Hazlitt, Keynes and the glazier’s fallacy

by John Quiggin on July 24, 2014

I’ve been working for quite a while now on a book which will respond to Henry Hazlitt’s Economics in One Lesson a book that was issued just after 1945 and has remained in print ever since. It’s an adaptation of the work of the 19th century French free-market advocate Frederic Bastiat for a US audience, specifically aimed at refuting the then-novel ideas of Keynes.

My planned title is Economics in Two Lessons. In my interpretation, Hazlitt’s One Lesson is that prices are opportunity costs[1]. My Second Lesson is that, in the absence of appropriate government policy, private opportunity costs (market prices) won’t reflect social opportunity costs. Here’s a central piece of the argument, responding to Hazlitt’s exposition of Bastiat’s glazier’s fallacy.

Here’s Hazlitt

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. 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 logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

The argument is compelling at first sight, but there’s a subtle problem. Implicit in the crowd’s reaction is the assumption that glaziers are short of work. If (as sometimes happens) glaziers have more jobs than they can handle, then there is no extra window – at best, the shopkeepers order simply displaces some other, less urgent, repair. Similarly, for Hazlitt’s riposte about the tailor to work, there must exist unemployed resources in the tailoring industry, so that the shopkeeper’s suit represents an addition to output. If not, the additional demand from the shopkeeper will raise the price of suits marginally, just enough to lead some other customer to buy one less suit. So, the story seems to imply that the economy is in recession, with unemployment across a wide range of industries.

With these facts in mind, we can tell a different story. Suppose that the glazier, having been out of work for some time, has worn out his clothes. Having fixed the window and been paid, he may take his $50 and buy a new suit. 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.

What if the window had not been broken? Under the assumptions made so far, the shopkeeper would buy a new suit for $50, the tailor would hoard the money and the glazier would remain unemployed. 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.

So, the seeming refutation of the glazier’s fallacy falls apart on closer examination. On the one hand, Hazlitt uses language that implies the existence of unemployment. On the other hand, he is implicitly assuming that private and social opportunity cost are the same. The Second Lesson tells us that this won’t be true in general if the economy is in recession.

None of this means that it’s a good idea to go around smashing windows during recessions. Obviously, the benefit to society in replacing a window is less than that from a new window (for example, in a new shop). Moreover, there’s no reason to suppose that the propensities to save and spend will work out as they have been assumed in the story here. Perhaps the glazier is a miser and the tailor a big spender.

But governments can do much better than this. First, they can spend money on things that are more useful than breaking windows and repairing them (or, in Keynes’ presentation of the same argument, burying bottles full of money in coal mines and letting people dig them up). They can give money directly to individuals and families through benefits or tax reductions. Alternatively, they can create jobs by undertaking public works or by expanding public services.

Second, they can target their efforts towards groups who are likely to spend any additional income (in the economics jargon, they have a high marginal propensity to consume), most obviously low-income families.

The crucial point is that, under conditions of high unemployment, the wage received by a newly employed worker is not a measure of the opportunity cost of their labour; the opportunity cost is the time they would otherwise have spent in idleness.

[^1:] Hazlitt describes his one lesson, in terms derived from Bastiat’s “What is Seen and What is Not Seen”, as

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
But this doesn’t describe any particular idea about economics; it merely assumes what is to be proven, that a complete assessment of policy will yield free-market conclusions.

{ 129 comments }

1

Peter T 07.25.14 at 1:00 am

There’s a few other assumptions in both lessons. Two that stick out are that money equals real resources, and that prices will adjust relations between buyer and seller. Neither are universally true, and the looseness of fit around these is what gives the economy much of its indeterminacy. What happens in real life? The baker has a small fund (maybe a loan arrangement?) for this sort of contingency, psychologically separate from any other funds he/she has. He/she draws on it, cursing, but as this is an anticipated, if unwelcome, event, and buys the coat. If the business is marginally profitable, or the hooliganisms recurrent, it goes out of business as a unit, several people lose their livelihoods and some debt is written off. Summed across some region, this has a depressing effect, as any drive through that well-known and avoided local area will attest. Does the tailor raise his prices? No – he more usually asks customers to wait a little longer. If the queues lengthen, does he then do so? No, he hires another worker, or his assistant opens another shop. In fact, as demand for tailors rises, economies of scale and greater attention to the possibility of exploiting profitably them may well cause prices to fall, as more and better machinery is employed. Provided that the technology is available, which it may or may not be….

I fail to see what value is added by perpetually hovering at a high level of abstraction. It may well serve to introduce undergraduates to some basic concepts, but if economists are – as Keynes hoped – to be as useful as plumbers, it does not substitute for detailed consideration of how the pipes actually function.

2

Main Street Muse 07.25.14 at 1:16 am

“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.

