the US president).

A good real life example is the Chevy Volt. No private company in the world would ever dream of making one. But the govt run GM company does, even though they admit it is overpriced and no one will buy it [except govt offices, who dont use their own money, but the taxpayers]. So yes, of course, if money is spent producing something, it gets produced, albeit in a wasteful manner. But it comes at the expense of something more important not getting produced.

I'm not sure what you are trying to prove by this example. Just because Microsoft would make something that Kellogs wouldn't dream of doesn't mean that Microsoft and Kellogs don't abide by the same economic principles. Are you saying that the government only produces unuseful things and private companies always produce useful things? My company recently spent $50,000 developing a particular product. And yet they've only made $300 from sales so far and will surely never break even. Private companies are in no way immune from producing undesired products. And governments are capable of creating useful products. Who do you think developed the internet that you are using right now?

An examination of every govt run business in any country shows that they always lose money, for some odd reason. And the more the govt owns, the poorer the country, with Soviet Russia the ultimate example.

What do you mean they always lose money? How could government survive if it always loses money? The primary source of government revenue is taxation. Just because a post office requires tax funding to operate doesn't mean it loses money. That would be like saying a landlord loses money because he requires rent to operate. How do you measure the poorness of a country? Are you using the same standard that you are when measuring the poorness of a company?

As far as I can tell, you haven't shown any essential differences between a government and a business that would affect economic predictions concerning productivity.

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What happened to Enron? they ran out of money and went bankrupt, because they ran the business as you described. The banks, too, all went bankrupt, but were bailed out. In other words, a business that isn't run like a business, meaning to be more productive, has to close down. Govts do not have to close down. There is plenty more money to waste, always, a whole country full of it. Or so it seems, until they indeed waste so much they drive the whole country into poverty. this has happened many times.

Bottom line, a good business, and there are plenty such, tries to be more productive, all as I described in the earlier post. No govt ever thinks about anything but milking the citizenry for all they can get.

Microsoft and Kellogs abide by the same principle, not producing something that they know in advance cannot possibly turn a profit. The govt has realized the Volt is too expensive for people to buy. Do you think they will stop making it? Of course not, too many free lunches are at stake.

As for your company making a mistake, it happens. But they won't get fooled again, will they? And if they keep churning out the product despite selling only $300 worth of it, they will go bankrupt. In other words, there is a built in mechanism, called profit and loss, that makes sure the productive people get rewarded so they can keep on being productive, and the incompetents get shuffled off to do something they are competent at, like sweeping floors. Govt shave no such mechanism. The more a dpeartment fails in its task, the more money it will get.

Govt survives even though it alway sloses money because they take nore and more money from the citizenry. It's like asking how can the Mafia keep existing if they blow all the money they steal on wild parties. The answer is they just steal more.

As for the post office, compare it to Fedex or UPS. the owners of those companies made back all the money they invested, plus more profits each year. Their business does not need more and more money from any one. It doesn't lose money for its owners, it makes money. The post office provides a similar service, in ana area in which it has a monopoly, and still cannot take in more than it spends, year after year after year. That is called it is losing money. Requiring more and more money from the citizenry, all the time without cease, certainly does mean it is losing money. Imagine if Bill Gates' son [if he has one] came in every day to his poppa and said the business the son opened needs more funding from poppa Gates. That means, by definition almost, that it is losing money.

In fact, claiming that just because a post office needs tax funding to operate doesn't mean it loses money is so wild a statement I can but suspect a troll at work. If you are, congrats, you got me until now. If you aren't and are humble in nature, then consider this a learning moment. The time has come for you to educate yourself far more thoroughly than what you can get from my posts. If you aren't a  troll and yet insist you are right, then of course one can only hope you will one day learn, hopefully not the hard way. In any case, time to end the dialogue, since no matter hwo you look at it, it's fruitless.

Hit the books, my son.

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In other words, a business that isn't run like a business, meaning to be more productive, has to close down. Govts do not have to close down. There is plenty more money to waste, always, a whole country full of it. Or so it seems, until they indeed waste so much they drive the whole country into poverty. this has happened many times.

