And that’s nothing compared to invading Poland

Good point, that somehow the idea of stimulus has become shrouded in moral criticism; not that long ago, it was the market that was seen as somehow reproachable (if not outright bad). All of this just increases my feeling that a good deal of the economics you see are more readily comparable to religion than to the supposedly impartial science its advocates would like to been doing.

Shoplifting does create jobs: ask a store detective.

Is it an inefficient use of human labor? Fine, fire the store detective, but don’t complain that some of the value of your store is going to shoplifters instead of shareholders. Tons of things that are complete wastes of human potential are loved by capitalists. Take advertising, that spends billions to convince you to buy brand X instead of similar brand Y. Lawyers live comfortable lives doing nothing but take money in order to convince a court that some other money should go to their client instead of the other guy’s client. Political campaign funds, after all the money and effort spent, result in the creation of a president, an event that was never in doubt.

Shoplifting does something else, it transfers ownership of capital from rich people to poor people. I’m so much less bothered by that than Grover Norquist.

I first wrote a long comment pointing out that you have mangled G. B. Shaw’s joke, because the first question, the entrapping one, ought to be “Madam, would you marry me if I were worth a million pounds?” Then the rest as you have it.

This, I was going to point out, is a far superior joke, because it drives home Shaw’s view that marriage is only a thin veil for legalized prostitution.

Then I went looking for confirmation that you had mangled the joke, and all that the web shows me so far is: more copies of your version, from various sources (and also attributed to Churchill etc.)

How strange: the version I remember strikes me as interesting and witty, where the version that apparently is standard strikes me as dull and pointless. The whole point of the joke is to make the woman realize that a marriage contracted on mercenary grounds is no different from prostitution, but that point only comes across if the question changes from marriage in the first instance to explicitly contractual sex in the second. If the woman really is willing to sleep with GBS for a million pounds, then of course she has established that she will trade sex for money–and in that case, what is witty about the punch-line?

But, again–this is all entirely irrelevant to your main point, which is correct: there is nothing paradoxical about the idea that shoplifting can lead to increases in employment and economic activity, and everyone sees this when it involves pilfering the Hermitage.

foosion
“The anti-Keynesian crowd denies that WWII through massive spending. They claim rationing caused massive pent-up demand and when rationing ended, the economy took off to meet that demand.”

This is actually correct – and I wish that Keynesian supporters (and I am one) would acknowledge it. Except there is a word missing. It should read …. caused massive pent-up EFFECTIVE demand … Because not only was there rationing, but the government paid salaries which accumulated into healthy household balance sheets.

And note – this is exactly the antidote we need to the problem we have today – massively unhealthy household balance sheets. I’m not suggesting that what we need is rationing – but we need the injection of household income (and perhaps a period of tighter lending standards – by modern standards rationing).

“The only thing worse than being talked about is being talked about by Crooked Timber.” — Oscar Wilde

“The anti-Keynesian crowd denies that WWII through massive spending. They claim rationing caused massive pent-up demand and when rationing ended, the economy took off to meet that demand.”

Some don’t believe that either — they argue that the post-war economy boomed when the government reduced its spending and re-liberalized the economy:

What about the end of the war, when government spending plummeted?

Paul Samuelson, a prominent Keynesian, warned in 1943 that when the war ended, the decrease in spending combined with the surge of returning soldiers to the labor force would lead to “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” He was not alone. Many economists predicted disaster.

What happened? Government spending went form 40% of the economy to less than 15%. And prosperity returned to America. Unemployment stayed under 4% between 1945 and 1948. There was a short and mild recession in 1945—while the war was still going on. But the economy boomed when government spending shrank and price controls were removed.

http://cafehayek.com/2011/02/congressional-testimony-on-the-stimulus.html

The broken windows fallacy isn’t “a” fallacy, but it can turn into one if misused. It’s like the Gambler’s Fallacy, which, if turned into an argument against switching in the Monty Hall problem, becomes the Gambler’s Fallacy fallacy.

mw
Either you or Jazz Bumpa are lying. And as he quotes and you just link to Cafehayek (i.e. not a reputable source) I’m more inclined to believe him.

Jazz Bumpa,
I stand slightly corrected. The post war hangover was significantly reduced by the effects of rationing and healthy household balance sheets.

P.S. I also think the post-war recovery was significantly aided by the Marshall Plan (i.e. nasty government spending). I wonder if someone has figures on that.

P.P.S.
Re post WWII unemployment – I wonder if someone has figures on labour force participation rates at that time (what with the great rise during the war, and that almost certainly being reversed afterwards). The short speech linked to by mw is a just so story very short on supporting evidence.

reason — No, neither is lying. It’s how you interpret the numbers. Look at unemployment moving from 2% to 4%. Government spending as a percent of GDP went from 40% to 15% during that time. The number of Federal workers dropped from 3.2 million to 2.0 million. Despite the increase in unemployment, the total number of employed workers increased from ’44 to ’46.

The Cafe Hayek post was point out that Samuelson’s warnings were not saying that there would be a minor recession. Samuelson was worried about 10%-range unemployment as the demand from the largest component of the economy dropped by 75%. A 2% rise in unemployment does not validate his worries.

Links to some of that data:
Total nonfarm
Total federal

Sean: …where was it shown that Bastiat’s “broken window fallacy” was in fact a fallacy itself?

Follow the links. MY quotes Daniel Mitchell:

Breaking a window at the local bakery, Bastiat explained, might generate business for the town glazier, but only at the expense of some other merchant, like a tailor, who would have benefited if the baker didn’t have to spend money on a new window.