3

Sandwichman 07.25.14 at 1:21 am

With all due respect, John, Bastiat’s Glazier’s Fallacy is just good ol’ Say’s Law of Markets dressed up in a picaresque tale. Supply creates its own demand, ad infinitum. Or, as I prefer to put it supply creates its own DEMON. Keynes tried to show the limitations of this argument, as had Malthus. But obviously it has irresistible appeal that is not amenable to logical refutation. Neither fact nor theory can kill this zombie. Please have a look at my 12-part series on “Supply creates its own demon” starting today at EconoSpeak. I could send you an advance draft of most of the episodes if you would like.

http://econospeak.blogspot.com/2014/07/supply-creates-its-own-demon-sciod.html

4

Sandwichman 07.25.14 at 2:20 am

I meant to say ad nauseum

5

Brett 07.25.14 at 5:37 am

@John Quiggin

If (as sometimes happens) glaziers have more jobs than they can handle, then there is no extra window – at best, the shopkeepers order simply displaces some other, less urgent, repair. Similarly, for Hazlitt’s riposte about the tailor to work, there must exist unemployed resources in the tailoring industry, so that the shopkeeper’s suit represents an addition to output.

Then it’s mostly an argument over the time frame. In the short run, a broken window might employ an unemployed glazier instead of driving up the prices for clothes if the supply of both is inelastic, but in the longer run you’re not changing much because the overall supply of both optimizes towards the clearing price. So if you broke a whole bunch of windows over a long period of time, you’re eventually just moving money around while reducing human happiness.

6

ZM 07.25.14 at 5:41 am

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.

7

reason 07.25.14 at 7:33 am

Brett,
“Then it’s mostly an argument over the time frame. In the short run, a broken window might employ an unemployed glazier instead of driving up the prices for clothes if the supply of both is inelastic”

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

8

Sam Dodsworth 07.25.14 at 7:37 am

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.

9

J Thomas 07.25.14 at 7:57 am

Suppose the glaziers find a way to make glass that doesn’t last as long. Then they will be kept busy making more glass to fulfill the same function as less glass which lasts longer.

They do more work. Do they get paid more? It depends. In an ideal system people would pay less for glass that didn’t last as long, or they would use less of it because — since it cost more per day of use, there would be fewer places it was worth using.

But we don’t live in an ideal system. People mostly choose how many glass windows to use, by tradition. If the price goes up then they pay more, and consider it an investment.

Oh, well. It isn’t such a big difference between glaziers who find a way to make glass that doesn’t last as long, versus them paying people to break windows.

Society ought to be better off if we get more stuff with less work. Then we can enjoy our leisure or make more stuff still, whichever we prefer. But somehow society is not set up that way. If I want to work but there are no jobs, I’m stuck. Society does not owe me a living. If there isn’t a job for me then I can live off handouts that I don’t deserve, or steal, or die. Something about this seems to me like an inefficient way to organize a society, but society has no obligation to be efficient or to serve any purpose for anyone. The way the system is set up, we exist to serve the economy and not the other way around.

10

Ze Kraggash 07.25.14 at 8:53 am

“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.

11

ZM 07.25.14 at 9:10 am

The social product is not necessarily increased by the addition of a new suit either. It is Professor Quiggin’s story so only he could tell you about the character and property of the shopkeeper. What if the shopkeeper is a “man so natty he leaves dapper in the dust” and owns 100 suits already, and the poor tailor is developing rheumatism and poor eyesight through stitching too many suits and has taken his young 9 year old son out of school to fulfil this extravagant need for suits? I think you need further information to judge whether the new suit is a social benefit or not.

12

Ze Kraggash 07.25.14 at 9:25 am

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.

13

Richard Simmons 07.25.14 at 9:27 am

Forget economics. First, there was a window, very useful for seeing the tasty buns. Then there was no window but the awful possibility of buying a bun that contained a sliver of glass. This is physics, namely entropy. The hoodlum increased entropy and, if you must translate back to economics, produced $50 of damage where before there was none. Had there been no glass to start with, the hoodlum might have stolen $50 worth of buns and the baker would have been in the same state as if the glass needed replacing – but who would argue that allowing the theft stimulates the economy?

14

Mike Huben 07.25.14 at 9:52 am

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

A diagram or illustration can make it vastly more clear.

15

Jeff 07.25.14 at 10:40 am

Isn’t 90% of labor spent on “replacement” anyway, because nature (entropy)? Road repair/repave, car repair, aircraft maintenance, housecleaning, trash removal, software maintenance, anti-virus software, police (restore order), etc. etc. There’s very little new under the sun. In the larger picture, arguing over whether glazier is a fallacy is a similar “waste” of intellect.

16

Viennacapitalist 07.25.14 at 11:41 am

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…

17

djb 07.25.14 at 12:00 pm

if the shopkeeper is middle class, there is probably little difference in the spending by the glazier and the shopkeeper,

so multiplier may not change

but what about the owner of the glass factory

he would perhaps benefit with some of shopkeepers money

and that may decrease the multiplier

redistributing the wealth in general when less than full employment increases the multiplier if goes from rich to poor/middle class

better if that redistribution is usefully applied

18

Billikin 07.25.14 at 12:20 pm

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.

19

MPAVictoria 07.25.14 at 12:42 pm

Of course governments don’t spend money to hire youths to go around breaking windows. They spend money to build roads and sewer systems or to provide health care. So I never really got this analogy.

20

Noni Mausa 07.25.14 at 1:13 pm

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

21

Peter K. 07.25.14 at 1:24 pm

@17

They also spend money on guns, bombs, missiles, riot gear, prisons, walls to keep the kiddie refugees out, and server farms to store their surveillance data.

@ 2

Yes when given illustrative examples such as Hazlitt’s and Quiggin’s, my mind often wonders to pondering about what happens in the real world.

