Hazlitt, Keynes and the glazier’s fallacy

“To make the story stop here, we’ll suppose that the tailor is a miser (a vice traditionally associated with the clothing industry, as with Silas Marner), and puts the money under his mattress. So, in this version of the story, the glazier and the tailor are both paid, and the social product is increased by a new window and a new suit.”

To me, a non-economist, this illustrates the problem with the art and science of economics. To create models means making stories stop before all relevant details are counted. Why do we have to suppose the tailor is a miser? Silas Marner may be a miser, but is Calvin Klein? Ralph Lauren?

A year ago, Mankiw wrote a paper defending the 1% – he opened it by asking us all to “imagine a society with perfect economic equality….” Why imagine this? There are no societies with perfect equality – it’s an absurd foundation for a defense of the 1%. But the head of Harvard’s econ department gets a lot of press for his theories about righteous goodness of the absurdly wealthy class. (http://bit.ly/1t0ZJgj)

Economics relies too heavily on assumptions. And when those assumptions go unchallenged even in the face of a reality that does not fit the model (the price of housing has never dropped; therefore it will never drop, even when the price of housing far exceeds the average salaries paid in an area), disaster can occur.

I meant to say ad nauseum…

I think maybe “appropriate ” does a bit too much work.

Also, when you talk about costs you don’t include inter generational costs and environmental costs.

It is a poor use of glass to break windows. Perhaps the government making appropriate policies could spend the $50 earlier to divert the young person from crime and the shopkeeper donate $50 also and encourage the young person in a reforestation and gardening social enterprise instead, the out of work glazier could donate his stored up used glass panes to make glasshouses and take lessons from the local glass blower (who assists the social enterprise) in making recycled glass from broken glass (nb I am not sure this is 100% doable )into pots and terrariums for plants, the tailor has lots of spare time now and gives darning and mending lessons in exchange for fruit and vegetables and herbs, then they could draw down GHG emissions , provide healthy local fruit vegetables and herbs for their community , spend some time being active in the outdoors, learn craft skills, and encourage further young people away from breaking glass by joining the enterprise.

This story would be a better social , inter generational , and environmental outcome but I am not sure how it would fare economically speaking – would the whole town go into a recession? You could add tourism to add to the economy to prevent recession – but then that is not so good environmentally or inter generationally, plus it adds a high degree of complexity by admitting the local economy is not closed and self-sufficient and where do the tourists get their money from and what are their other environmental impacts and so on.

None of this means that it’s a good idea to go around smashing windows during recessions.

If we’re considering wider benefits to society then I think it depends whose windows you break, and how many people are with you.

“and the social product is increased by a new window and a new suit”

Clearly the new suit is better than the old one (otherwise why purchase it), but is the assumption here that the old window also wasn’t as good as the new one? No, it was exactly as good as the replacement window. Therefore, I don’t see how “the social product is increased by a new window”; the amount increase in break-replace is zero.

Well, it’s at least conceivable that the new suit increased the social product, while for the break-replace it seems obviously wrong. What happened here is that the break-replace caused some social labor to get wasted.

Comparing paragraphs of stories requires more thinking than most people will want.

A diagram or illustration can make it vastly more clear.

Of course Hazlitt is right, and his arguments stand whether there is “slack” in the economy or not.
Case 1: no “slack” in the economy
In your example: the demand for suits rises the price for suits marginally (so you are implicitly assuming imperfect competition, just saying). Consequently only the shopkeeper gets the suit as he is apparently willing to pay the highest price, which somebody else is not willing to pay…Q: Why is he willing to pay the highest price? A: Because his preferences rank the suit highest (in society). So the shopkeeper buying and the marginal guy being priced out, satisfies the preferences best, hence utility maximizing, this happens in undistorted markets every day – well done, Hazlitt

Case 2: recessionary economy
You write:
(…) “So, in this version of the story, the glazier and the tailor are both paid, and the social product is increased by a new window and a new suit.(…)”

ahem, nothing is being increased (on the margin): the new suit would have been bought anyway (by the shopkeeper) and the new window merely replaces the destroyed window (which you forget to deduct). Consequence: The act of vandalism DOES NOT create additional wealth. Rather, it destroys wealth since precious resources (raw material, time), which you do not even mention, are wasted to build the same thing twice (the window)…-well done Hazlitt.

You further write:
(…) “The shopkeeper is better off, since (before the window was broken) he preferred a new suit to a new window. On the other hand, the glazier is worse off, since he gets no work and no suit. For society as a whole, both output and employment have increased (…)”

I do not know how the last sentence in the above paragraph supports your conclusion, so I suppose it is a typo. I think you wanted to say the opposite because you seem to think that the glazier is worse off twice: “No work” and “No suit”.. This is double counting, since he works IN ORDER to buy the new suit. Work is a means to an end, not an end in itself…
If he just worked and hoarded the money, there would be just work. Thus, correctly stated: No suit (which is the shopkeeper’s).
I think this should make the Austrian position clear.

By the way, your critisism about market prices not measuring “social opportunity costs” raises a few questions:
I would like to know where I can observe “social opportunity costs”. I mean, where do I find them in order to incorporate them in my decision making as an individual actor?
Or, do you want to tell me they need to be estimated using economic models?
If yes, I have the following question:
How reliable are those models? I mean, it is not that economists mathematical models have such good track record…

I am far from an economist, but let me present a somewhat different take on the story, if I may.

First, the story is presented as though the $50 appears from nowhere and circulates forever. Both propositions are false. Since neither bank lending nor government printing or coinage are part of the story, we may assume that the $50 already exists and that it is eventually used to pay off a loan or to pay taxes. And, as indicated, it may be hoarded before either happens.

Second, the critique assumes a zero sum game. +$50 here is balanced by -$50 there. But trade is typically a positive sum game, a win-win for all parties. The mutual gains are not accounted for. If we look at only the single transaction of buying a new window, the gain from getting a new window does not appear to offset the cost of the window breaking, since it takes time to get the window replaced, and it takes work to clean up the mess. There may also be emotional costs. The gain to the glazier is probably not enough to offset the net cost to the baker. And there is the question of whether we can compare them at all.