Plenty more money to waste, in other words, the difference between government and business is quantitative and not qualitative. Quantitative differences are not enough to adopt a different set of economic assumptions. The differences must be qualitative. The bigger an entity is, the longer it can survive failure. The collapse of governments just takes longer. Besides, the people running the government is always changing. In what sense is the present US government the same as the one that existed 20 years ago? If a different group of people coming to power to dominate a single territory constitutes a single state, then a different group of people coming to power to dominate a single market constitutes a single business.

Bottom line, a good business, and there are plenty such, tries to be more productive, all as I described in the earlier post. No govt ever thinks about anything but milking the citizenry for all they can get.

And what do we mean by productive? Is producing Chevy Volts not productive? You argued that the government is only interested in producing Volts and not in making a profit. But now you're reversing that position. You're saying that they are not interested in producing but in milking profits from its citizenry. Which is it--are they interested in being productive or in milking money?

Govt survives even though it alway sloses money because they take nore and more money from the citizenry. It's like asking how can the Mafia keep existing if they blow all the money they steal on wild parties. The answer is they just steal more.

Business survives even though it always loses products because it takes more and more products from its employees. Remember, its government that produces money, so if we are going to compare the two, we have to compare equivalent functions.

As for the post office, compare it to Fedex or UPS. the owners of those companies made back all the money they invested, plus more profits each year. Their business does not need more and more money from any one. It doesn't lose money for its owners, it makes money. The post office provides a similar service, in ana area in which it has a monopoly, and still cannot take in more than it spends, year after year after year. That is called it is losing money. Requiring more and more money from the citizenry, all the time without cease, certainly does mean it is losing money. Imagine if Bill Gates' son [if he has one] came in every day to his poppa and said the business the son opened needs more funding from poppa Gates. That means, by definition almost, that it is losing money.

OK, what do we mean by profits? Owners of a business make a profit by making more money than they invest. For example, a business owner invests $100 on labor priced at $100 on the market. This labor produces a commodity that is sold by the owner for $120. Let's look at the post office. The postal workers invest labor priced at $100 on the market for a commodity that is worth $100 on the market. They sell this commodity for $120. Thus, the postal workers have made a profit.

If we can say that the post office loses money by selling something to the government, then any business that sells something to the government loses money. Microsoft sells products to the government, so Microsoft must lose money.

We can make one of two conclusions:

1) The government produces only money and nothing else. If we accept this view, then the government can only be unprofitable in money. Since it's the only producer of money, it can never have more money than it produces.

2) The government produces everything that money can buy. If a business owner can be said to produce a commodity because he has given money to his employees, then the government can be said to produce everything because it is the original giver of all money. Both the post office and FedEx receive money, so there is no essential difference. They are both subsidiaries of the state to different degrees.

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Fool on the Hill,

I see two possibilities.

1. Your mind is already made up, unshakably. Then there is of course no point in further discussion.

2. You seek knowledge. In that case, you must do what we all did, some systematic reading with an open mind, because your needs obviously cannot be filled from forum postings.

Come back when you have read Economics in One Lesson, a free, easy book, and can summarize its position. Then we can see why you think it in error, if you do. 

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z1235 replied on Sat, Aug 20 2011 12:18 PM

Smiling Dave:

Fool on the Hill,

I see two possibilities.

1. Your mind is already made up, unshakably. Then there is of course no point in further discussion.

2. You seek knowledge. In that case, you must do what we all did, some systematic reading with an open mind, because your needs obviously cannot be filled from forum postings.

Come back when you have read Economics in One Lesson, a free, easy book, and can summarize its position. Then we can see why you think it in error, if you do. 

Dave, there is a third possibility: He may be losing his mind. His latest posts are completely devoid of coherence.

 

 

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OK, I'll read it.

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OK, I'll read it.

You have gained my respect.

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I have begun reading Economics in One Lesson. I had thought of waiting until I finished all of it before posting something, but I'd like to write down my thoughts before I forget. And it seems the sections are relatively self-contained, so I don't expect to find a justification for the first lesson in the last one.