#5 Brett must be a troll or making a trollish comment. Seems the biggest difference between the neo-classicals and Keynesians is that that the latter believe in two important economic concepts – recessions and bubbles – and the former don’t. Scott Sumner the neomonetarist believes in output gaps but not in bubbles and so is a hybrid. (Did Keynes writte about bubbles?) Neo-classicals like Brett believe in Say’s law which insist there are never shortfalls in demand. I think it’s partly semantics: the neoclassicals don’t believe the amount of employment is important: it is what is given the supply of demand. Likewise with an asset bubble: the NCs just see the asset price as being what it is – neither wrong nor right – even if the price is determined by a bunch of overleveraged investors jumping on the bandwagon hoping to get rich, not by actual demand for the use of the asset. Even if the price is far from historical norms as what happened with housing.

@ 2

What happens in the real world after a bubble pops and there’s a recession or shortfall in aggregate demand? My personal preference if for the government to spend more on infrastructure and provide debt relief as in Quiggin’s discussion and make up the shortfall. But what often happens is that the Central Bank lowers the benchmark Fed Funds rate or raises the interest rate paid on excess reserves and gives the banks more money to allocate out into the economy. This is usually (mostly?) done via mortgages and the housing market. Ideally the banking sector is competitive. Profitable banks will have done wise/smart lending. As the Central Banks gives them money, the profitable/competitive banks will make good use of it, while others may squander it on bad loans and go out of business.

And so as the benchmark Fed Funds rate is lowered or they are earning more on their reserves, banks can offer lower rates to mortgage customers than their competitors who will in turn try to match them. Consumers will spends less on mortgage payments and more to boost the rest of the economy. Consumers who have been saving their money may decide to buy a house and get a mortgage with the lower rates. This puts money in the pockets of the banks, builders, etc. Students should be taught this kind of thing about what really happens.

Whether the Central Bank is “borrowing and loaning’ by expanding its balance sheet or the government is cutting taxes and spending and increasing its debt, the moving forward of economic activity is a free lunch. The neo-classicals will argue its just taking away economic activity from the future but it’s not.

Another way to look at it is in the context of debt contracts. With debt forgiveness you get the economy moving again with both the debtor and creditor taking a hit. So maybe the creditor will be a little more wary in providing loans in the future but so what?

When the government gets the economy moving again, it will gain more in taxes and pay out less in safety net expenditures and its debt will go down again. As the economy recovers the Central Bank will raise rates again and pay out less in interest on reserves. The government and Central Bank can’t provide endless demand as the economy recovers or else you’ll get runaway inflation.

22

Peter K. 07.25.14 at 1:31 pm

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.

23

MPAVictoria 07.25.14 at 2:05 pm

“They also spend money on guns, bombs, missiles, riot gear, prisons, walls to keep the kiddie refugees out, and server farms to store their surveillance data.”

Yes. Lets have less of this kinda thing and more school lunches.

/I am preparing the new budget as we speak. Good bye F-35, hello rural broadband.

24

Trader Joe 07.25.14 at 2:27 pm

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.

25

Watson Ladd 07.25.14 at 2:34 pm

I don’t think this is right. Society had a certain quantity of goods before the window was broken. Afterwards it had fewer. Whatever actions took place to reproduce the starting conditions could have increased the quantity of goods available, had the window not been broken. This is the case no matter how the goods are divided.

@MPAVictoria: 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.

26

MPAVictoria 07.25.14 at 2:41 pm

“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.

27

Layman 07.25.14 at 2:45 pm

“I don’t think this is right. Society had a certain quantity of goods before the window was broken. Afterwards it had fewer. Whatever actions took place to reproduce the starting conditions could have increased the quantity of goods available, had the window not been broken. This is the case no matter how the goods are divided.”

Not if there’s a recession resulting in no demand for windows. How much unspent cash is now sitting on the sidelines? Why isn’t it being spent to increase the quantity of goods available?

28

Brett 07.25.14 at 3:53 pm

@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).

29

john m 07.25.14 at 3:54 pm

Where is he hiding the suits?
Let me get this right -every delta t where the window is not broken the shopkeeper buys a new suit?

I can show using math that you wouldn’t understand, but would know that I am more clever than you, that for every delta t where there is a window broken/ not broken, there is a new universe where there is a window not broken / broken. Taken to the limit we find that there is a random assortment of universes and in some everybody is employed as a baker, or a tailor, or a glazier. But regardless there is always full employment in all universes.

I will soon be presenting a paper showing that we happen to be living in an unusual universe where there is a paucity of glaziers. This does not break the axiom that through spooky action at a distance the number of idle glaziers matches 1:1 the number of brick chucking young men.

While the math is correct, the conclusions are probably hard for you to wrap your mind around. You should find an alternate university where people get tenure showing through microfoundations why these young men prefer to remain unemployed tossing bricks than taking a job paying a pittance fair wage.

30

Joseph 07.25.14 at 3:59 pm

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.

31

Wonks Anonymous 07.25.14 at 3:59 pm

“But that’s a market monetarist style argument rather than Keynesian”
Even an RBC economist who thinks monetary policy is irrelevant could agree with that. In fact, “make hay while the sun shines” is a very RBC concept, although here we are talking about temporal variation in prices/scarcity rather than productivity.