What about looking further than the single transaction of buying a new window? Is that justified? In normal times, maybe not. In normal times the circulation of the $50 will hardly be affected. The baker would have spent the money elsewhere in a short period of time. But in a relatively stagnant economy then the baker would have held onto the money for an appreciable time, and the need to replace the window would have put the money into circulation before it would otherwise have been. OC, the glazier may hang on to it, but maybe not. In any event, replacing the window has increased the money is circulation for a time, which is a good thing in a stagnant economy. Balancing the pros and cons is not obvious.

Hmm. Here’s another way to look at it.

The village has one real resource, human energy and ingenuity. In a depressed economy, as with a depressed person, that resource is largely wasted, or even diverted to harmful activities. You might compare it to a small motor, which turns usefully when connected to a load, but which, if not allowed to turn, overheats or even catches fire. (The other option, removing the power source to the motor, is discouraged in human populations.)

So, the release of money, initially by way of the glazier’s repair job, could be viewed as one way to release the overheating motors of human activity, to attach them to loads and get them operating usefully. Absent misers in the circulation, tightening that looseness whenever they encounter it, an active and more prosperous village would be the result.

Noni

Also Krugman and others have discussed how economies can bottom out in recession even without government or central bank help. At some point stuff needs to be replaced and economic activity begins again. The NCs are okay with this sort of “recovery” ignoring the waste and loss of welfare and productivity.

Left out of JQ’s account is that the manufacture of glass, particularly the vinyl sealings requires a lot of energy and the use of petrochemical resulting in polutants and a common cost that may or may not be captured in the $50 price.

Likewise, I have it on good authority the tailor only uses the finest wools and very expensive dyes that can be quite toxic to the water supply and its unclear exactly how well that common cost is captured in a $50 suit.

Of course lots of regulators and police could be hired but the tax money to pay them doesn’t come from nowhere – it comes from the rich merchants of the town who by definition must be forgoing something – whether the security of being a miser or some imported luxury to pay for bureaucracy, although that is a social choice (i.e. preferring inherently socialist bureaucracy to wealth accumulation) not a social cost.

“Yes, the USG should buy infrastructure it will need in the future now because it is cheap to do so as interest rates and construction costs are low. But that’s a market monetarist style argument rather than Keynesian, even if they both end up with the same result.”

Well I am just a simple, country, internet poster and not a fancy, big city economist so you could be right.

@reason

ummm… no the supply is not inelastic, we are assuming unemployed resources.

It’s assuming that there’s unemployed glaziers and fully employed tailors, which is what Inelasticity of Supply is – you can’t throw any more work on the tailors without simply driving up prices (since you have to lure them away from doing something else), and there are unemployed glaziers waiting for work at the price level.

But as I said, that changes in the longer run. Eventually the glaziers give up on waiting for work at that price and either drop the price level or get out of the business, adjusting supply down to the level of demand. And eventually the high demand for tailors drives new people into the job, assuming the tailors don’t lock them out somehow (such as by regulatory capture).

I’m not sure this holds: “So, the story seems to imply that the economy is in recession, with unemployment across a wide range of industries.”

Intuitively, couldn’t the glazier or the tailor (or the mechanic, dentist, etc.) have less work than they might want, while still being employed and living comfortably? People can be more or less busy in their daily lives. This doesn’t imply people are losing their jobs, ceasing production, and the economy is growing at a negative rate.

That said, I don’t think this damages the argument about the marginal propensity to consume, which was one of Keynes’ key contributions. So the conclusion to transfer money to the poor and unemployed during recessions (or less than optimal growth) remains strong.

Watson Ladd’s Platypine trolling has slipped up: it seems he’s extolling transfer to the ‘lazier’ – from shopman to glazier – even though that’s, like Stalin, ‘controlling’.

This is silly argument. The destruction of a $50 window reduces the capital stock by $50. It also will presumably shift how resources are employed towards glassmaking and security and insurance and away from other activities that would provide people with more satisfaction that guarding, insuring and replacing broken windows. Because of the extra costs of guarding and insuring, living standards will be reduced by more than $50. The relative slack in glassmaking, security and insurance compared to other activities is an astoundingly stupid thing to be concerned with.

The destruction of a $50 window reduces the capital stock by $50. It also will presumably shift how resources are employed towards glassmaking and security and insurance and away from other activities that would provide people with more satisfaction that guarding, insuring and replacing broken windows.

If there’s too much inventory of window glass built up, it won’t do any of that. Likely in that case the replacement window will sell at a discount, and it will slightly hasten the day that the glass factory will re-open beyond a skeleton crew, and start making more glass.

I think most of us agree that you can’t look at the single events in isolation, without considering the rest of the economy. You are considering the bigger picture.

And the trouble is, the bigger picture doesn’t have to be just one way. It can go lots of different ways. And sometimes the second-order effects are more important than the direct effects.

This story points to the trade-offs involved in buying for durability versus other factors. It makes a certain sense to make things to last, particularly when it isn’t that much more expensive. When the capital stock decays slower, that’s good.

But that doesn’t make so much sense when the technology is improving fast. Do you care whether your computer lasts 10 years? 20 years? What would you do with it after 8 years?

It doesn’t make sense when things have a high attrition rate anyway. The military wants equipment that will be utterly reliable for its intended (fairly short) lifespan. They can plan to replace stuff, and get the needed supplies where they belong. If they pay extra for stuff that lasts longer, in battle a lot of it will be lost, stolen, captured by the enemy, blown up, etc. Not worth it.

It doesn’t make sense to go for durability when you can’t actually measure durability. If you pay extra because the advertising claims it will last longer, that’s expensive advertising.

It doesn’t make sense for producers to make durable products unless they’re sure that’s where the market is. They do better to sell at higher volume, depending on what prices they can get. And customers generally won’t pay for durability, certainly not what it’s worth.

It might possibly make sense for glaziers (not government) to pay kids to break windows. But it makes even more sense for them to make glass that’s more fragile, if their customers don’t much notice the difference.

and suggests socialism is a reasonable alternative: which is funny, of course, because even the suggestion that arguments in favor of a mixed economy have to be taken seriously would never (I gather) appear in a college textbook these days unless the name “Marx” was on the cover

Bianca Steele:

Caught me up short there a second with the s***alism bit until I saw your addendum.