The Broken Window

In this section, Hazlitt seeks to show that the "new" economists are primarily focused on the short term to the detriment of the long term. Now, while it certainly seems that Hazlitt thinks that there is a "right" economic policy, he does imply two value-neutral outcomes that will result from the implementation of "his" policy. These things are: (1) there will be more goods in the given society and (2) the majority of the people will prefer this outcome to the alternative. I think it is best from an economic standpoint to look at factors such as these as opposed to saying something like "you shouldn't break someone's window because breaking someone's window is inherently wrong." The latter is a moral position. While I may have argued against such a moral position in other threads on this board, I have no interest in doing so here. I am interested in an economic theory to the extent that it can explain and predict.

Hazlitt begins with the scenario of someone breaking a baker's window and ends thusly:

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

http://steshaw.org/economics-in-one-lesson/chap02p1.html

While this seems reasonable enough at first, I fear that Hazlitt may be falling into the same nearsightedness that he accuses his opponents of. Let me present three scenarios that take the same premises and expand on them with additional details that could possibly be in play.

Scenario 1

Let's assume that all the characters have the following possessions, abilities, and desires at the beginning of the scenario:

Baker:

  • Possessions: 1 window, $250
  • Ability: making baked goods
  • Desires: 1 suit, money

Glazier:

  • Possessions: None
  • Ability: making windows
  • Desires: 1 suit, money

Tailor:

  • Possessions: None
  • Ability: making suits
  • Desires: baked goods, money

Now let's look at two possibilities: whether the window is not broken or broken.

Possibility A: No broken window

If the window is not broken, then the baker pays the tailor $250, the tailor makes a suit for the baker, the tailor gives the baker $250, and the baker makes baked goods for the tailor. All desires capable of being fulfilled having been completed, the transactions stop. The gains and losses in possessions can be expressed as follows:

Baker:

  • Gains: 1 suit
  • Losses: None

Tailor:

  • Gains: 1 baked goods
  • Losses: None

Glazier:

  • Gains: None
  • Losses: None

Now let's look at possibility B.

Possibility B: Broken window

If the window is broken, the baker acquires a desire for a window that supersedes his desire for a suit. The baker gives the glazier $250, the glazier makes a window for the baker, the glazier gives the tailor $250, the tailor makes a suit for the glazier, the tailor gives the baker $250, the baker makes baked goods for the tailor, the baker gives the tailor $250, the tailor makes a suit for the baker. The transaction thus ends, and we are left with the following gains and losses:

Baker:

  • Gains: 1 suit
  • Losses: $250

Tailor

  • Gains: 1 baked goods, $250
  • Losses: None

Glazier:

  • Gains: 1 suit
  • Losses: None

Let's look at the two predictive claims that Hazlitt makes and compare the outcomes of the two possibilities.

(1) Which possibility produces more goods?

Final goods in possibility A: 1 window, 1 suit, 1 baked goods, $250

Final goods in possibility B: 1 window, 2 suits, 1 baked goods, $250

The only difference is one extra suit in possibility B. So breaking a window produces more goods than not breaking it.

(2) Which possibility would the majority of the people prefer?

Baker: gains 1 suit in both, but loses $250 in B. Prefers Possibility A.

Tailor: gains 1 baked goods in both, but also gains $250 in B. Prefers Possibility B.

Glazier: gains nothing in A, but gains a suit in B. Prefers Possibility B.

Thus, a majority of people prefer the result that breaking a window would produce.

Conclusion: Hazlitt's prediction is false for Scenario 1.

Scenario 2

The glazier is starving but has no money to buy food. His only skill is to make windows but no one wants windows. The glazier dies of starvation.

Next year, after saving up more money, the baker decides to build a second bakery. The bakery needs 5 windows, but there is no glazier in town to make them. The baker has to hire a glazier from out of town who charges $500 to install each window. If the original window had been broken, the glazier would have lived, the baker would have saved $1000, and no fuel would have been destroyed by the out-of-town glazier traveling from long-distance.