32

Limericky Dicky 07.25.14 at 4:41 pm

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’.

33

J Thomas 07.25.14 at 4:45 pm

Society had a certain quantity of goods before the window was broken. Afterwards it had fewer. Whatever actions took place to reproduce the starting conditions could have increased the quantity of goods available, had the window not been broken. This is the case no matter how the goods are divided.

I don’t think this is a very useful approach. Stuff is continually going bad, and the economy is continually making new stuff. There are exceptions — Roman roads over 2000 years old and still functional etc — but not a lot of exceptions. (Even a road that doesn’t go bad won’t always be laid out in the directioni you want to go.)

If at any time we said “We have all the stuff we need now, let’s just stop making more”, there would be no economy. We would have GDP = 0. Presumably people would be growing their food in their own gardens, and putting their sewage through their own septic tanks, and getting their water from their own cisterns etc. Trade would consist of people exchanging stuff they have for stuff they expect to need (or stuff they expect will go up in value). People who do good trades could get rich in a zero-sum game. No new production.

But we don’t have that. Many many people depend on production. If you grow up and your parents were too poor to leave you wealth, you must produce stuff to pay for what you need to buy. If you can’t do that, what will you do instead? Maybe you can do zero-sum trades and make a living that way. Or steal. Get a job doing Human Resources, filing job applications from tens of thousands of people who can’t get jobs.

Many businesses depend on cash flow. If they can’t get enough sales then they fail. They do better to make a product that wears out fast enough to give them lots of repeat business, provided there isn’t a better product available that customers prefer to buy. Planned obsolescence, etc. We talk like it’s a bad thing, but what’s the alternative? What would you think of a company that made a product that never wore out? Better to make something that’s replaced often. Razor blades. Deodorant. Shampoo. Pharmaceutical companies prefer to sell drugs that their customers will take for the rest of their lives, over drugs that cure people….

The system as a whole may be better off if we make things that wear out slower. But the producers are not better off, and their employees are not better off. We know how to make bullet-proof glass (which often breaks when shot at but is much harder to break than regular glass). If we made a whole lot of it, it would be cheaper. Would glass-making companies be better off that way? Unless the price was high, they’d make less money.

Our system is mostly not designed to reduce the flow. In many ways its designed to increase the flow. So for example, if people who went to prison were persuaded to get productive jobs and stop doing crimes, society would be better off (provided we could find jobs for them). But the prison system would be smaller, it would have fewer jobs and managers would have fewer people working under them and so would have less prestige. And so people who have been to prison are more likely to commit crimes than people who have not been to prison.

Whether or not it would be good to do it some other way, this is the way we do it.

34

Tom 07.25.14 at 4:50 pm

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.

35

Robert 07.25.14 at 5:15 pm

In the post linked to by my name, I quote Paul Samuelson:
“This is why books entitled Economics in One Lesson must evoke from us the advice: ‘Go back for the second lesson’.”

36

J Thomas 07.25.14 at 5:28 pm

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.

37

bianca steele 07.25.14 at 5:37 pm

I think Peter T had it right @1. Not only is it abstract, both the model criticized and the one Hazlitt replaces it with ignore the salient features of the anecdote. Hazlitt doesn’t bother showing how, though, because he has a simple “they ignore everything they don’t see” close to hand, to serve as critique, and “free markets yay” as the automatic alternative.

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. Destroying large swathes of Paris so it could be rebuilt, presupposed there was more value in the new Paris than the old one. I’m not aware that anyone has proposed even making shoddy products that provide automatic labor for people to make them usable (though putting less effort into production, on say a software product, because it’s easier and more profitable to add on after-sale support).

Then again, I can’t read econ books and don’t even have any, except a 1973-era community college textbook that always makes me laugh because it has no math at all and suggests socialism is a reasonable alternative toward organizing an economy, and a copy from the same source of “Economics in One Lesson.”

38

bianca steele 07.25.14 at 5:44 pm

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

39

William Berry 07.25.14 at 7:20 pm

As a long-time, hard-core USW guy, here’s an idea for another Hazlitt symposium: “Do Unions Increase Wages?”

As a callow youngster who thought he knew something those semi-literate old New Deal types did not, I was partially seduced by Hazlitt.

Union membership and activism has long since set me free.

There is truth in what Richard Simmons says @13. Ultimately, all boils down to the physical dynamics, entirely subject to the conservation laws. But there is a lot of noise in the system.

The troughs are recession/ depression with real unemployment, real hunger, real human misery. The peaks are good times of relative abundance.

A mere average of the process is fine with the Hazlitts of the world and their acolytes, the one per-centers— provided the cycles are short enough as not to affect their own bottom lines. For working-class dogs and the poor, not so much.

40

William Berry 07.25.14 at 7:28 pm

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!

41

john c. halasz 07.25.14 at 8:31 pm

Really? No one bothers to mention that planned obsolescence is an essential feature of capitalism-as-we-know-it? Over-consumption for the sake of over-production. The regulated maintenance of waste and inefficiency to maintain the rate-of-profit.

42

Shatterface 07.25.14 at 8:46 pm

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.

43

AJtron The Invincible 07.25.14 at 8:48 pm

> A young hoodlum, say, heaves a brick through the window of a baker’s shop.

Let us throw in religion.