I remember that kind of text from my own secondary school days in the 1960s.

Social Studies books that took you on a tour of a Soviet kholkoz, as though collective farming were the most normal thing in the world!

Left out of this equation is the fact every broken window represents an increase in entropy and so brings us closer to the heat death of the universe.

#42

Left out of this equation is the fact every broken window represents an increase in entropy and so brings us closer to the heat death of the universe.

And every new window likewise. The heat to melt glass creates a whole lot of entropy.

@37 “I’m not aware that Bastiat or Keynes or anyone else advocated destroying actual things that people had and liked, to create jobs.”

I have no doubt that Yglesias did, in his Slate column. He must have. Probably more than once.

One wonders whether Chaplin had read Bastiat when he made

One Lesson, Ad Nauseum>/i>

Hazlitt’s Economics in One Lesson was one of the first places I looked back in 1997 when I began my quest for the origin of the lump-of-labor fallacy claim. The word “fallacy” and its plural appears in the book twice as often (44 times) as the word “economist” and its plural (22 times).

Further to the comment above about Say’s Law I posted above @3, I have posted at EconoSpeak citations from the book to illustrate that point — and to indicate its connection with the lump-of-labor fallacy claim. On page 15 (2007 edition), for example, Hazlitt made explicit the connection between the broken window fable and Say’s alleged Law:

Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.

Again, on page 152:

The real purchasing power for goods, however, as we have seen, consists of other goods. It cannot be wondrously increased merely by printing more pieces of paper called dollars. Fundamentally what happens in an exchange economy is that the things that A produces are exchanged for the things that B produces.

Hazlitt’s footnote for the argument cites Benjamin Anderson’s “A refutation of Keynes’ attack on the doctrine that aggregate supply creates aggregate demand,” which Hazlitt later reprinted, with effusive praise for the author, in The Critics of Keynesian Economics.

Hazlitt doesn’t use the term “lump-of-labor” in the book, but that fallacy argument recurs frequently. On page 45:

I have referred to various union make-work and featherbed practices. These practices, and the public toleration of them, spring from the same fundamental fallacy as the fear of machines. This is the belief that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them.
Allied to this fallacy is the belief that there is just a fixed amount of work to be done in the world, and that, if we cannot add to this work by thinking tip more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible. This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious.

Page 49:

The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.
The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other. What these relations are we shall later consider.

Page 131:

Most of these policies have been followed under the assumption that there is just a fixed amount of work to done, a definite “job fund” which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces.
But because this false assumption exists, and because the policies of unions are based on it, their net effect has been to reduce productivity below what it would otherwise have been. Their net effect, therefore, in the long run and for all groups of workers, has been to reduce real wages — that is, wages in terms of the goods they will buy — below the level to which they would otherwise have risen.

Note that in the last quote, Hazlitt rehearses the same “what A produces constitutes the demand for what B produces” argument that he later credits to B. M. Anderson. Hazlitt’s juxtaposition of the “supply creates demand” doctrine and the “fixed amount of work” fallacy was not an idiosyncrasy but standard, textbook usage.

Raymond Bye’s Principles of Economics, first published in 1924, became one of the most widely adopted college introductory economics textbooks in the United States during the interwar period. In it, Bye presented an atypically clear exposition of the “‘lump-of-labor’ or ‘make work” fallacy,” which he defines as “very similar to the general overproduction fallacy…” “The reader,” Bye assures, “will see the error in this sort of thinking if he understands the true nature of exchange.” So what is the “true nature” of exchange?

Every laborer creates a product which is offered in exchange for the products of other laborers. The demand for labor thereby grows as fast as its supply; the one cannot be greater or less than the other, for they are the same thing. Every addition to the labor force of a community gives other laborers work to do providing for the needs of the newcomers, while the latter can find occupation catering to the ungratified desires of those who were already employed.

Of course, “supply creates its own demand” was the classical doctrine that Keynes likened to “an optical illusion, which makes two essentially different activities appear to be the same.” No, those “two essentially different activities” Keynes referred to were not producing and consuming. They were “decisions to abstain from present consumption” and “decisions to provide for future consumption,” the two of which are activated, Keynes argued, by different motives.

It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s ‘axiom of parallels’. Granted this, all the rest follows — the social advantages of private and national thrift, the traditional attitude towards the rate of interest, the classical theory of unemployment, the quantity theory of money, the unqualified advantages of laissez-faire in respect of foreign trade and much else which we shall have to question.

Why Say’s Law did not “sink without trace” in the wake of Keynes’s refutation is the topic of the final episode of the supply creates its own demon series.

http://econospeak.blogspot.com/2014/07/one-lesson-ad-nauseum.html

As I read Sandwichman, I wondered why the Young Hoodlum of the story is a vandal and not a thief. For surely, if he be a thief, we can wonder at how fully illustrated is the power of Says’ Law, in this instance. There’s demand: the thief is hungry, or the thief’s friends and family are hungry, or the thief knows people, who can pay some price for bread, but not the baker’s price. Breaking the window is a production and distribution process.

The problem is both ways of looking at things import tacit assumptions about the stock of goods and its reproduction, which are not natural laws but socially conditioned. Hazlitt presupposes that production is not increased by the breaking of the window in excess of that required to replace the window, Quiggin the existence of a glut. However, from the purely physical perspective of what resources society has at its disposal, and what production can be carried out, Hazlitt is clearly correct, but interpreting the result as revealing a natural law of human behavior.

Simply put I think both sides in this argument are naturalizing society, in ways that are fundamentally wrong.

