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Discussing with a Keynesian -broken window fallacy..need some help!

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Heather posted on Thu, Oct 20 2011 1:14 PM

I just fresh signed up with this site and happen to currently be in a discussion with a guy at work who i will call "Mark". I sent him an email containing Lew Rockwell's article on where he talks about the broken window fallacy. http://www.lewrockwell.com/rockwell/broken-window.html

The following is Mark's response to the article.

OK so I have read the article on the Broken Window Fallacy and here is my critique. I will agree that government spending after disasters does not act as an economic stimulus (via the money multiplier) to those that have suffered a true loss (like a flooded house.) However,  there is a whole segment of companies that do find a way to profit from a natural disaster without suffering an economic loss. Think Home Depot and the extra plywood sales they make. That is true economic stimulus via the money multiplier.  In other works the Broken Window Fallacy only explains one side of the economic equation. Those that suffered a loss.   

 Economic activity is just too complicated to be explained by simple theories and laws.

 Economic activity is so complicated that even the best minds in economics get it wrong all the time.

 Economics attempts to explain or predict human behavior and no one will  ever come up with a formula or theory that correctly predicts human behavior. Impossible! We are irrational creatures.   

If all economists were laid end to end, they would not reach a conclusion.

 

Like i mentioned earlier, i'm pretty new to all of this, but i really want to help enlighten this guy. How do i go about this one?

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First off, Welcome to the forum!  Always great to have new peeps around, especially with great questions (and who are debating and discussing out in the real world.)  Be sure to check out the New Member welcome thread, and feel free to PM me or anyone else with any private questions or anything about the forum itself.

 

On to your topic:

perhaps some other examples...see here.  And here.

 

I will agree that government spending after disasters does not act as an economic stimulus (via the money multiplier) to those that have suffered a true loss (like a flooded house.) However,  there is a whole segment of companies that do find a way to profit from a natural disaster without suffering an economic loss.

So what?  He just admitted it wasn't an economic stimulus.  Just because someone profits from rebuilding, it doesn't mean the economy is better off than if the destruction never occured.

 

Think Home Depot and the extra plywood sales they make. That is true economic stimulus via the money multiplier.  In other works the Broken Window Fallacy only explains one side of the economic equation. Those that suffered a loss.

This leads me to believe he doesn't fully understand the story.  I haven't read that article you sent him, but the links above (especially the videos) will do a much better job.

The bottom line is, he sees people making money and thinks "hey look...they now have a job.  There is some good done.  Now someone has a job...See, you and your broken window fallacy are trying to ignore that glazier, and the janitor who cleans up the glass...and all the multipliers like the guy who paints the glazier's truck, and the guy who makes the glass, and the guy who fixed the glazier's truck.  You need to look at both sides."

The problem is he's ignoring the fact that destruction has occurred.  The videos will illustrate this, but the point is if the man who owned the window didn't have it broken, he would have been able to spend his money on something else...a new suit maybe...which would have created an opportunity for a tailor to profit..and added to all his "multipliers".  But now, those resources have to go to replacing the window.  Meaning the man has no suit.  If the vandalism had never taken place, he would have a window and a new suit.  Now, he only has a window.  The economy is poorer overall.

And just think...what argument is the guy trying to make anyway?  If breaking windows is so good for the economy, why don't we pay people to break more windows?  Why the hell don't we just bomb a few cities?  We have pretty high unemployment...that would create plenty of jobs.  Why don't we do that?

 

Economic activity is just too complicated to be explained by simple theories and laws.

That has to be the most ignorant statement I've heard in a long time.  Would he say the same thing about physics or chemistry?  Not that those hard sciences are the same as a social science like economics, but the point is "theories and laws" aren't explanations, they are descriptions...there's a difference.

But his statement here is basically an argument from ignorance...the position of "I don't know the answer, so there must not be one."

People do this all the time.  It helps them make sense of the world and feel better about their own ignorance.  It helps them explain how all these smart people in government, trying to micromanage the economy, could be so incompetent.  Because the alternative (that they're just not really that smart, and actually quite dishonest) is too hard to swallow.  (See here).

People just bank on this whole idea that the world and economics is so complex that no one could ever possibly really know anything. That everything is "always something of an experiment"...that the economy is nothing more than a chemistry set for the government bureaucrats to mix chemicals into and see what comes out...never being able to know what will happen before they do something, and never knowing what would have happened had they not done it.

Everything has to be a big question mark because the person talking doesn't have the slightest clue, so the only way he can call anyone else wrong is to say that no one can be right.

It's a common form of rationalization...A philosophical con game people play to make reality fit their own feelings. "I don't have the evidence or knowledge or insight to draw a conclusion, so I'm going to claim no one does."  (see here for an explanation of this)

The best you're usually going to get from these people is a simple mention of the fact that there exist people who say opposite things. "There's smart people on both sides of that debate."  They will pretend as if this is sufficient (because of course if there is disagreement it means it's a matter of opinion. It's not as if one side could be right and the other wrong. It's just impossible to be able to know anything. And let's not forget, these are very smart people who say these things. They have degrees and prizes and high-level posts that prove how smart they are. They're "economic experts." Nothing like those biased rubes who simply advise world governments on economic matters and don't stand to gain from an inflated currency.)