This is obviously fallacious if applied to a depressed economy. The glaziers are not competing with the tailors for labour, which is in excess supply. Of course it’s not suggested that breaking windows is Pareto-improving or that it raises welfare. But it does increase income and employment.

To my mind, MY gets into rather a tangle by dragging money into a question which doesn’t really require him to (Nick Rowe would disagree). But that’s beside the point. He has Mitchell dead to rights.

Kevin Donoghue – you are missing the point about the baker spending his money either with the glazier or the tailor. Bastiat – by the way is also wrong because although the baker hasn’t money to spend for a tailor – the glazier now does. Going back to money and the circular flow (and the problem really is a lack of investment) is really the right way to do it. Ceterus parabus really does suffer from ceterus not being parabus EVER.

Sean
“Despite the increase in unemployment, the total number of employed workers increased from ‘44 to ‘46.”

That is not the way I read that diagram you posted.

Kevin Donoghue

“This is obviously fallacious if applied to a depressed economy. The glaziers are not competing with the tailors for labour, which is in excess supply.”

It is not obviously fallacious. In Mitchell’s example, he is correct it would create problems. MY adjusts the problems by compensating the bakers for the broken windows. Without the government subsidising the glaziers absolutley ARE in competition with the tailors for the baker’s money. In the pre-broken situation, the baker must decide between replacing or improving his window versus buying a new suit. New windows are almost never needed, so the tailor wins that battle. In the broken window situation, windows are more necessary than suits, so the glazier wins that battle. But if the government buys new windows for all the ones its broken, then the baker can still buy that suit.

“That is not the way I read that diagram you posted.”

Not sure what you mean by that. You can download the data from the link next to the chart to confirm what I said.

I also had a high school teacher who told the American version of that joke. It was a Government class, so I guess it was somehow appropriate.

In Mitchell’s example, he is correct it would create problems. MY adjusts the problems by compensating the bakers for the broken windows. Without the government subsidising the glaziers absolutley ARE in competition with the tailors for the baker’s money. In the pre-broken situation, the baker must decide between replacing or improving his window versus buying a new suit. New windows are almost never needed, so the tailor wins that battle. In the broken window situation, windows are more necessary than suits, so the glazier wins that battle. But if the government buys new windows for all the ones its broken, then the baker can still buy that suit.

No, AFAICT it has nothing to do with government subsidies.

As Matt points out, the “fallacy” only applies in a situation of full employment. But in a depressed economy, the baker was not planning to buy a suit. So the tailor and the glazier are indeed not in competition. Both are idle. Demand is low so labor is in surplus.

But when the window is broken, the urgent necessity of replacing it creates demand, and thus employment for the glazier, that otherwise would simply not exist in any form. Without the broken window, the baker would be holding onto his money. This is independent of the baker’s savings or the existence of government support. If necessary, the baker will use credit to purchase the window, which still creates the demand (credit which is conveniently, and not coincidentally, very cheap at the moment).

If I pick 1/1/1944 42661
1/1/1946 39839

But by 12/1/1946 (in that crazy date format Americans use)
43379

So its 1 all it seems.

But I’m not sure how servicemen stationed overseas are treated in statistics so I’m very wary.

Sean @26 – Ah yes – but you missed my point about the glaziers now having money to spend at tailors.

I guess this is source approximately what Samuelson said:

http://www.tnr.com/book/review/unemployment-ahead-the-coming-economic-crisis

Here is a key passage:

“I myself am somewhat apprehensive over the period after reconversion and demobilization. But even if I am wrong or especially if I am wrong, it is demonstrable that the immediate demobilization period presents a grave challenge to our economy. How well we meet it will not simply determine living standards and unemployment in the next fifteen months. The tone of the whole postwar decade will be crucially conditioned by our degree of success in providing continuity of income and employment in the transition period from war to peace.”

“Thus, while GDP may be increased due to spending that otherwise wouldn’t happen, the universe is poorer because of foregone or delayed future spending.”

Assuming the economy is at full employmentand that “foregone future spending” would have actually happened. Unemployment is foregone income (and also a reduction in wealth – and be careful not to confuse financial wealth with real wealth – remember the window has been replaced – we are back where we started – but the baker is poorer but the glazier – exactly equally – richer).

I have come around to the view that anti-Keynesianism is econo-denialism. The Keynesians have made, and more than made their point, and it is time to acknowledge reality and get on with it.

Sean @41
… then he will probably not be able to afford a new suit (since he has other costs). – One man’s cost is always another man’s income. See the point is that the whole story wouldn’t have a point if the glazier wasn’t in need of work.

Just admit it, in a macro sense – what happens to the baker (or any particular actor) is not the point. The point is always that increased effective demand will increase employment, so long as there unemployed resources.

I see that chestnut about Samuelson is still making the rounds of the pinhead wingnut econoblogs. But guess what? It’s not Keynesianism that was wrong, just Samuelson (who as noted in a comment above doesn’t seem to have taken into account the massive accumulation of money on household balance sheets during the war with little to spend it on, resulting in enormous pent-up private demand that was easily able to replace government demand). Interestingly, if you really want to deal in personalities (already a sign that you have no actual argument), Keynes himself got it right though not entirely for the right reason.

And by the way, there actually was a sharp recession right after the war- Samuelson’s mistake was in thinking this would herald a long-term return to Depression conditions. And there was another recession from the end of 1948 to the end of 1949 which again was ended by classically Keyenesian countercyclical fiscal policy.

Here is your handy guide to understanding Austrian economic claims.
1. Austrians are always full of shit.
2. If it ever appears that an acolyte of Austrian economics is saying something sensible, refer to #1.