Bianca Steele,
“Yes, waste really is waste. Yes, there’s often a silver lining. I’m not aware that Bastiat or Keynes or anyone else advocated destroying actual things that people had and liked, to create jobs. Burying gold in copper mines is a waste of labor, not things. ”

Quite often governments and economists advocate destroying things for economic profit despite awful social and environmental consequences. The gold rush here made some people very rich and governments collected revenue through license fees and men who had little or no employment due to the economics of the day could become miners etc but most of the trees were cut down, water ways damaged, the soil was poisoned with cyanide which is still there now, we still have lots of un filled in mine shafts, indigenous people were displaced to protectorates (reservations), people had to leave their homes and extended families and communities, there were many people who died from violence, diseases , and women and children suffered particularly badly. We have a piteous little cemetery of children who died in the gold rush, and the Anglican Church usually marks the fourth day of christmas – Holy Innocents Day there. This song is about that cemetery and makes the point that the awful social consequences mean gold is turned into lead, metaphorically speaking.

http://youtu.be/G-xaKcpUQ2w

“When it reaches the point that mainstream economics must compete in a free market of ideas, and it is judged by its marginal utility, it won’t be much of a threat.”

If all it took to kill an idea was a better idea, then a lot of current ideas would not be still kicking around. To make progress you have to marry ideas to agreed facts – exactly observed, carefully defined, rigorously tested. You have to do fieldwork, and test the ideas against the observations. Economics seems averse to this (yes, I know of behavioural economics, which seems a good idea for the most part very poorly executed).

Ideas are attractive and often beautiful: theologians are not stupid people, and their ideas are often subtle, complex and informed by great learning. But they are not a good basis for running a railroad, which is the business economics is in.

It depresses me to see intelligent people keep circling the same tired topoi.

Some one like Hazlitt does not care if he’s logically or factually right, because he’s convinced in his heart that he’s morally right, and he’s not afraid to lie to prove it.

«But it’s not just the Hazlitts and hacks that keep this ritual alive. It’s mainstream. There’s heaps of unrequited deference there toward reactionary talking points and the “smart” people who promulgate them.»

What if it is the patrons that sponsor the mainstream? The patrons who make a big difference to whether your career is an uphill battle for a small position at an average place or an easier glide into influential positions at a top place and huge corporate consulting and speaking fees?

People at the beginning of their careers do see who gets well rewarded and that aligning to some messages drives those rewards.

The Powell memo rules…

«Because the latter is NOT a theory. It is a shape-shifting rationale for class prejudice. You can’t pin it down because it just invents another version of itself.»
«convinced in his heart that he’s morally right, and he’s not afraid to lie to prove it.»

Keynes opined that “practical men” are unwittingly enslaved to the narratives of dead economists, but that point does not go deep enough.

Those “practical men”, politicians and economists are enslaved far more deeply to the salvation theories of long dead theologians.

Brett Bellmore,
I successfully diverted the youth from breaking glass in my version and what’s more added in a small scale glass recycling factor to utilise any past broken glass for the good of the community. How would your story go?

I think Brett Bellmore has hit on the rhetorical hook. “Blah, blah, blah and anybody who doesn’t agree is a vandal.”

I thought Hazlitt’s example was a riff on disaster capitalism: smash something (Iraq) or let something fall victim to decay (national infrastructure) and then make a fortune on the rebuilding. I suppose introducing insurance into this tale sucks the life out of it. The glazier gets the work, the tailor still makes the suit, the baker is pleased at his prudence. Maybe an iron worker gets a call about a decorative window grille…but in a sufficiently advanced society these little hiccups should be easily coped with.

Watching what’s going on in the world today, it looks like the powers have already decided to revitalize the dead horse of the world economy by breaking a whole lot of windows. Maybe even all of them, a-la Dr. Strangelove.

Michael Gubb: “Hazlitt didn’t make a subtle implicit error, he made a giant blinking “please learn basic logic” error. Forget the stuff about full employment or price setting behaviour.”

Hazlitt: “The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added.”

Michael Gubb: “Now Hazlitt adds in a second order effect, what about the tailor? Yes, he doesn’t now make a suit for the baker. But guess who now has $50 more to spend than they would have had? The glazier! What will he spend the $50 on? Sausages? Suddenly the butcher is better off by $50 than he would have been. A new suit? The tailor now isn’t worse off, he just made a suit for a different person. And what do they spend the money on? You could keep going on forever.

“You either include 2nd order effects for both situations, or you keep them out. Including them for one and not the other is either bad logic or dishonest debating.”

Exactly. If Hazlitt can assume that the baker was going to spend the $50 to buy a suit from the tailor, why not assume that the glazier spends the $50 to buy a suit from the tailor? (Neither assumption is warranted, BTW, by the rules of storytelling. If the tailor were relevant, he should have been included in the story.)

But note that the crowd in the story makes the same kind of error. “The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.”

The crowd assumes that the glazier will spend the $50, and that it will circulate ad nauseum, but it does not make that assumption for the baker if he did not buy the new window. They should. There is nothing in the story to say that the baker is a miser. Therein lies their fallacy. Hazlitt tries to address the fallacy, perhaps, by bringing in the tailor, but that just confuses the issue. The smashed window may provide money and employment, but so would the unsmashed window.

Now. What about the assumption by the crowd that the broken window provides work for the glazier and the money will provide more work as it circulates? Here I have to think that we should allow the the crowd knows the society they live in. Even Hazlitt grants that the window provides work for the glazier. “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 condition, within some period of time, is understood.

Pace Quiggin, I think that it is normal to have some slack in an economy. You don’t have to have a recession for that to be the case.

Why are we (in the US) complaining about excessive health care expenses, when these expenses undoubtedly create jobs and increase GDP?

I make this argument all the time for inefficiencies, but with the current iteration of this inefficiency people have their lives ruined or ended, so maybe not the greatest example.

To clarify, I’m not making this argument because I agree with it. I do think health expenses are too high (and also, the costs of the legal system, of the military, of prisons, of the financial system, etc. are too high). But I don’t believe, as most economists do, that economic growth is inherently good and that’s the contradiction I am pointing out.

John Maurice Clark on window smashing (The Costs of the World War to the American People, 1931.)