Scenario 3

Suppose the baker had $500. He wants to spend $250 on a suit but has no use for the other $250. If the window is broken, the baker can still buy the suit and nothing less is produced.

While these three scenarios indicate that breaking a window can indeed meet Hazlitt's two goals, I do not mean to imply that this is always the case. And I suspect that the Keynesians don't believe that either. Nor do I mean to suggest that breaking the window is the best solution. Stealing the money, for example, would probably require less total work than breaking and remaking the window while achieving the same end result. And, particularly in scenario 2, it might be in the baker's best interest to simply give the money away.

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z1235 replied on Tue, Aug 30 2011 7:32 AM

Fool on the Hill:
Nor do I mean to suggest that breaking the window is the best solution. Stealing the money, for example, would probably require less total work than breaking and remaking the window while achieving the same end result. And, particularly in scenario 2, it might be in the baker's best interest to simply give the money away.

Let me know if I sum up your argument correctly: If the only village doctor sits unemployed (and is, gasp, about to die of hunger due to lack of income) it may be beneficial to (1) occasionally break someone's leg/arm, (2) steal goods/money from someone and give them to the hungry doctor, or (3) voluntarily give money to the doctor -- so that the village has a (living) doctor available when one may be needed in the future. Or, assuming villagers are short-sighted idiots, an enlightened ruler would be well advised to devise versions of the above schemes for the long-term wellfare of the village.

Have you ever heard of insurance, or how the free market (or peaceful/voluntary exchange of property) allows for the costs of rare, large, future losses to be distributed over long periods of time and/or large sets of agents potentially to be affected by such losses? 

 

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Let me know if I sum up your argument correctly: If the only village doctor sits unemployed (and is, gasp, about to die of hunger due to lack of income) it may be beneficial to (1) occasionally break someone's leg/arm, (2) steal goods/money from someone and give them to the hungry doctor, or (3) voluntarily give money to the doctor -- so that the village has a (living) doctor available when one may be needed in the future. Or, assuming villagers are short-sighted idiots, an enlightened ruler would be well advised to devise versions of the above schemes for the long-term wellfare of the village.

If by beneficial, you mean it meets the two criteria that I specified, then yes it might be. To be clear, this does not mean that there aren't other criteria that might be deemed "more important." It also does not mean that I necessarily advocate such actions (nor does it mean that I necessarily don't).

Have you ever heard of insurance, or how the free market (or peaceful/voluntary exchange of property) allows for the costs of rare, large, future losses to be distributed over long periods of time and/or large sets of agents potentially to be affected by such losses?

Yes, I believe that's also called social welfare in certain cases and is pretty similar to some of the ideas that I discussed. Additionally, the baker could insure his window, which might change the scenario and make it beneficial for him to have it broken.

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Wheylous replied on Tue, Aug 30 2011 8:34 PM

which might change the scenario and make it beneficial for him to have it broken.

But then the insurance company doesn't have as much money to invest in other businesses.

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The Blessings of Destruction

In this section, Hazlitt takes his broken window analogy and seeks to apply it to the real world. As could be expected, he applies it to the event that evokes the strongest emotional reaction: War. The implication seems to be that if you support Keynesian reasoning, you must support war. I'm not sure what the Keynesian position is exactly, but as my previous response indicated, the breaking of a window doesn't necessarily lead to a net increase in productivity or a situation that the majority prefers to the alternative. And I've indicated that there could be other reasons not to break a window. So let it be clear that my position in no way necessitates the avocation of war.

[The broken-window fallacy ] confused need with demand. The more war destroys, the more it impoverishes, the greater is the postwar need. Indubitably. But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power.

Hazlitt is right in this assertion. War does increase need, but what we call "peace" does not necessarily satisfy existing needs. In the broken window scenario, the glazier had a need for a suit but he didn't have a demand for one. What breaking the window did was transform his need into a demand. True, it did create a new need for the baker, but this need was also capable of changing into a demand. Ask yourself this: if it's never necessary to create new needs to satisfy current ones, then why do businesses spend so much on advertising?