Supposing the young man, after throwing the brick, gives a short sermon. Very short sermon: “Be Good in your heart. Heaven knows when you have been Bad.” Now, would you find it preposterous if I insist that these two acts of the hoodlum increase social welfare?

Yet, that is precisely what religious organizations claim. For instance, companies have to pay to put the “K” mark (for kosher) on their products. These costs are passed on to consumers. (This part is like the hoodlum throwing the brick through -your- window.) And of course, the hoodlum, far from expiating for his sins, argues that this is actually good for society and, therefore, for -you-. Why? Because sermon. Exactly what religious organizations do.

By the way, Americans, you are paying for this type of brick throwing stuff already. Have been for years.

44

J Thomas 07.25.14 at 9:06 pm

#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.

45

TF79 07.25.14 at 10:23 pm

Shorter two lessons: 1. Prices correctly reflect opportunity costs if the assumptions of the First fundamental theorem hold. 2. The assumptions of the first fundamental theorem never hold.

46

Ze Kraggash 07.25.14 at 11:06 pm

@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.

47

Ronan(rf) 07.26.14 at 12:38 am

Yep, Iraq?

48

Diodotos 07.26.14 at 1:01 am

One wonders whether Chaplin had read Bastiat when he made

49

Diodotos 07.26.14 at 1:02 am

The Kid https://www.youtube.com/watch?v=2MUBrClhgks
[apologies for the html fail!]

50

Sandwichman 07.26.14 at 1:50 am

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

51

Peter T 07.26.14 at 2:08 am

If I want to know about, say, the causes of World War I, I go to a book written by someone who can read all the relevant languages, has spent a lot of time in archives looking at records, has immersed themselves in the culture of the time. If I want to know about ecology, I can find a general overview, but it will be written by someone who has spent time finding out just what happens in a rainforest/beach/forest or wherever. When I open an economics text I get a lot of hand-waving by people who apparently have never actually looked at a bakery, or a tailor shop, or a car factory.

Take price. There are things which are partly or mostly sold through more or less continuous auctions (oil, wheat, iron ore…) where price adjusts constantly. Then there is the local baker: when there is a queue, do prices rise? If queues persist, do prices rise? Mostly, no. In my direct experience of living through civil unrest, does this causes prices to rise? Yes, for those outside the local networks. Those inside get rationed. Does anyone investigate what actually happens. Mostly, no.

In fairness, there are corners of the profession which take the subject seriously. But they do not appear to be the mainstream, which more closely resembles an undergraduate bullshit session.

52

Bruce Wilder 07.26.14 at 2:12 am

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.

53

bianca steele 07.26.14 at 2:14 am

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 above is empty paradox-mongering. Remove a few words and I would have sworn, if I’d had to guess, that it was written by C.S. Lewis:

Those who think that the . . . forget that . . . and . . . are merely two sides of the same coin. They are the same thing looked at from different directions. . . . creates . . . because at bottom it is . . . .

Maybe there should be a tumblr for forms of the paradox using as closely similar words as possible.

The error identified in the second paragraph could also be used to argue that we couldn’t put anything into orbit: “It cannot be wondrously made to fly merely by making it go very fast. Fundamentally what happens is that things fall to the earth.” It’s entirely negative. It doesn’t answer the question, “So what?”

54

Watson Ladd 07.26.14 at 3:46 am

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.

55

Michael Gubb 07.26.14 at 4:04 am

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.

Baker has $50 in cash savings plus a window. He intends to buy a $50 suit.

Brick through window. Window is gone. Adjust his assets by $-50 due to this.

Now he hires the glazier for $50. For simplicity sake lets assume the total cost is pure glazier labour and the glazier has free time. Now the baker has $50 less cash than he began with, and an identical non-cash asset amount that he began with, for a total -$50 change. The glazier has an income of $50, and now has $50 more. At this stage it’s just a wealth redistribution.

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.

56

ZM 07.26.14 at 5:09 am

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.

57

J Thomas 07.26.14 at 5:49 am

#49

In fairness, there are corners of the profession which take the subject seriously. But they do not appear to be the mainstream, which more closely resembles an undergraduate bullshit session.

“The mainstream” is merely the sum total of economic ideas that most economists will not publicly disagree with. It is not a coherent point of view.

Something similar happens in physics. Everybody gets taught newtonian laws of motion. They are a useful approximation which physicists use whenever the results are acceptable. Nobody says they’re correct, but they’re mainstream. Then there’s relativity, which every physicist must accept. It gets results which are closer to reality than Newton. Special relativity is an approximation which can be used when the results are acceptable. General relativity is true, but harder to use. Of course in practice, whenever a real problem comes up that requires general relativity, it also involves things that are hard to measure, and the measurements must be corrected using general relativity. So getting correct answers in those cases is not a test of GR. Then there’s quantum mechanics. Meanwhile, active physicists often do research in areas where newtonian mechanics, SR, GR, and quantum mechanics are not useful. They don’t disagree with the mainstream, they just do their own work and their work tends not to become “mainstream”.

Similarly with astrology. The mainstream in astrology is what astrologers will not disagree with. As above, so below. The stars determine our paths, and we can make valid predictions by studying them. Etc. When it gets down to details there is less agreement. For example, while people were using astrology the heavens precessed and all the astrological signs moved over by one. Should we take that into account? There’s a lot of disagreement about the little details, but not about the mainstream of astrology. Of course the mainstream does not get any actual research — it’s what people already know, so why would they test it?