We come next to the question whether disasters which consume or destroy wealth can be, after all, advantageous to the social economy because the demand they create is “good for business” and leads to increased production and circulation of wealth. Traditional economics says: “No. The breaking of windows, for example, can never be anything but destruction of wealth; it cannot be metamorphosed into the creation of wealth, no matter how far its effects may be traced as they ramify through the economic system.” It is admitted that breaking windows may help glaziers for the moment, but only at the expense of other producers; those who would otherwise have received the money the glaziers got for replacing the panes, and in exchange would have satisfied some additional want beyond the need for windows that will keep the weather out. That extra satisfaction is lost when the pane is broken. And for the rest, glaziers work more and receive more, while others work less and receive less. This view is certainly sound, on traditional economic assumptions; but is it all sufficient and equally applicable to all cases? The experience of the War seems to afford ground for giving the question some fresh examination. The crux of the question lies here: is the effective demand for other things, and the consequent production of other things, necessarily cut down by exactly the amount that is spent on replacing the broken panes? Or, to put it the other way around, if the panes had not been broken, would other things have been demanded, produced, and consumed to an exactly equal amount? As a matter of long-run adjustment, the establishment of a permanent habit of breaking some thousands or millions of panes every year might be expected to have substantially this effect. But we are not dealing with the long run results of permanent habits, but with single events which break into the customary spending and producing habits of the people; and we must examine the case at issue on that basis. Such evidence as the war experience offers is suggestive, but not by itself conclusive. For the record of a complex historical episode seldom carries within itself the proof of the precise effect of each one of a multitude of collaborating causes. America prospered in the period of neutrality, when it was in the position of the glaziers in our illustration. Prosperity in such a situation proves nothing that is not admitted at the start. But the suggestive thing about this prosperity is the fact that we prospered by making goods without getting paid for them. The glazier who lets his customer’s bill run may be doing well by himself, if the customer is “good pay” in the end, but we should hardly expect him to live high in the meantime from his work for that particular customer. From the fact that we improved our living moderately as well as expanded our glassworks very substantially over and above the credits we were accumulating for unbalanced exports, one may conclude that the actual situation contains elements which the simplified illustration does not indicate. The general nature of these elements of productive expansion has already been indicated: namely, the new demand not balanced by an equal falling off in other demands, the additional derived demand for capital equipment, the increase in employment and volume of work done, and the further resultant demand for goods by more prosperous workers and other participants in the earnings of industry. The net increase in aggregate money demand was seen to be made readily possible by the elasticity of the credit system, the stimulus to production intensified by the well-known effects of rising prices, and the increased money demand, representing an increase in the world’s economic necessities, was enabled to take effect as an increased total of “effective demand” for actual goods by reason of the elasticity of our productive powers, which were then, as at most times, working short of full capacity. It may be remarked in passing that the “elasticity of the credit system” is no matter of inscrutable necromancy conjuring something from nothing, magical as its effects may appear. Banks can multiply purchasing power because depositors are willing to accept the position of lenders without interest. Depositors do this to the extent of most of their reserves for current spendings, in exchange for the privilege of calling these deposits at any moment by the process of drawing a check. This is a painless and largely unconscious form of lending, involving no increase of abstinence. Expansion of deposits through expansion of loans finds its main base (aside from adequate cash reserves) in a quasi-automatic increase in this painless and unconscious furnishing of credit. Turning to the experience of our actual participation in the War, the evidence it affords on the question at issue is less conclusive in one way than the experience of neutrality, and stronger in another. It is less conclusive in that consumption of wealth did not actually increase; and it is stronger in that whatever compensating effects were secured, were secured in the face of the fact that it was now our own windows that were being broken, as well as those of our European neighbors; so that we were no longer in the position of glaziers who might expect to profit for quite obvious reasons. The work and materials absorbed by our window-smashings were clearly not a net subtraction from our previous or our normal activities but involved an increase in the gross total. Production increased to a limit apparently set largely by congestion of rail facilities under an abnormal concentration of traffic at the Atlantic seaboard, rather than by any more general and abstract law of economic equilibrium. Economic effort, it must be noted, increased more than results; since war production was abnormally wasteful and lavishly expensive. Other nations fared far worse, in this respect, than the United States. In France, for instance, the calling of the army to the colors resulted in throwing a still larger army of unemployed on the streets: a condition which was only very gradually remedied. Instead of calling the existing unemployed into the workshops to take the places of those who had gone to the front, many shops were closed because the employer had gone to the front, and his employees not liable to service were left to find new work if possible. Thus French production fell off on account of this element of disorganization, as well as on account of the more obvious and unavoidable fact that the first invasion had snatched from her an area in which a large section of her heavy industries and mines was located. In this case the smashing of windows was emphatically not “good for business.” Further evidence might be sought in the general testimony of studies of the business cycle, to the effect that reviving demand acts cumulatively, at least within fairly liberal limits. This does not prove that an economic disaster brings an increase in effective demand for goods; but it indicates that such an increase is not impossible. To sum up: the effect seems to depend on the character and extent of the disaster, on the attitude with which it is met, and on the state of the credit system and of business activity in general. A disaster which does not cripple the machinery of production, of an extent which spurs people to increased efforts rather than reducing them to helpless despair, coupled with a credit system and an industrial system each of which has some unused capacity for expansion-these conditions enable a disaster to be self-repairing in part at least, through stimulus to productive activity. One of the penalties of increasing economic power is the need to find new forms of consumption in which to embody it. This process is tentative, risky, and wasteful. We are limited in our imagination as consumers as to the best ways to use increasing spending power: still more as producers in devising economically practicable goods which will capture the consumers’ unformulated buying potentialities. Nowadays producers must, perforce, try to meet the consumers’ latent desires more than halfway-to form them, indeed, in ways capable of successful and profitable gratification. But this attempt is inherently uncertain. And there is, as a consequence perhaps in part of this uncertainty and of these limits on our economic imagination, a tendency to waste capital in unimaginative duplication of existing types of facilities, to produce familiar goods. This being the case, production by these facilities is limited by the limited demand for these familiar things; the more nearly unlimited potential demand for new goods being no help to those who have not diagnosed the potentialities aright. In such a situation, anything which increases the need for familiar types of goods may be a blessed relief from the very perplexities of progress, enabling industry to go ahead with certainty and confidence rather than undertaking the more difficult task of diagnosing the consumers’ unknown potentialities and devising or selecting goods to call them forth. With a known wastage to make good, industry can count on what it has to do and on the necessary instruments; and it may move forward far more rapidly and easily in repairing the known wastage than if it were doing pioneering work in developing new and untested demands. Will the new demands therefore remain just so much longer undeveloped and unsatisfied? Perhaps that question may remain for omniscience to answer.