Bastiat is forgetting that one man’s cost is ALWAYS another man’s income.

Are you kidding? Bastiat is not ignoring that point, it is where he is starting from. It is certainly NOT the key insight of Keynesism. Keynesism is the idea that, in certain limited situations, the benefits from the new ‘seen’ spending will exceed the costs of the ‘unseen’ losses.

P.S.
It seems reasonable to assume that the Baker had in fact money in the bank because he was aware of the danger of his window being broken, and if he didn’t spend it for a new window, it would in fact have just sat there. (Or maybe it was sitting with his insurance company). And it is true that as a consequence, he may in the future cut down on other expenditure in order to rebuild this precautionary balance. But on the other hand other people (the glazier at least) have more money to compensate for this. At the very least there is NO LOSS to the economy as a whole – regardless of the multiplier.

Per Cafe Hayek, he was quoted saying the US was going to see “the greatest period of unemployment and industrial dislocation which any economy has ever faced”. He also predicted a “nightmarish combination of the worst features of inflation and deflation” per wikipedia. He was entirely wrong.

Does that disprove his model? Yes. Does that disprove his entire Keynesian approach? No, but it should require some serious meditation. No one school of thought has all of the answers. Some have none. And most of the answers that were developed adjusting to those past mistakes still have no predictive power over current issues.

Keynes himself did not predict a recession after WWII:

http://socialdemocracy21stcentury.blogspot.com/2011/07/post-1945-boom-in-america.html

Sean
please look at this sentence of yours and apply it to the situation in hand.
“Keynesism is the idea that, in certain limited situations, the benefits from the new ‘seen’ spending will exceed the costs of the ‘unseen’ losses.”

The baker has money sitting in the bank. The glazier is unemployed (has no income coming in). The baker spends the money on a new window (so he now has less money – ignoring some sort of insurance for the moment). But the glazier now has money AND he has produced a window. So the seen spending is real. The unseen losses to the Baker are exactly cancelled out by the gains of the glazier. So where are these losses you are talking about? Bastiat doesn’t make any allowance for the money the glazier can now spend – but you keep ignoring that.

And if the shopkeeper is ‘hoarding’ the money, why do you get to assume that the glazier won’t hoard it?

I don’t know about Norquist in particular, but most anti-Keynesian local politicians I’m aware of are eager to build prisons and military bases in their districts. The objection–much of the time–isn’t to government spending as such, but government spending that benefits the “unworthy.”

,,,you still aren’t valuing the preexisting window at all.

I don’t understand. Doesn’t “exactly cancelled out” mean that the preexisting window is valued at the same amount as the new window? Which actually seems generous to your argument.

The locus classicus for the “vice is good for the economy” idea is Mandeville’s Fable of the Bees. It’s all demand-side, and what people demand is vice.

Bastiat was not talking about demand or GDP.

MY’s criticism was directed at Mitchell, not Bastiat. Mitchell criticised Krugman for “stating that the 9/11 terrorist attacks would be stimulative for the economy” and for his recent “Wag the Dalek” comments. Mitchell tells us that at best, destruction “makes us poorer and then shifts how current income is allocated.” He makes no allowance for the possibility that it also boosts aggregate current income, which is all that Krugman was claiming.

That’s just great. You put asterisks is, intending them to stay asterisks, and they turn into *bold text*. You put slashes in, intending them to turn into /italics/, and they stay slashes.

Yes, nobody disagrees that war is a horrible way to end a depression, it’s just that it engages the national emotions so that rich people are swept up with the rest, or at least think “oops, we’ll be lynched if we don’t put our hands in our pockets and get people working on stuff”.

So the question is, what can we do that will engage the emotions the same way without killing people? We need what Jimmy Carter called “the moral equivalent of war”.

“There is a difference in kind, not just degree, between the two proposals. (You get that a lot with Sorites-type situations.)”

What? You mean changes in quantity can result in changes in quality?

That’s totally irrelevant to whether an economist should be taken seriously. Some of those at the top of the profession are well known for being fools, crooks, and liars.

But that’s not the point. You can take him seriously as an example of what conservative/libertarian economists believe about Keynesianism even if you don’t accept his arguments (even if you don’t think his arguments are solid enough to be worthy of discussion on CT).

Where are the examples of successful stimulus *other* than WWII?

…chirp….chirp…chirp….

I thought so. If a prerequisite of your economic theory is global war, better come up with another theory.

Or : what makes you think WWII has *anything* to do with overwhelming stimulus circa 2011? It is true the former involved a massive increase in federal govt spending, but that’s where the similarity ends.

For starters, federal spending grew 5 fold during WWII. To achieve the same relative increase today the feds would have to spend over 125% of GDP. Even if you could persuade the rest of the world to lend to us at that rate, you would quickly exhaust the available savings. And before you claim it is only absolute, not relative spending that matters, think for a second what that would imply if the federal govt already spent a WWII-sized proportion of GDP.

Secondly, WWII involved pretty much the entire country mobilized against an existential threat. Today the threat is from within: the Baby Boomers taxing their children and grandchildren to pay for the promises they voted for themselves. Not exactly a nationally galvanizing scenario.

Finally, WWII spending was directly stimulative. It paid for men to go into battle and for women to build weapons. These days we’re so crippled by bureaucratic sclerosis that there are no “shovel-ready” projects anymore. The best we can do is prop up public sector pension funds, almost entirely non-stimulative.

reason 08.23.11 at 3:03 pm, quoting Samuelson:
“I myself am somewhat apprehensive over the period after reconversion and demobilization. But even if I am wrong or especially if I am wrong, it is demonstrable that the immediate demobilization period presents a grave challenge to our economy. How well we meet it will not simply determine living standards and unemployment in the next fifteen months. The tone of the whole postwar decade will be crucially conditioned by our degree of success in providing continuity of income and employment in the transition period from war to peace.”