If you don’t like the mainstream view, it’s better to ignore astrology or economics and get your results with some other discipline. For economics I suggest operations research. They make a big deal about the tools of mathematical modeling and computer simulation, and pay careful attention to how models get validated. They make economic models for specific purposes, typically to make specific predictions that will be checked by people who need to use them. OR guys don’t necessarily buy into mainstream economic assumptions, they use whatever they think will work and then check how well it works for them.

So given time, starting from a different foundation, we might get something that has the relation to economics that astronomy has to astrology, or that chemistry has to alchemy.

It does no more good to complain about mainstream economics than it does to complain about mainstream astrology. You can’t change other people’s assumptions that they believe in on faith. But in the long run you can marginalize them. 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.

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Peter T 07.26.14 at 7:16 am

“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.

59

Sandwichman 07.26.14 at 9:15 am

Peter T: “It depresses me to see intelligent people keep circling the same tired topoi.”

Me too. But somebody’s got to do it. “In economics,” Samuelson wrote, “it takes a theory to kill a theory…” So why didn’t Keynes’s theory kill the Say’s Law/lump-of-labor complex? 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.

60

Bruce Wilder 07.26.14 at 9:26 am

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.

61

Sandwichman 07.26.14 at 9:40 am

Hazlitt was a publicist. A hack. 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. And “even liberals” (like Samuelson, Krugman and Jonathan Portes) parrot part of the formula.

62

Blissex 07.26.14 at 11:56 am

«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…

63

Barry 07.26.14 at 11:57 am

Sandwichman 07.26.14 at 9:15 am

“Me too. But somebody’s got to do it. “In economics,” Samuelson wrote, “it takes a theory to kill a theory…” So why didn’t Keynes’s theory kill the Say’s Law/lump-of-labor complex? 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.”

Nice. You sorta contrapositived Samuelson’s statement.

64

Blissex 07.26.14 at 12:08 pm

«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.

65

Brett Bellmore 07.26.14 at 12:52 pm

I don’t know what to say, beyond, hey, look at yourselves, you’re making excuses to smash windows. Seriously, that’s what you’re doing. You’re so far down that rabbit hole, that if somebody you don’t like argues that smashing windows is a bad idea, you feel compelled to rationalize that it isn’t.

Can you step out of the moment, and see that this is what’s going on?

66

ZM 07.26.14 at 1:02 pm

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?

67

J Thomas 07.26.14 at 1:44 pm

#63

I don’t know what to say, beyond, hey, look at yourselves, you’re making excuses to smash windows.

Brett, as usual you have monumentally and intentionally missed the point.

Do you believe that supply creates its own demand?

Do you believe that if in fact supply does not create its own demand, and many people will be helplessly unemployed unless something changes, that the only solution is to artificially reduce supply?

It starts with a false assertion. Then we have an implicit claim that the only alternative is worse.

And when I disagree you say I’m agreeing with the worse alternative in the false dichotomy?

So do you agree with Says? Is it true that supply creates its own demand?

68

Sandwichman 07.26.14 at 1:44 pm

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

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Sandwichman 07.26.14 at 1:47 pm

And by the way, that’s precisely the formula of the original, not Say but Dorning Rasbotham’s “Thoughts on the Use of Machines in the Cotton Manufacture,” published 21 years earlier.

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Some guy 07.26.14 at 3:58 pm

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.

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The Temporary Name 07.26.14 at 4:25 pm

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

Now, if the baker had the Walton family in the window and the vandal smashed THEM even Hazlitt would have to admit that the resulting astonishing flow of money would be good for the economy.

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Ze Kraggash 07.26.14 at 4:33 pm

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.

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godoggo 07.26.14 at 4:43 pm

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Billikin 07.26.14 at 5:07 pm

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.

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TM 07.26.14 at 5:20 pm

In my mind, neither Hzlitt/Bastiat’s nor Quiggin/Keynes’ argument puts the issue to rest.

I would like to ask the following question and see whether any economist living or dead has a satisfactory answer to it:

Why are we (in the US) complaining about excessive health care expenses, when these expenses undoubtedly create jobs and increase GDP? Since all economists save the tiny fraction who follow Daly (probably less than a percent of a percent I would guess) believe that GDP growth is good and desirable, why would anybody have a problem with health care creating that much needed growth? Krugman is clearly a prominent example of an economist who wants to have it both ways – we need GDP growth and also health care cost must come down. He might make the argument that health expenses saved would be spent otherwise. Well maybe, maybe not – there is no a priori way of knowing that, and there is no a priori reason why spending the money on something else – say more iPhones – would be “better” (a poorly defined term) for the economy as a whole. So in my mind, the fact that (some*) pro-growth economists believe that health expenses should be lower (and the rest of us mostly agree) points to an inherent contradiction in their world view. I have never seen this contradiction even remotely addressed. Maybe JQ can help?

Also, I like what ZM @6 said.

(*) to be fair, some economists take the view that health care expenses are exactly where they should be because the invisible hand of the market yada yada.

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The Temporary Name 07.26.14 at 5:31 pm

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.