“But the shopkeeper will be out $50 that he was planning to spend for a new suit.”

Counterfactuals about imaginary individuals are not properly arguments, but illustrations of a fictional story. My version is that the baker kept $200 in a petty cash hoard. So when this money is spent the community benefits by an increase in money and trade. Another version could be that the baker is operating on a shoestring, so he pays the glazier with a credit card. In the end the community ends up sending more money out (in the form of interest on the loan) and ends up losing. No nonsense about the tailor required. He was just BS from Hazlitt.

The real objections in Hazlitt et al. are nonsense as in @16. The argument is that in a full production economy, where marginal utility has determined the prices, only the shopkeeper was planning to buy the suit, therefore Hazlitt was right to ignore the potential purchase by the glazier. Not only does this assume the conclusion, but it also insists that the shopkeeper’s preference “prices out” the marginal shop keeper before the baker actually makes the purchase.

As for a recessionary economy, @16 makes a parenthetical remark about “on the margin,” then ignores the argument that putting money into circulation can improve the wealth of the community by lowering the loss posed by an idle glazier. As the OP points out in different words, this ilk assumes that there is no cost in unemployment, and refuses to analyze whether the loss of the window is more, less or equal to the gain from employing the glazier.

I am skeptical of the OP on two points though: Why would anyone think that the kind of people who take Hazlitt and Austrian economics and “free markets” seriously are ever going to accept logic when they won’t even accept the evidence of economic history? If real life depressions can’t convince someone Say’s Law is not, made up stories won’t do it. @16 has the gall to write “Work is a means to an end, not an end in itself…”

Thus, what is really important is what happens with capital formation and the changes in the rate of profit and so on. There is very little insight to be gained with just so stories about individuals. Economic life is not a psychological event.

I’ve long argued that a very efficacious stimulus would be to pay off all or a large portion of everybody’s carried credit card debt (no joy for those who pay off their bills every month). These people are proven consumers!

#84

Why would anyone think that the kind of people who take Hazlitt and Austrian economics and “free markets” seriously are ever going to accept logic when they won’t even accept the evidence of economic history? If real life depressions can’t convince someone Say’s Law is not, made up stories won’t do it. @16 has the gall to write “Work is a means to an end, not an end in itself…”

Look at what #16 says. His ideas are not illogical. They merely start from crazy assumptions which do not fit the real world.

And are his assumptions that crazy? He identifies with capitalists. If you imagine his ideas entirely from the point of view of a capitalist and nobody else, they make a kind of sense. A man who owns nothing that brings him an income, must work. There is no other ethical way for him to survive. He must work in competition with everybody else who must work, and if there are no jobs for him then he doesn’t deserve to live. Meanwhile the capitalist rents labor, and he has an obligation to himself not to pay any more than he has to. That does not mean he must accept the rock-bottom price. When it takes time for him to train workers to do what he wants, he loses if his workers starve faster than he can train new ones. So he has owes it to himself to keep them healthy enough to work as long as new workers would be more expensive.

For capitalists, supply creates its own demand. If I am a capitalist and I personally make a million tons of steel or a million tons of wheat, I then have something to trade with other capitalists that would not have existed if I had not made it. I made it because I thought they would want it. If I made a million tons when they only wanted half a million tons, then I have not created wealth but waste and I will suffer for it. When I make legitimate products they create their own demand — if they do not then I have made a serious mistake that I should not have made, and it’s my own fault that I lose money.

Logical reasoning that works for capitalists may not work for anybody else. But as long as capitalists are in control, any problems with the reasoning are problems *for* people who are not capitalists and not problems for capitalists. So it all works out for capitalists and so that means the reasoning is sound.

@16 has the gall to write “Work is a means to an end, not an end in itself…”

But work is a means to an end, isn’t it? When you work you do it because you want to be paid. If you do it for fun it isn’t work, right? And the capitalist pays you because he wants the fruits of your labor, not just because he enjoys watching you work. (Except when he pays exotic dancers etc, when he does just want to watch people work.) Usually, the work is a means to various people’s ends and not an end in itself.

However, Krishna says that you don’t have a right to be paid for your work, but you do have a right to do the work. What a different culture, compared to here where you do not have any right to work unless some employer chooses to gift you with a job!

[b]J Thomas @88[/b] Capitalists’ “work” is production for profit. They do accumulate profit as an end in itself. Work is only for the means to an end for some of us.

But I gather your real point is that @16 is not crazy. First, I’m sorry if I implied I thought @16 was crazy. I meant to state as politely as possible I think @16 is a liar.

@89 So, if I follow you, “the view you’ve imposed” on Keynes “starting from observed reality” is economic history.

Am I the only one who thinks that Keynes’s remark about burying money to be dug up is a joke aimed at the gold standard? I. e., that the gold standard makes just as much sense?

Like that Italian comedian/politician who said that we dig up gold from the ground and then put it under the ground in a bank vault, so why don’t we just leave it in the ground and build a bank on top of the mine?

;)

Does supply create demand? If that is Say’s Law, he changed his mind, didn’t he? At least in a monetary economy. You can have an oversupply of goods and services if you have an undersupply of money.

But what about a barter economy? If I bring 10 chickens to market, those 10 chickens are my supply. But at the same time they are my demand for other goods and services. It is not that supply creates demand, it is that they are the same thing.

OTOH, what if I am a masseur and set up a stall in the market. Where is my supply? Where is my demand? All I have is a potential supply of massages, and hence, a potential demand for other goods and services. Now suppose that somebody offers me two chickens for a 20 min. massage, and I take the chickens and give the massage. Demand created supply, right?

If I bring 10 chickens to market, those 10 chickens are my supply. But at the same time they are my demand for other goods and services. It is not that supply creates demand, it is that they are the same thing.