Just like in most debates they really won't be able to go beyond "Well, ____ say this government policy is a good idea. And they're scientists."

 

Economic activity is so complicated that even the best minds in economics get it wrong all the time.

See what I mean?

 

Economics attempts to explain or predict human behavior and no one will  ever come up with a formula or theory that correctly predicts human behavior. Impossible! We are irrational creatures.

We're not talking about predicting human behavior.  We're talking about physical existence of desired stuff in the world.  He's saying destroying stuff creates an opportunity for some people to profit.  And he even admits that this opportunity only arises because some other people lost...and yet somehow he seems to want to argue that this is a good arrangement?

But just for good measure, to speak to his point about prediction (even though it's completely irrelevant to this discussion, he just introduced it because it helps support his defense of his ignorance), the truth is, yes, the world is complex. It can be impossibly difficult to predict the precise location a man will land if he jumps off the top of a skyscraper. There are countless variables that would make it quite difficult to do such a thing. But you don't need a mathematical model to prove he's going anywhere but down.

Just because you cannot tell the exact details of every specific thing does not mean overall laws cease to exist or that they should be ignored. But that's their entire argument.  People quite literally say that just because no one could tell you with "a high level of certainty" where the man will land after he jumps off the building, it means that no one can even be confident in saying what will happen to him after he jumps.

 

If all economists were laid end to end, they would not reach a conclusion.

Har har har...yes, I've never heard that one before.  And if all ignorant rubes who tried to claim someone else was wrong because "no one can be right" would quit with their nonsense, the world would be a much nicer place.

 

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Welcome to the forum, HeathieAK!

So your co-worker "Mark" says that:

[...] there is a whole segment of companies that do find a way to profit from a natural disaster without suffering an economic loss. Think Home Depot and the extra plywood sales they make. That is true economic stimulus via the money multiplier.  In other works the Broken Window Fallacy only explains one side of the economic equation. Those that suffered a loss.

It's clear to me from this that "Mark" does not understand Bastiat's parable of the broken window. The point of the parable is to show that, in breaking the baker's window, the boy has reduced the overall wealth of the village (and wider community, and so forth). The money that the baker pays the glazier with is not new wealth. The payment is simply a redistribution of existing wealth. When a natural disaster strikes, wealth is redistributed without any intentional harm done. Regardless of who may personally benefit from wealth being redistributed in his favor, the economy as a whole is still poorer.

It's also clear to me that the last four lines of his response are simply a mantra he's repeating to himself to ward off contrary thoughts. I see no need to address them further.

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xahrx replied on Thu, Oct 20 2011 3:05 PM
"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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Economics attempts to explain or predict human behavior and no one will  ever come up with a formula or theory that correctly predicts human behavior. Impossible! We are irrational creatures.

If true, this would cut both ways... how the hell can economists know that there is a "money multiplier" in the first place, given that the economy is so complex as to defy any analysis whatsoever? If it is conceivable that economics could determine that natural disasters result in economic stimulus, then it is conceivable that economics can determine the opposite. Else, the conclusion is itself unfaslifiable (and, therefore, metaphysics, not science).

Clayton -

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Autolykos, good point. And it's the right place to note that simply "jobs" don't make the economy better, but increased productivity makes the economy better. As you said, dstruction-made jobs create a redistribution of resources to just get back to the previous state. If the disaster had not happened, you would have extra productivity.

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Here's an engaging dissertation of Bastiat called L'Etat (The State, written in mid-1800's France so keep that in mind) that addresses the heart of the Broken Window fallacy... the belief that, in the right hands (namely, the government's), something can be gotten for nothing. Destruction is destruction. Even a child can see this. The work done to restore what has been destroyed is exactly equal to the cost of the destruction. If a house is obliterated in a tornado, the cost of rebuilding is the price of what was lost.

The military Keynesians (Republicans) are a tad bit more subtle about this and suggest that the psychology of being at war stimulates people to be more productive and industrious than they otherwise would be, and that this increased productivity is what is causing the increased national product. Even if it is true that people work more and more enthusiastically in a time of war, this does not take into account the lost psychic satisfaction (the ultimate measure of any cost) of leisure. Sure, people are at the lathe milling away... but if they could choose with a magic wand, they'd surely choose not to be at war to begin with and be rocking on their front porch, sipping cider rather than sweating away in front of a steel grinder building bombs to blow up the enemy's lives and property.

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 Alright first of all I want to thank you so much for your input. Let me now follow up on what "Mark" responded to what I hoped would be his wakeup call.

You clearly missed the fact that in the real world there is a new money injected into an economy,  after a disaster, in the form of government spending and aid agencies sending in donations. (think Haiti after the earthquake) These new dollars do act as an economic stimulus subject to the money multiplier. The Broken Window Fallacy assumes the glazer does not get any aid in replacing his window. (no new money into the economy) The broken Window Fallacy completely falls apart in a real word situation.