First, what he’s saying is the ‘doing things wrong will result in deep and long-lasting problems’ *not* ‘we will have deep and long-lasting problems’.

Second, GI Bill.

Rich people focus on money, because that’s what makes them different. Economists focus on money, because that way they can bundle all the messy world up and do complicated maths. But money is just pictures, it’s not the real things. The US in World War II did not just spend money – it built lots of large factories, trained lots of people to run them, developed a great many technologies, trained lots of others in all the technical and other skills demanded by modern war (only about 10% of industrial armed forces actually hold a weapon), put lots of people in roles that demanded responsibility, teamwork and initiative, showed lots of people that they were as good as (or better than) the rich, and reminded the rich that their privileges come at the price of exercising them responsibly – and of the possible costs of not doing so.

Post-war demand for real things was met by post-war supply able to supply real things.

Sebastian H.
aaaaaakkkkkkK!!!!!!

“Aaaaackkkkk. You can’t dismiss this with just a GDP argument. Before the broken window there was a whole window AND six francs that could be spent on all sorts of things. After you break the window you have destroyed the value of the window and forced the shopkeeper to spend it specifically on replacing the window. The whole point is that a GDP focus assumes away the value of already existing wealth.”

NOBODY is arguing that breaking windows is a good thing to do. You are arguing against a straw man. But breaking a window DOES create employment if there is unemployment – the argument CLEARLY demonstrates that. Why is the other side in this argument so thick?

Peter T.
good comment.

@77 Exactly – it is the old trick. Someone says “if we don’t do so and so terrible things will happen” – then someone extracts the “terrible things will happen” and ignores that so and so in fact happened. e.g. Environment – Lomborg.

…chirp….chirp…chirp…. I thought so.

Presumably the “…” represents fingers stuck firmly in the ears, with loud “nyah, nyah” noises in case any sound might penetrate. Meanwhile, anyone who wants empirical estimates of multipliers greater than zero will find them without difficulty.

I think we should replace the broken windows argument, with an compulsory insulation of houses in the next 15 years argument. The act of destroying the value of the existing window is confusing people. People can’t seem to get their head around that this is a thought experiment (the window may well have been broken by hailstones for instance) and not a proposed plan of action.

Not sure compulsory insulation of houses would do the trick either. It seems that, to address the issue from the demand angle, you really need to take from those with an excess of money and give it those with a lack of money. And probably introduce some protectionist measures too. Employment at this point is irrelevant, it’ll follow.

You could, of course, address it from the supply angle as well: burn warehouses and factories, break windows. But that would be a much more radical, highly controversial solution. And it may not work without boosting demand either.

John Holbo @ 96
Just having everyone stand in a circle and hand 6 dollars to the person to their left, so that we end up where we started, won’t do it.

Unless of course, you’re part of the Kula ring trade.

On the WW2 stimulus: It seems like there are two reasons WW2 could have created stimulus: 1) the war itself (i.e. deploying soldiers, manufacturing weapons), and 2) the specific government response to the war (i.e. investment in training, infrastructure, and job creation across the US). As good scientists, we should test each variable independently. Since for the past 8 years we’ve been engaged in costly war without the corresponding investment and spending on public services, infrastructure, and job creation, etc, it appears we can rule out the “war” aspect of WW2 as stimulating the economy. Now, if only there were a way to test government investment in infrastructure, public spending, and job creation without a war…

Nah, on second thought, lets invade Poland and see if the economy picks up!

Goodbye Keynes, forget multipliers.

Here in Spain our “socialist” (ha) goverment just announced that they will go ahead and with the conservatives and get that Merkel-Sarko “balanced budgets” thing on our Constitution. No referendum, no anything, they have the numbers, and it is all for our own good, including not asking us about it.

My deep seated instinct would be “ok, time to pack things and move” but where? The whole world is on the same train to nowhere

Nababov 08.24.11 at 10:00 am

” On the other hand Britta, what would the US economy look like now without many hundred billions of taxpayer money pumped into the military-industrial-security establishment and the hundreds of thousands, if not millions it employs?”

Better off?

Paul Krugman joins the debate
http://krugman.blogs.nytimes.com/2011/08/24/anti-keynesian-switcheroos/

“Yglesias notices the way conservatives argue against fiscal stimulus:

The fact that breaking windows would make a society poorer (fewer windows) is precisely why nobody ever proposes stimulating the economy by deliberately smashing windows. But the way the dialogue works is that first a Keynesian observes that fiscal stimulus can increase growth in a depressed economy. Second, as an attempted reductio, a conservative says “if that was true, then you could increase growth by breaking a bunch of windows.” Third, the Keynesian accurately points out that you could, in fact, increase growth by breaking windows. Fourth, the conservative accuses Keynesians of wanting to break windows or believing that window-breaking increases wealth.

But it’s not just breaking windows. As regular readers know, I’ve pointed out that World War II ended the Great Depression. Then critics say, how could war, a destructive activity, do anything good? I answer that when the economy is in a liquidity trap, there are a lot of perverse consequences. And then the critics declare that I’m a warmonger.

You have to assume that this kind of argument is made in deliberate bad faith — although I suspect that many of these people don’t remember what it is to make an argument in good faith.”