So far, so good.

OTOH, what if I am a masseur and set up a stall in the market. Where is my supply? Where is my demand? All I have is a potential supply of massages, and hence, a potential demand for other goods and services. Now suppose that somebody offers me two chickens for a 20 min. massage, and I take the chickens and give the massage. Demand created supply, right?

What if a second masseur sets up her own stall in the market. Supply has doubled. Can you expect that your massage is still worth two chickens?

Maybe it will still be worth two chickens. Maybe it will be worth one. Maybe it will be worth an egg. It depends on elasticity of demand, and also on how desperate you both are to eat, and on customers’ perception about the relative quality of the massages.

If your competitor is a recent immigrant from North Korea, she might be overjoyed to get an egg. She may feel rich to earn 2 dozen eggs a day. She wants the work far more than you do. Possibly some customers simply won’t want a massage from a starved-looking asian girl, though.

Then one day a truck breaks down that’s carrying 1000 chickens from a battery farm to the abattoir, and the chickens wind up at your market. Does supply create its own demand? Can you still get for your 10 chickens what you got the day before?

What if instead of chickens you bring a lot of chicken guano to market? Does supply create its own demand? There is a market for fertilizer, and somebody might pay you something for it.

Demand and supply. Supply and demand. No, supply does not create its own demand. You don’t get people to want something just by having it for sale. If you could, there would be a big market in bottled tap water. (Well OK, there is. But it comes from advertising, people believe they are getting pure spring water.) There would be a market in stock market opinions. (OK, there’s that too.) People could make a living teaching economics. (OK, there’s even some of that going on. But it’s silly, right?)

I think there is a simpler take but I am surprised JQ doesn’t mention it. The big assumption is that the baker was going to buy the suit rather than save his money. I.e., the reason a broken window might be economically advantageous is the changes to preference for consumption versus savings. Isn’t that one of the core messages of Keynes?

(And once again I am struck by the superficiality of “preference maximizing” arguments from our trolls.Given that these preferences are often in small magnitude, constantly fluctuating and often self-defeating, why anyone thinks they are a basis for gauging personal happiness or social health remains a mystery to me.)

From TM @75 “Why are we (in the US) complaining about excessive health care expenses, when these expenses undoubtedly create jobs and increase GDP?”

Is this for real? We shouldn’t complain about the highest healthcare costs with poorest outcomes simply because those expenses undoubtedly create jobs/increase GDP?

Again, economics is filled with assumptions not founded in fact. US healthcare is exceptionally inefficient (for decades prior to ACA implementation, FYI.) The market is secretive and opaque – patients cannot determine the costs of procedures until after the procedure; patients cannot pick and chose providers – their insurance exerts a strong hand in this “choice” – consumers generally cannot pick and choose when they will have something requiring urgent medical care – like cancer or appendicitis or a broken leg.

Healthcare is not a “textbook” market in any way, and yet economists continually want to shove this sector into textbook scenarios. To say that the expense of healthcare will create jobs and add to GDP… well – that way madness lies…

MSM @102, that’s not an answer to the reasonable question @75. No one is defending bad health outcomes. The question is (setting aside the portion of health care goods that are imports — a big qualification), if we’re paying ourselves to care for ourselves, why are the costs per se, which are by hypothesis American incomes, a problem? I suspect there are several answers, but they aren’t self-evident.

You mock “economists” for viewing health care as a “textbook market,” yet you invoke “efficiency,” a textbook market ideal. Textbooks say efficiency gains will create a pool of surplus that can be distributed as money always is–i.e., the rich will get most of it. Yay. If I were a nurse or a hospital janitor and efficiency cost me my job, I might not cheer. So what are the net distributive consequences of our current costs? Probably not good, either (doctors aren’t poor, poor people die young), but it’s a real empirical question.

In public discussion the cost problem isn’t an efficiency or a distributive problem, it’s 100% a federal budget problem — serious people don’t believe Congress will raise taxes enough to cover the projected costs 20 years hence. (Democrats think Congress won’t, Republicans think it literally can’t without ruining the economy.) But if it’s a budget problem, it can, as Paul Krugman has been saying, be “solved” by a combination of (1) GNP growth, (2) political will to raise taxes a bit, and (3) partial cost containment. What if we “solved” the budget problem and were seeing “good health outcomes,” but our costs were still sky high and “inefficient” by world standards? Let’s say we spend 25% of GNP on our own health. Economically and morally, if that’s what “we want,” so what?

Widmerpool: “In public discussion the cost problem isn’t an efficiency or a distributive problem, it’s 100% a federal budget problem”

Yes, the public discussion is the result of misdirection. The problem of medical costs is not a simple one. It includes distribution, and to a large extent what we might call social opportunity costs, as so much of our economy is devoted to health care. It is a societal problem, not a problem of the government budget per se.

If you look back to the late 1970s health costs in the US were in line with health costs in other developed economies. Then US costs started to increase more rapidly than theirs. Why? Has anybody studied that question?

One thing that happened is that the law changed to allow pharmaceutical companies to patent medicines developed by research funded by the government. Sounds like a stupid law to me, but it surely affects both the availability and cost of drugs. So it may be a cause of our high medical costs, but surely not the only one.

There is exactly one interesting question in economics at the moment: how is it that so many smart people engage in an activity that is totally useless as a matter of logical necessity? That is, the assumptions that must be true for economics to have value are demonstrably false, so how does it keep going?

The answer is that instead of seeing falsification, economists see the need for little tweaks. In this case, a second lesson that makes the parable less free market oriented.

But both lessons are premised on the following false assumption: it is possible to predict the manner in which a dollar of spending will ricochet around the economy. The whole glazier nonsense above understands that a butterfly flapping it’s wings in the Amazon can change the weather in New York, but makes the further claim that we can keep track of the flapping and therefore calculate our prediction accurately.

This is not idle badness. People die because economic theory leads to governments “debating” whether or not to fix broken window, where every statement in the debate is a claim to know the unknowable.

The correct thing to do is fix broken windows and tell the people who claim to know how a butterfly flapping it’s wings will affect the economy that if they believe that, there’s a bridge in Brooklyn (built without asking about the multiplier, but because we needed a bridge) you’d like to sell them.