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Francis 07.26.14 at 5:42 pm

I actually spoke to the baker after the window was broken. He told me he was actually thankful. You see, the damn thing wasn’t installed correctly. So rain was getting in and heat was getting out. But finding the time to replace a window that wasn’t actually broken was hard.

So he’s going to get a new window that reduces his heating bill and spoiled goods cost. And the local government is kicking in a tax credit because he’s buying a double-paned window that will dramatically reduce lost heat.

(I could have sworn that the current Administration has talked about retrofitting houses as a stimulus measure. Isn’t a retrofit just the deliberate destruction of windows, minus the prison sentence?)

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TM 07.26.14 at 5:45 pm

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.

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TM 07.26.14 at 5:50 pm

Fracnis 75: In the US, I have seen many buildings with outdated and waaay substandard windows that are not being replaced anytime soon despite the obvious beneficial effects this would have on job creation, on energy conservation, and on the comfort of the residents. So you have a good point, if somebody just smashed those darn windows, the slumlords owning the buildings would finally come around to replacing them (albeit they would still choose cheap, substandard replacements). But see, this is a specifically American problem. It’s not nearly as common in Europe.

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Sandwichman 07.26.14 at 5:50 pm

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.

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Sandwichman 07.26.14 at 6:08 pm

The above quotation, with paragraph breaks (mine, not original as I don’t have the text available to consult): http://econospeak.blogspot.com/2014/07/john-maurice-clark-on-window-breaking.html

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John Quiggin 07.26.14 at 10:31 pm

@Sandwichman Thanks for this!

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J Thomas 07.26.14 at 10:56 pm

In my mind, neither Hzlitt/Bastiat’s nor Quiggin/Keynes’ argument puts the issue to rest.

Hazlitt is wrong. That much of it should be clear. JQ presents alternate arguments which are as good as Hazlitt’s and get wildly different results. Should we consider that any of these are right, and “put the issue to rest”? No.

When products do not last as long, is society better off or worse off? In a rational world, society would be worse off. But in a world where people do stupid things, a product which does not last as long might result in society being better off. If so, it is because of the other stupid things.

Do we have a society where people do stupid things that make us better off with planned obsolescence, random destruction of property, and wars on foreign soil? Maybe.

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stevenjohnson 07.26.14 at 11:17 pm

“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.

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ZM 07.26.14 at 11:32 pm

Economic life must in part by psychological/character based because how else is there an economy but by the people who make and do and exchange and use etc things? It is not wholly psychological but cultural I would think – so it us about the cultural structures (laws, expectations) and individuals praxis.

As far as I can tell the 2 stories we were given told us nothing of the town’s economic structures (except the policies were appropriate in JQs version) only about the individuals’ praxis (not sure what the plural form is) – thus to engage with the story argument you can only offer a different individual praxis story.

There seems to be the implication in the OP that the individual praxis stories should assist in finding what the best structure / appropriate policy is . For my version my story needs appropriate policies (structure) to stop the town going into a recession when everybody moves their consumption to sustainable levels while helping prevent young people at risk from breaking windows.

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Tired of Blogs 07.27.14 at 1:25 am

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!

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bobbyp 07.27.14 at 1:38 am

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

A great deal of this “GDP”, if measured solely in dollars, reflects economic rents captured by favored groups (doctors, big pharma, medical device mfrs., etc.). We could shift these expenses to other priorities and still have similar healthcare outcomes and an enhanced polity in the bargain.

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J Thomas 07.27.14 at 2:23 am

#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!

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mpowell 07.27.14 at 3:00 am

I’ve never understood why people think this is a critique of Keynes. Keynes was noting that when more gold is discovered, the real economy frequently benefits. This is simply an observation of economic history. He noted that the government could duplicate this result by hiring people to bury money, and then hire more people to dig it up and claim it. These broken windows examples are an attempt to extend Keynes observation to what would seem to be an absurd result. But here’s the problem: Keynes is starting from observed reality. Either the broken windows example doesn’t match the case of discovering physical gold or the view you’ve imposed on Keynes is right and you’re wrong, not because of an argument Keynes has made, but because the history demonstrates so. It’s pathetic.

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stevenjohnson 07.27.14 at 3:31 am

[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.

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Bruce Wilder 07.27.14 at 3:43 am

Sandwichman: There’s heaps of unrequited deference there toward reactionary talking points and the “smart” people who promulgate them.

Yes, I’ve noticed.

The long quotation from John Maurice Clark was excellent. It furnishes an example of what an acquaintance with facts might do to improve the quality of reasoning.

The indeterminacy of a loosely-coupled economy that Peter T referred to in the first comment stands out in Clark’s account, for me anyway.

I do not understand why economists of otherwise reasonable mien are so reluctant to reject clearly absurd assertions that money doesn’t matter or that exchange is governed by markets reaching a clearing equilibrium in price.

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Trivial 07.27.14 at 3:58 am

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

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ZM 07.27.14 at 5:13 am

mpowell,
“Keynes was noting that when more gold is discovered, the real economy frequently benefits. This is simply an observation of economic history. He noted that the government could duplicate this result by hiring people to bury money, and then hire more people to dig it up and claim it. “

Keynes notings here were not very sensible, I put this down to 1. Him not taking part in a gold rush or poorly regulated mining operation to see all the social and environmental harms imposed on people and nature even if some particular people and the government coffers benefit in terms of money making; and, 2. Him for some odd reason thinking people are not inclined to get very grumpy if the government takes to imposing a Sisyphean job load on them making them bury and dig up gold to no good discernible purpose.