“It is actually irrelevant to the argument. I was just arguing that we would not be worse off in total (of course the glazier is better off and the baker worse off). ”

Hoarding is completely relevant to the argument. And you’re illustrating exactly the foolishness that Bastiet was arguing against. Of course we are worse off in total. There was a whole window + 6 francs before. You just wasted the glaziers time and materials creating a new window which could have been put somewhere else and gotten nothing we didn’t already have out of the transaction AND he may horde it just as much as the shopkeeper. The fact that we have anyone arguing against the broken window fallacy illustrates that we have way too many faux economists who are stuck in their toy models.

““Why not keep the old window, and just force the baker to give 6 francs to the glazier?”

I take it you yourself see why this would not, in itself, achieve the desired effect, henri. ”

Actually, it would cause no more or less money supply circulation than the original hypothetical–you have to assume that the glazier won’t hoard the money and you have to assume that the shopkeeper was planning on hoarding the money (remember that wasn’t part of the original hypothetical). If the shopkeeper was already planning on spending the money, you’ve definitely created negative value.

But henri is actually on the right track. The government could print six francs and give it to the glazier. That would tend to increase the money supply.

“it is not illogical to suggest that increasing the money supply by giving people coupons for glasswork would have the desired effect.”

No, coupons for glasswork wouldn’t have the desired effect because you can only get glasswork out of them and the glazier doesn’t get anything usefully tradeable (unless the coupons are tradeable for money at some point in which case why not just give someone money at some point).

Which should bring us back to the original fallacy. Yglesias was suggesting that shoplifting would be good for the economy. That is the broken window fallacy.

Well. Actually Yglesias said that given teh current employment situation, shoplifting would create jobs. That is true. And back to teh “fallacy” – teh borked window getting replaced results in economic activity. That is also true. Whether baker or glazier is a hoarder doesn’t matter – fixing the broken window is economic activity that is a direct result of the window getting broken.

So it comes down to wealth destruction. First, let me just use this opportunity to state that I am Pro-Wealth Destruction. Sometimes teh best route is to (pardon teh language) fuck shit up and burn shit down. WOOT!

Anyways:
Item – the new window is better than the old one. Unless you live in a magical capital depreciation-free world. Also one with zero technological progress.
Item – the glazier actually working his trade has value. Long-term unemployment leads to chronic unemployability. Unemployment isn’t seen as a negative only because it reduces the efficiency of the economy – but also because unemployment is bad in and of itself.
Item – what about the breaking of the window? In the “fallacy” there’s the implication that the listener is supposed to go out and smash the window, but that’s not the only way wealth is destroyed. If a technology becomes obsolete, wealth is destroyed – but no one would argue for stopping all research and development in order to protect the value of existing technology. When capital depreciates due to aging and needs repair or replacement, no one argues that replacing or repairing the old stuff is not economic activity.
Item – Bastiet’s fallacy specifically cites the baker’s reduced resources and handwaves the glazier’s increased resources. And then claiming that analysis means that other people are ignoring facts in order to make a point. Maybe he has a point, but his broken window scenario is a piss-poor way of making it. Unless his point is that he’s a hypocrite.
Item – The real problem isn’t breaking the windows. The amount of deferred maintenance on existing infrastructure, regardless of where you live, is staggering. Even the glazier has broken windows. But no one is fixing any windows. And that’s the result of rejecting Keynes.

Ralph Hitchens 08.24.11 at 3:33 pm

” I’m so, so tired of conservatives/Norquistists repeating the lie that government stimulus programs don’t work, as proved by the Great Depression, which only ended thanks to a war. What was “War Two” but a giant stimulus package, running up the federal deficit? Geez, if you can’t get your mind around basic economics, at least try to come to grips with history!”

They’re now switching to saying that WWII wasn’t a stimulus; it was right afterwards (ignoring what happened to the economy in the immediate post-war years).

I was just trying to figure out why the Austrian-economics site somebody pointed me to was going on about the fallacy of destruction as stimulus (they used the example of the Gary Oldman character from The Fifth Element, a movie I only remember vaguely, but apparently he was committing the broken-window fallacy). Who, I wondered, were they arguing against who was actually advocating destroying value as a stimulus program?

I think that if you’re one of these guys, it’s obvious that income taxation or welfare or something is equivalent to burning down people’s houses, but I didn’t have the heart to read the whole thing.

This is just (demonstrably) dumb:
“Of course we are worse off in total. There was a whole window + 6 francs before. ”

BUT We have a new window (in place of the old one) and the glazier has 6 francs that he didn’t have before. To think otherwise is idiocy.

Reason, you could have had the old window plus whatever else the shopkeeper bought with the 6 francs from some other person (the tailor perhaps). So the shopkeeper could have had a suit plus a window plus the tailor has 6 francs he didn’t have before. That’s the whole point.

So speaking of idiocy, there is a log in your eye…. thanks.

Reason, you could have had the old window plus whatever else the shopkeeper bought with the 6 francs from some other person (the tailor perhaps).

This doesn’t make any sense. You’re saying the shopkeeper is going to spend the money on something else. That’s false by hypothesis, because we’re assuming the shopkeeper is hoarding money, and will not spend that money on anything unless incited/forced to do so.

You could say “there’s no such shopkeeper,” in which case you’re disputing the hypotheses. But the statement violence incites economic activity is by implication the statement violence incites economic activity from hoarders. You can’t dispute that by saying “but the hoarders would spend the money elsewhere!” If they did, they wouldn’t be hoarders…

Bastiat is ruling out hoarding and unemployment by assumption. (At times he seems quite conscious that this assumption is doing some work.) This becomes quite clear later in the essay, when he goes on to discuss thrift: “it is sufficient to understand this consoling maxim, which is no less true from having a paradoxical appearance, ‘To save, is to spend.'”