But why don't we assume that Hazlitt is right for a minute. Let's assume that breaking a window can never create more products or satisfy more people's desires. What are some more examples we could come up with?

1. An office worker works 8 hours a day and spends 30 minutes of that time browsing Facebook. One day, his boss reads a book by John Maynard Keynes and decides to "break" the worker's "window"--that is, he blocks Facebook from the company computers. Having lost his "window," the employee decides that he needs to purchase a new "window." So he buys internet service at his home and now spends the extra 30 minutes at the office working since he has nothing else to do. While it my appear that productivity has increased, we have to remember the money that the worker spends to purchase internet access. We're forgetting about the tailor. The worker was planning on buying a suit with that money. Now there is one suit that the world will never see as a result of the employer's naive actions.

2. A squatter lives in an old dilapidated house. One day, after having a conversation with a  "new" economist, the absentee-owner of the house decides to demolish it to make way for one that he can rent out. While this act may provide jobs for the demolition and construction crews, we are forgetting the squatter. The squatter was going to use his $250 to buy a suit. Now he has to use it to rent the new house. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

3. Taggart Transcontinental has built a new super fast railway made of Rearden Metal. No one wants to ride the old Phoenix-Durango Railroad anymore. It's now in danger of going out of business. In order to prevent the Phoenix-Durango Railroad from "breaking," the owners have to invest more money to convert the track to the superior Rearden Metal. The owners were planning on spending that money on 10,000 suits. That's 10,000 suits the world will never see thanks to the reckless actions of Taggart Transcontinental.

Always remember what James Taggart ... I mean Henry Hazlitt says: What is harmful or disastrous to an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.

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But then the insurance company doesn't have as much money to invest in other businesses.

So the insurance company pays the glazier $250 to replace the window. You're right. The insurance company no longer has $250 to invest in other businesses. BUT the glazier now has $250 to invest in other businesses. So the total amount of investible money has not decreased.

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1. It's not the worker's window. The computer and the worker's time during working hours belong to the employer. Far from breaking a window, he was saving his own window from being broken, by preventing the worker from stealing from him.

2. Same mistakeas in 1. Also same mistake as in 3.

3. Let us not confuse destruction with investment. Destruction means just that, destruction. Destruction does not increase the supply of goods and services that existed before the destruction; by definition, it decreases them. The railroads have increased the supply by replacing the inferior metal with the superior metal. Same thing in 2.

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1. It's not the worker's window. The computer and the worker's time during working hours belong to the employer. Far from breaking a window, he was saving his own window from being broken, by preventing the worker from stealing from him.

I am measuring whether an action can meet two criteria: (1) Increase the number of products in the economy; and (2) produce a situation that is preferable for the majority of people than the alternative.

Can you explain why who owns what matters in meeting these two criteria? Wouldn't the effect have been the same if the baker had broken his own window? Would Hazlitt have said it would have be a good idea for the baker to break his own window?

3. Let us not confuse destruction with investment. Destruction means just that, destruction. Destruction does not increase the supply of goods and services that existed before the destruction; by definition, it decreases them. The railroads have increased the supply by replacing the inferior metal with the superior metal. Same thing in 2.

Well my Scenario 1 increased the supply of goods. Therefore, breaking a window can be a form of investment by your definition.

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z1235 replied on Tue, Aug 30 2011 9:08 PM

Fool on the Hill:
To be clear, this does not mean that there aren't other criteria that might be deemed "more important."

"More important" to whom? The one's whose arms and legs had to be broken, perchance?

Yes, I believe that's also called social welfare in certain cases and is pretty similar to some of the ideas that I discussed. 

I said "peaceful/voluntary exchange of property". Social welfare and breaking inocent people's windows, arms and/or legs has absolutely nothing to do with it. Finally, if more broken windows, arms, and legs do end up being more "beneficial" in some sick, perverted, sociopathic way, wouldn't that imply that an utter destruction of this planet would bring "benefits" of orgasmic proportions? Reductio ad absurdum, much?

 

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Wheylous replied on Tue, Aug 30 2011 9:13 PM

So the total amount of investible money has not decreased.