  Under your narrow way of viewing the world we should not send aid into disaster areas because doing so will not really help the surviviors economicly.

 Your view of the world ignors true human need and shows a utter lack of compassion.

 I also have no doubt that if your house was washed away by a flood you would be seeking refuge in a Red Cross shelter and applying for a FEMA loan.

 

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Wow.  That is even more confused than before.  I'm wondering what you said to him.  Did you send him any of those videos?

Perhaps a simpler approach.  Just ask him: "If such a stimulus is created from natural disasters, why don't we just evacuate a few cities...get everyone out of town...and then bomb the cities, leveling everything.  We can certainly replicate natural disasters...if they are such a stimulus, why are we sitting around waiting for one when we have so many people unemployed?  We can destroy stuff just as good as a hurricane or an earthquake.  Hell, even better than that.  Why not break some windows ourselves?"

Seriously.  I want to hear him answer that.

 

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"Mark":
You clearly missed the fact that in the real world there is a new money injected into an economy,  after a disaster, in the form of government spending and aid agencies sending in donations. (think Haiti after the earthquake) These new dollars do act as an economic stimulus subject to the money multiplier. The Broken Window Fallacy assumes the glazer does not get any aid in replacing his window. (no new money into the economy) The broken Window Fallacy completely falls apart in a real word situation.

Where does the government spending and aid come from? Typically either comes from taxes, inflation, or borrowing. All three are forms of "window-breaking". Taxes take money directly from people. Inflation creates additional money out of thin air, which dilutes the purchasing power of the pre-existing money. Borrowing is paid for by taxes, inflation, or a combination of both. None of them amounts to any increase in wealth or productivity (i.e. the ability to create more wealth). Instead, they all amount to redistributions of existing wealth.

For someone who apparently loves to accuse others of not thinking in terms of the real world, "Mark" could use some reality-checking himself.

"Mark":
Under your narrow way of viewing the world we should not send aid into disaster areas because doing so will not really help the surviviors economicly.

Another ad hominem. "Mark" likes to use these in the hopes of intimidating his opponents into silence. At this point, he also seems to be deliberately ignoring the point of Bastiat's parable. Once again, it's not about particular individuals or groups thereof - it's about the economy as a whole. If he's going to sandbag on that point, then I'd say he's being intellectually dishonest and you've won by default.

"Mark":
Your view of the world ignors true human need and shows a utter lack of compassion.

See above. This really is pathetic.

"Mark":
I also have no doubt that if your house was washed away by a flood you would be seeking refuge in a Red Cross shelter and applying for a FEMA loan.

... Ditto.


This dude apparently has a problem being shown up. You're revealing the depths of his ignorance, at least to himself. So I'm not surprised that he's personally offended and therefore trying to wipe out what he sees as the source of the offense - you.

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 Thanks again for your input, though i'm not sure he is getting it. In your experience do these people ever quit hardening there brain and open up a little?

"Mark" goes on to say;

 It does not matter where the money comes from, any new dollar into an economy acts as an economic stimulus to the recipient of the money. A dollar raised by taxes or given as a donations spends exactly like any other dollar. Trying to expand  the argument from one little shop keeper out to the economy as a whole just does not make the argument work. If that were true you could make the argument that trade does not grow an economy it just merely redistributes wealth.  

Inflation has no place in this discussion at all it is just a red herring.

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I don't think when he talks about "new money" he literally means "additional money created, making the money supply larger"...I think he just means money being spent.  And even if he is talking about new dollars being printed out of thin air, he certainly is not going to follow the inflation argument.  He'll just use that as something else to derail the point.

What did he say when you asked about why we don't just bomb a few cities to help get the economy back on track?

 

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He's making a straw man of your argument and it seems like you're not picking it up:

Under your narrow way of viewing the world we should not send aid into disaster areas because doing so will not really help the surviviors economicly.

No, aid helps to rebuild. What it doesn't do is improve the economy over pre-disaster levels.

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Regarding the bomb a few cities question "Mark" said;

 I did not argue that wars and natural disasters stimulate the economy. I argued that they bring “new” dollars into the economy in the from of aid. New dollars into an economy are different that old dollars in an economy.   

 The Broken Window Fallacy says that the glazer will have to spend his money, to replace the window. Money,  he could have spent on a  new suit Therefore, the whole economy is worse off. The tailor won’t get to sell the glazer a new suit. As an economic argument I would agree with this statement 100%

 However, what really happens is the government steps in and gives the glazer the money to fix his window (new money in the economy) and once again the glazer can afford to buy the new suite. This new money triggers the money multiplier.   

 Now it is an error in logic by using the “well then if disasters and wars are good of the economy we should just destroy buildings and have wars to get us out of this mess” argument. If you want to pump new money into an economy to spur economic growth you can do it in a lot of ways that don’t cause destruction.  An unemployment checks is a much more efficient way of dumping money into a struggling economy. Breaking windows is just terribly inefficient.   

 Aid flows into an area after a disaster to order to help people in need. People that have lost their house, People who’s lives have been destroyed. Making those people whole is the reason we send in aid.  

 

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