That’s about as blunt an assertion as Keynes could have wished for, of the doctrine which he attacks in the GT. (Maybe he should have called it Bastiat’s Law and left poor J-B Say alone.) So really, Bastiat is a poor choice if you want to mount an attack on Keynes.

In the parable, Bastiat acknowledges only the unseen potential use of the six francs by the shopkeeper. The glazier is thus implied to be a hoarder – otherwise Bastiat has no point. If the glazier is not more likely to hoard than the shopkeeper than the six francs is irrelevant.

Or if there is a fixed stock of money circulating with a fixed velocity. This is presumably the assumption. (Altho in that case, asset transfers will crowd out productive activity just like window-breaking does…)

This is presumably the assumption.

Isn’t that what I said? For velocity of money to be constant, then the glazier must be a hoarder. For example, if the fixed velocity was six francs.

IOW, it’s a wash for the village.

IOW, even giving Bastiat all the gimmes you can – senseless and useless destruction of value causes no net loss.

““Of course we are worse off in total. There was a whole window + 6 francs before. ””

The only net loss would be in terms of the nonrenewable resources needed to make the window. Otherwise, there is an expense in labor (which is renewable and abundant) and a transfer of money but both are no net loss to society.

Especially money is not a scarce resource at all and all the fuss our society is making about it is completely irrational. We need to be concerned about our ecological debts – drinking water, clean air, arable land and the like – not our monetary debts. Our society is once more sacrificing children on the altar of mammon.

I think the only conclusion that the parable permits is that the broken window per se is not associated with any net benefit or loss.

But assume that the window is old and cracked, materials to replace it are plentiful and unemployed glaziers would love to get to work but the owner (the cobbler) can’t afford to fix it. Also, the farmers grow plenty of food but it’s rotting because the unemployed glaziers can’t afford to buy it. In turn, the farmers can’t afford to buy shoes.

Surely there is something that President Roosevelt could do about that?

And the glazier wears no shoes?

And the shoemaker doesn’t replace windows?

This is fun.

Haven’t read all the other comments but an analysis of the joke told in the original post:

Libertarians tend to use utilitarian or non-utilitarian arguments as it suits them, switching off frequently. They usually start off with utilitarian ones – “capitalism unfettered is best for everyone” – until we hit a recession and everyone starts dusting off Keynes. Since the historical, empirical (not to mention the logical) record favors Keynes, they then switch to a non-utilitarian (usually moralistic) argument – “taxation is theft, the stimulus is stealing.” What makes the joke so funny is that you’d have to be nuts to think that the theft of one dollar is so wrong that the wrongness would outweigh any possible benefit. So then we just haggle about when the “badness” of taxes outweighs the “goodness” of the spending that taxes fund, which is usually not conducive to the libertarian argument given multipliers. And of course, since technocratic/policy arguments implicitly assume utilitarian motives, it’s hard to get much audience for pure libertarian arguments. Think about, e.g., the gold standard – even though they don’t sound like it at first, most arguments for it (“sound” money) are ultimately moral or use rhetoric that implies a sense of morality because from a utilitarian perspective, they’re empirically proven bad ideas.

And 129, and 128, and 127, and…

In your quote, the new investment would reduce unemployment, just like smashing windows or burning Paris in Bastiat’s essay. But new investment is distinct because it adds to the capital stock–society’s wealth increases. In Bastiat’s essay, wealth is destroyed and then replaced–so society’s wealth does not increase.

This is fun.

Indeed it is. You’ll note that in both Situation 1 and 2 as outlined above, the shoemaker is plus six francs so he can buy a new window if he wants regardless. If it truly does not matter whether or not the shopkeeper or glazier is a hoarder – then it does not matter whether or not the shopkeeper would have spent those six francs or sat on them.

Francs are francs. Money is the most frungible of assets. It is the ne plus ultra of liquidity. Six francs spent by the shopkeeper are exactly interchangable with six francs spent by the glazier. And for those six francs to have been removed from the local economy, someone has to be hoarding them regardless of their vocation.

I’m not making any claim as to which of the two is more likely to hoard (although you would imagine that a shopkeeper with francs on hand is a better candidate than a glazier who is idle) – I am just pointing out that if the liklihood of hoarding by the shopkeeper is equal to that of the glazier, then Bastiat[1] can at best claim the useless destruction of the window causes no net loss[2].

Maybe I’m being trolled here, I don’t know. Unless someone can explain why the village is worse off if the broken window is replaced. No money has left the village and there’s a shiny new window where the old one was.

And all of this is without considering the human elements. The reduction in unemployment[3]. The discovery on the part of the shopkeeper that windows can be broken[4]. The illicit pleasure experienced by the vandal at the breaking of the glass. The smug sense of schadenfreude experienced by the shopkeeper’s neighbours. But we’re excluding them and only looking at the window and the six francs – and in this case the useless destruction of property results in no net loss for the community.

fn1: I realize he’s dead. Zombie Bastiat then.
fn2: On the point of consumables to produce the replacement window, the assumption is that the 6 francs is the amount of value added by the glazier to those materials to produce a glass pane. A life cycle analysis fully accounting for disposing the broken glass and all consumables used in manufacturing, transportation and installation as well as any administratinve costs or overhead associated with the deal are assumed to be amortized over THEY AREN’T PART OF THE STORY. geez.
fn3: Again, my point regarding the fate of the long-term unemployed. Exercising marketable skills has value to the practitioner and therefore to the community. Nevermind the possibility of process or technological advances that may occur while the repair/replacement is being implemented
fn4: Of course he’d notice the window was broken. But in the general case – destruction of capital can have value in learning that that capital can be destroyed or discovering what the weak points are or finding out that that location might be suboptimal for your enterprise. All things with value.