But you're down one perfectly good window. So it does seem like the total amount of usable goods in the economy has decreased while money went from one guy to another.

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who owns what matters because nothing was actually broken in your facebook story. you called denial of access to facebook a breaking. I pointed out that it is a repair, preventing theft.

again, nothing was broken in 1. the computer still exists. all that happened is that the employer put a stop to theft.

it's good to see someone reading a book with an open mind and a spirit of humility.

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z1235 replied on Tue, Aug 30 2011 9:22 PM

Fool on the Hill:
(1) Increase the number of products in the economy;

More products, in and of itself, does not translate into more wealth. Stealing $2billion from Bill Gates and paying 20,000 artists to make silly wood-carved figurines that no one wants does not increase wealth. 

(2) produce a situation that is preferable for the majority of people than the alternative.

One surly Bill Gates, 20,000 happily employed wood-carvers, and 20,000 figurines does not make the world a wealthier place, even though 20,000 > 1. Value is only subjective, which makes it impossible to aggregate into an objective quantifiable measure.

 

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"More important" to whom? The one's whose arms and legs had to be broken, perchance?

For example, one might consider it unethical to break someone's window. One might say it's more important to uphold morality than it is to increase productivity or overall utility.

I said "peaceful/voluntary exchange of property". Social welfare and breaking inocent people's windows, arms and/or legs has absolutely nothing to do with it.

If all the participants sign a "social contract" giving someone the right to break windows/legs when he thinks it's to the community's best interest, then it could be voluntary (again, I'm not advocating this per se).

Finally, if more broken windows, arms, and legs do end up being more "beneficial" in some sick, perverted, sociopathic way, wouldn't that imply that an utter destruction of this planet would bring "benefits" of orgasmic proportions? Reductio ad absurdum, much?

If eating some food right now is beneficial to me, does that mean eating all of the food in the world will bring me even greater benefits? You reasoning doesn't make sense.

BTW, do you think if someone had killed Hitler that it might've benefited humanity in some way? If you do, then you believe in a variant of the broken window fallacy.

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Wheylous replied on Tue, Aug 30 2011 9:27 PM

BTW, do you think if someone had killed Hitler that it might've benefited humanity in some way? If you do, then you believe in a variant of the broken window fallacy.

How so? It decreases war, eliminating broken window.

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But you're down one perfectly good window. So it does seem like the total amount of usable goods in the economy has decreased while money went from one guy to another.

But you're thinking in the short term, which is what Hazlitt condemns the Keynesians of doing. There will be a new window. So they have not really lost a window.

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z1235 replied on Tue, Aug 30 2011 9:36 PM

FOTH, value is subjective. Ponder. Give it time to simmer. Your inability to distinguish between (1) valuation of things for yourself (eating vs, overeating) and (2) valuation of things in someone else's stead (destroying just enough of other people's limbs and property, but not more than that) is bordering on sociopathic.

 

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who owns what matters because nothing was actually broken in your facebook story. you called denial of access to facebook a breaking. I pointed out that it is a repair, preventing theft.

OK, let's change the ownership then and see if things change. The office and computer belong to the employee, he's the only worker. The worker/owner decides to block Facebook on his office computer. Now he has to buy it at home. Has that changed the outcome?

again, nothing was broken in 1. the computer still exists. all that happened is that the employer put a stop to theft.

OK, but something was definitely broken in 2. Are you saying the results for the community as whole would be different if (a) the squatter's home was destroyed by the owner, or (b) the "squatter" owned it but someone else came along, demolished it, built a new one, and forced the "squatter" to pay rent. It seems to me that both scenarios are equally harmful to the squatter and equally beneficial to the owner/builder.

it's good to see someone reading a book with an open mind and a spirit of humility.

Likewise the people reading my posts.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
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Wheylous replied on Tue, Aug 30 2011 9:38 PM

A new window which was not needed. A window which took time out of the broken window guy's life which he could have spent writing a book, fixing his house, living with his family (and there is no "new life" for him). A new window which created an artificial need for new window fixers who waste time learning how to fix windows which are not really needed.

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