Billikin: “You can have an oversupply of goods and services if you have an undersupply of money.”

Bruce Wilder: “One would think this would follow from the Keynesian insight that effective demand is demand backed by money.”

According to Brad DeLong (who should know) that John Stuart Mill had that insight in 1829.

Bruce Wilder: “The reactionary response is that any “quantity” of money can be sufficient to the case, if prices adjust accordingly.”

Is one answer to that, “People have to eat”?

To spell out the aha moment: will command and control regulations about climate change be “less efficient” than a carbon tax? The answer is: which situation will lead to greater human creativity? Economists think they can answer this question when it’s quite obvious that they cannot.

J Thomas: “No, supply does not create its own demand.”

Billikin: “The supply of X does not create the demand for X. But I hope that is not what anybody who said that supply creates demand meant.”

J Thomas: “What else could it possibly mean? That meaning is dead wrong. And no other reasonable meaning comes to mind.”

Well, that meaning is so obviously stupid, except for pet rocks and such, that another meaning was likely intended. And, judging from the explanations of those who say that, it is an inexact way of saying that supply is demand.

Hazlitt: “demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods.”

So supply is demand and demand is supply. Supply creates demand and demand creates supply.

This interpretation obviously holds for goods in a barter economy. But there are only potential supply and demand with services, hence my example of the masseur.

A monetary economy is another matter. But J. S. Mill pointed out that we can think of money as a good which is being traded, as in a barter economy.

#114 Billikin

Hazlitt: “demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods.”

The trouble is that this simply does not make sense.

Suppose that last year you produced a ton of hay and that was your supply and your “demand”. This year you produce two tons of hay. Has your demand doubled? Maybe. Maybe it’s more than doubled. Maybe it hasn’t increased at all, or decreased.

The demand you can create from your hay depends on demand for your hay. If people need twice as much this year, then you’re doing fine. If they need less, then having twice as much does not help you at all.

So it simply is not true that supply is demand. It does not make sense to say it is. Because it isn’t.

The only thing that makes your supply of hay worth anything is other people’s demand for hay. If you have chickenshit for sale then that’s a supply that becomes your demand when you sell it, because there is demand for it. If you have bullshit economics lessons for sale likewise. If there is demand for them then you can sell them and buy stuff. But only if there is demand for bullshit.

Supply is not demand. It just isn’t. You could sort of say that supply creates demand because when you sell stuff that gives you the opportunity to buy other stuff. But that’s only true when there is already demand for your product. Your product has not created demand, the demand had to pre-exist.

Very often in economics, people can spout bullshit and other people just believe it because it sounds good. Can you see that this time you have fallen for that? It can happen to anybody, it doesn’t say anything bad about you that this time it was you getting fooled.

“A monetary economy is another matter. But J. S. Mill pointed out that we can think of money as a good which is being traded, as in a barter economy.”

We could think of it that way, but we would be wrong – money has value that is non-intrinsic. (And it needs to be a barter economy with unperishable goods to even start to be comparable, time transferance is of the essence here).

reason, ceteris paribus, it is cheaper (and therefore generates less GDP) to cook at home than eat out (that is true even when you compare home cooking with high quality ingredients with restaurant fast food), and owning a bicycle generates less GDP than owning a car. Of course you can speculate that the saved money will be spent on something else, maybe solar panels or massages. But the GDP villain might just as well decide to work fewer hours in order to enjoy more leisure time (and perhaps exchange massage and similar services with friends without them ever showing up as GDP), and if their lifestyle makes them healthier (a big if but quite plausible), then the villain is undoubtedly guilty of hurting “the economy” big time (according to conventional economic wisdom).

So no, you haven’t addressed anything (but thanks for trying), and I would add, my original point (75 etc.) remains unrefuted.

@TM and Reason
There is no such thing as a GDP hero because the consequences of his actions are mostly the result of future circumstances that cannot be predicted because they are indetetminate. Even if that weren’t the case, reasoning in an Ivory Comment Thread cannot predict the future unless you have data on multitudes of variables.

121, 122: quite a bit of handwaving.

“completely ignored source of inefficiency”, reason? This has been pointed out for decades. If you are not familiar with the literature, don’t assume that everybody else is also ignorant.

TH: “the consequences of his actions are mostly the result of future circumstances that cannot be predicted because they are indetetminate.” Ok, economics as a social science is pointless because economic outcomes are not predictable. But I don’t subscribe to mainstream economics, I’m pointing to a contradiction within that paradigm.

The problem with Hazlitt’s book is that it’s a work of propaganda that grotesquely misrepresents and misunderstands Keynesian ideas. I would never recommend anyone to start their economics education with it, unless they intend to become part of the Austrian crowd (cult?) and spend their time online explaining why liberals don’t understand economics and how it’s self-evident that only libertarianism works.

That being said, there is definitely some value to the parable of the broken-window, in that it helps think through common-sense assumptions about how the economy works. I think it’s good for people to be able to identify the assumptions embedded in the story and in the Keynesian perspective, so as to better understand when and how stimulus is most appropriate.

So I’m not as dismissive of the story as other people here. I think too many people in the general public tend to completely ignore the reduction in value of the capital stock in the story, focus only on production, and are not aware of their implicit assumptions (e.g. that there are idle resources). Teaching people about opportunity costs is also good and we want people to think about alternative uses of resources.

But it’s a very bad idea to stop there, and you should also lay bare the assumptions underlying the story (e.g. that the shopkeeper would have spent the money on something else) and also point out, as was done here, that it doesn’t mean that destruction is good in and of itself: it just happens to have positive effects which outweigh the bad ones, but are still worse than a more productive alternative. We basically never run out of useful things that need doing, so we never have to rely on destruction to stimulate economic activity, unless silly people insist that stimulus never works and destruction forces them to start building stuff.

TM @124
Thanks for the insult, but I was refering to inefficiency in consumption being completely ignored in the measurement of GDP which just measures consumption, so that a paradigm that maximises GDP can still be inefficient even though it claims to be maximising “efficiency”.