Unless someone can explain why the village is worse off if the broken window is replaced.

You keep insisting that the village is not worse off, but nobody said that it is; all that’s been suggested is that the village economy is not better off. Although the shopkeeper, at least, is, obviously, worse off.

I suppose everybody noticed the switch that Sebastian H. makes – assuming at first unemployed resources and then denying it implicitly. Is he just bad at logic, or is he arguing in bad faith? I think we need to make pin him down on his assumptions to make it clear to even him. But he also seems to be ignoring that nobody is suggesting that breaking windows is good policy option – so in reality the loss (of the window) has happened anyway, spontaneously. We are examining the consequences. If there are unemployed resources they don’t look bad at all for the economy as whole – admittedly not so good for the owner of the broken window.

dictateursanguinaire @132

Yes I think you are right.

Oops
That should be Henri (Vieuxtemps),
And here is that David Brin Post:
http://www.salon.com/news/haiti/2010/01/26/urban_planning_open2010/index.html

It doesn’t matter whether the baker is “hoarding” money–if you like, assume that he is and that there is high unemployment in the glazing sector: the smashed window will cause otherwise idle resources to be put to use, but the product of those resources will be wasted.

If you want to tie this into policy, the implication is that make-work schemes do not contribute to wealth but merely redistribute it, though of course, they might still be a good idea on these terms.

That is only true of the net value of the work really is absolutely 0. Many conservatives reject them (makework schemes) because their net worth is less than their cost, which is a much more stringent criteria – and nonsense when their are unemployed resources going to waste. We have just been argued that replacing a window doesn’t leave the society worse off (and will actually be better off depending on the state of the window before it was broken). But nobody is proposing that breaking windows is what we should do – we can surely find better solutions.

Reason, 142, he’s assuming, obviously, that the economy, the size of it, is constant. You have 6 francs, you either spend it on a new pair of shoes or a new window.

The assumption is wrong, obviously, but I think it works fine on the micro (very micro) level. You got a $5 bill in your pocket, whether you give to a mugger, or you buy a hot dog (as you planned) – it doesn’t affect the economy.

in some Keynesian models increased employment means increased GDP

That’s true–e.g., coordination failure models. But in Bastiat’s parable the increase in GDP corresponds only to the value of the destroyed capital stock.

Another way to see the same effect would be to imagine an economy that produces only widgets. To raise employment, the authorities mandate that, after it is produced, every widget is destroyed and then produced again. Employment of resources is necessarily higher, but their product is wasted.

P.S. Planned obsolescence is your toaster breaking down with a dud thermostat, but the replacement is either
1. not available
2. impossible to install
3. more expensive than a new toaster.

no this is not strictly correct – the destroyed resources are wasted – not those produced to replace them.

But the asset was destroyed in order to employ the resources, which is unnecessary by assumption. Thus the resources employed to replace the deliberately destroyed asset were wasted, because the asset did not need to be destroyed.

To make it even more obvious, say that a capital good is produced and then destroyed. This is logically equivalent to destroying a capital good and then reproducing it.

Or, again equivalently, the effort involved in a ditch digging and filling in again scheme is wasted, because nothing is produced.

Address planned obsolescence and you will see my point. (Actually changing plug standards on electronic devices is even better.)

And yes bankrupcy is an issue – but as I implied before this analysis is all contingent. There is nothing to be gained if there is full employment, and there is nothing to be gained if there is not some money that is sitting idle and not circulating. And nobody seriously contemplates that breaking things is the BEST way to get unemployed resources employed.

Address planned obsolescence and you will see my point.

Sorry, don’t understand where you’re coming from with this. Can you expand?

Anyway, speaking as a liberal with no training in economics, I’ve never been particularly interested in defending window-breaking or hole-digging-and-filling-in schemes. The point is always that if you can achieve stimulus that way, how much better to actually do something useful with the effort!

But Austrian-economics fans insist that it’s a net loss even if you do something useful with the effort. On the other hand, they’re fond of using gold as a medium of exchange seemingly because it involves a big waste of effort in getting it out of the ground. That makes me think that waste isn’t really the issue, since to them waste incurred to increase the velocity of money is bad, but waste induced as a brake on it is good.

@157
Planned obsolescence – i.e. forcing the purchase of new durable goods (i.e. household capital) even though the old are serviceable. This props up demand (at least from the point of view of oligopolistic firm practicing) by writing off old stock. But remember what we are interested in with durable goods, is the service they provide. If a manufacture a new product and then destroy it before it is used – the good is truly completely wasted. But if I destroy that still functions and replace it with a new good that performs the same function, then both goods have provided a service. The situation is NOT exactly the same, because the value of good is not that it has existed, but that it has existed for a period of time.

Or to avoid mixing metaphors ignoring the hurricane and going frantic about the sea breeze – or ignoring the Tsunami and going frantic about the tide.

“I suppose everybody noticed the switch that Sebastian H. makes – assuming at first unemployed resources and then denying it implicitly. Is he just bad at logic, or is he arguing in bad faith?”

Instead of attacking me, you should point out flaws in the argument. Unfortunately you don’t actually bother to do so. I don’t deny it, implicitly or otherwise. The Bastiat essay doesn’t deny it, implictly or otherwise. I deal with it absolutely explictly in my very first comment (#56):

This is an insight which doesn’t require full employment. Full employment under those conditions merely means that breaking the window has no positive effect whatsoever. Some level of unemployment means that breaking the window employs some level of ‘money’ that wouldn’t be employed. But you don’t get to assume it is the full six francs. Let’s call it ‘x’. The whole question is what the value of ‘x’ is. And there is no agreement whatsoever from this ‘science’ of economics about what ‘x’ is. It may be something like 1 franc or it might be closer to 5. But it very likely is NOT 6. And even if it were 6, you still aren’t valuing the preexisting window at all.

“But he also seems to be ignoring that *nobody is suggesting that breaking windows is good policy option* – so in reality the loss (of the window) has happened anyway, spontaneously. ”

Really? You apparently haven’t been reading this thread very carefully. The idea has come up repeatedly. I’m not going to reread 163 comments, but without looking back very far at all I see comment #103, and I have also seen a ridiculously stupid discussion about how good a fire through Paris would be for the economy. There are also a number of people taking it further, suggesting that it doesn’t even represent a loss of wealth *at all*, which is completely idiotic. In every case outlined you have one more window in the non-broken-window cases in addition to any of the other benefits.

Your error is outlined as early as 55 and you repeat it throughout the thread from there:

You write:

The baker has money sitting in the bank. The glazier is unemployed (has no income coming in). The baker spends the money on a new window (so he now has less money – ignoring some sort of insurance for the moment). But the glazier now has money AND he has produced a window. So the seen spending is real. The unseen losses to the Baker are exactly cancelled out by the gains of the glazier. So where are these losses you are talking about? Bastiat doesn’t make any allowance for the money the glazier can now spend – but you keep ignoring that.

This is an enormous change from Bastiat’s argument and you don’t even seem aware that you changed it. The shopkeeper wanted shoes, or a suit, or books. He doesn’t get to buy those. He has to buy a window that he already had. Every single chain of spending that starts with your hypothetical glazier, could ALSO have been started with the spending of the francs on shoes, a suit, or books. In all of those chains of spending Bastiat gets a window which already existed *in addition* to anything else you get to put into the equation.

Nice use of ellipsis. That next sentence couldn’t possible have clarified anything.

“Each time I’ve gone back to it I have stipulated that we’re talking about a scenario where there is zero opportunity cost of replacing the window because the glazier is otherwise idle.”

No. The opportunity cost is not zero because the shopkeeper wanted to spend the 6 francs on a new suit, shoes or some books. He did not get to do so because he had to replace the broken window that he did not want to replace when it was unbroken.

“Ignoring the francs for a moment – what you are saying is that the old window (the one that was lost) has higher value than the replacement.”

No. I have no opinion on whether the old or new window had a higher ‘value’. What I’m certain of is that the suit, shoes, or some books that the shopkeeper wanted *plus* a window (which he already had) has a higher value than *just* a window.

“You’re saying that the loss of the window results in the loss of 6 francs because that’s the cost of replacement – but the replacement window is worth less than 6 francs because that’s the cost of replacement. In that case, no one had better replace anything since that can only lead to a loss in net wealth.”

I’m saying no such thing. You are repeatedly ignoring that the value of the suit or whatever PLUS a window is worth more than JUST a window.

Yes, neither the glazier nor the shopkeeper are hoarders. So what?

Lets assume that they both want to buy a suit.

Situation 1. Window not broken. Shopkeeper buys a suit. Tailor ends up with 6 francs.
Final outcome 1 window. 1 suit. Tailor has 6 francs.

Situation 2. Window broken. Shopkeeper buys window from glazier. Glazier buys suit.

Final outcome. 1 window. 1 suit. Tailor has 6 francs. Unnecessary raw materials consumed for window.

This is the very best case scenario for the window breakers. No change in aggregate welfare whatsoever, and an unnecessary use of raw materials.

Notice what it definitely is not. It definitely is not an increase in overall welfare. It is definitely not a great fire helping the Parisian economy.

Note also that it assumes that the shopkeeper has the money to both fix things and go on. If he is a poor shopkeeper he may just have to put a board up over the window hole. You’ve seen that right? Or if the broken window was broken by someone stealing from just inside the window, he may have needed the money from the sale of the items in order to restock. Shoplifting sure helps in those cases, right?

The BEST case scenario is no overall change and a waste of raw materials. Everything else is negative change. All this talk about it potentially being a good thing is just pure crap.

Sebastian H,
“Instead of attacking me, you should point out flaws in the argument. ”

Actually, I did REPEADEDLY and you keep saying the same thing again ignoring my point (the point being that any planned expenditure by the Baker can be replaced by new enabled expenditure by the glazier). Absolutely, everybody but you understood this.

Sebastian, the underlying model is that the propensity to hoard is not constant and not exogeneous, but a function of how well business is going. So the glazier doesn’t just have more money, but is more likely to consume or invest than before, which ripples through to his suppliers in turn. It’s not a watertight model, but models without similar effects tend to predict no recessions in the first place.

Of course, an actual policy of gangs going around breaking glasses or setting fire would make people more likely to hoard, if they knew recessions generated that kind of policy. But that doesn’t apply to subsidized isolating glass.

This is Sebastian H’s MO. If he doesn’t want to concede a point, he’ll pretend not to understand it forever and ever. It’s a higher class of thread diversion than mere trolling.

It was said by someone upthread that Sebastian argues to win, but that is not the case. Rather, Sebastian argues to argue.

…when you get stupid results…they uncritically take it like gospel….

Some do, no doubt. Robert Waldmann delights in getting such results and presenting them as a reductio demonstrating the absurdity of the axioms. This is a little awkward for conservative economists, is it not?

“Robert Waldmann delights in getting such results and presenting them as a reductio demonstrating the absurdity of the axioms. This is a little awkward for conservative economists, is it not?”

Not at all. In my experience, conservative economists then just adopt the absurd conclusions.