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Billikin 07.27.14 at 7:18 am

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?

;)

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Billikin 07.27.14 at 7:51 am

Will we settle the issue (whatever it is)? Not as long as we try to refute one story with another, will we? Hazlitt was the first one to do that, bringing in the tailor. Maybe he was following Bastiat in that, I don’t know.

But there is a fallacy in the original story. The broken window is an obvious loss, and replacing it is a cost. But the cost to the baker is offset to some degree or other by the gain to the glazier. So far, so good, although the last is an assumption of the crowd, but they should be aware of the economic conditions of the town. Then the crowd speculates about the benefits of the payment to the glazier circulating through the economy. You could argue about that, but they have a point. So where is the fallacy? It lies in the crowd’s failure to make the same speculation for the counterfactual in which there is no broken window and the baker does not spend the money on replacing it.

Hazlitt tries to refute the crowd by making another story about a tailor, but in doing so makes the same logical mistake as the crowd. Now you have story vs. story, with no end in sight.

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Billikin 07.27.14 at 8:06 am

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?

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Billikin 07.27.14 at 8:23 am

And, I should add, supply created demand.

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J Thomas 07.27.14 at 9:20 am

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?)

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stevenjohnson 07.27.14 at 12:51 pm

Billikin has overlooked the sad fact there is no happy ending for the masseur in the market place.

It is ideological to identify capitalist production for profit as “the market.” Production and consumption took place before capitalist markets dominated society. And even today whole sectors of society do not operate on market principles (families, schools, armies) and attempts to make them do so are crazy. Fictions or would be parables about the market’s state of nature start with the Robinsonade, which teaches us a simple labor theory of value. Not only is that politically incorrect but it is incorrect!

At the very least, if we insist on telling fables, let us copy Aesop, and have our characters be the beasts that talk (aka slaves.) And we could eschew a glib sophistication and actually end them with the moral spelled out. Wouldn’t that be more charming?

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otpup 07.27.14 at 1:08 pm

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.)

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otpup 07.27.14 at 1:11 pm

PS. I should have mentioned that I do realize the issue of whether the economy is below capacity is bound up with the savings issue, I just think it is a more accessible route into that story.

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Main Street Muse 07.27.14 at 1:44 pm

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…

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Billikin 07.27.14 at 1:48 pm

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

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.

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Widmerpool 07.27.14 at 2:23 pm

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?

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Billikin 07.27.14 at 2:29 pm

OK, here is another story, one that justifies the asymmetry of the crowd’s speculations.

Same story as above, but the baker has to take out a loan in order to buy the replacement window, and the banker makes the loan. Making the loan creates money that the baker pays to the glazier. This money would not exist except for the broken window. Now the crowd is justified in speculating about the effect this money has as it circulates. In this story the economy is in a recession, so the new money indeed stimulates the economy and creates work. (Whether the effect of this money as it circulates is enough to more than offset the cost of the broken window is another question, but it certainly may.)

In a recession the government does not have to wait for windows to break to inject new money into the economy. It can do so by spending more or taxing less, or both, so that it runs a deficit. The actual borrowing or printing to create the new money is a separate operation, but is entailed in running the deficit.

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Billikin 07.27.14 at 2:47 pm

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.

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Main Street Muse 07.27.14 at 3:19 pm

@104 “why are the costs per se, which are by hypothesis American incomes, a problem? “

Where should I start?

You clearly a) have never been self-insured; b) you do not realize the high cost of American healthcare becomes a competitive disadvantage in a global economy; c) the high costs of American healthcare are the result of too many all-to-visible hands in the pie; d) the public costs (medicaid/medicare/uninsured) are huge, but so too are the costs to private corporations and to employees who fund their own healthcare via wage deductions and lower salaries; e) if “by hypothesis” these costs are American incomes, the costs are income taken from consumers to spend on an unwieldy and inefficient and overpriced healthcare market – what’s to love about that? Not a thing.

Have you ever been self-insured? It does not seem you have been. You offer up sketchy generalizations, probably in part because you have been protected by your employer-provided insurance from the knowledge of what your healthcare really costs you. I was self-insured for many, many years and it was a very costly burden for my family.

When I talk about “efficiency” in healthcare, I am absolutely not talking about the “textbook” definition. My family (self-insured at the time) dealt with a broken ankle in 2006 – the bill we received was more than $20K and included things like an $80 Ace bandage. We paid a portion – I think 10% – on top of our astronomical monthly premium payments. Of course, everyone will point out that the $20K bill was not the “true price” of fixing the broken ankle (and that an Ace bandage costs a few dollars at Walgreens.) And they’re right – I have no idea what the doctors/hospitals/Ace bandage companies got from our broken ankle – and I have no idea why they’d bill an Ace bandage at $80 – but again, this is another example of how this sector is not a market by any “textbook” definition of a market. Price opacity in the healthcare market doesn’t align with the textbooks.

“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.)”

I don’t know why you feel that only taxes pay for healthcare. A false assumption. Taxes pay for the portion that the private sector fails to cover – the uninsured, the poor and the elderly – all of whom are locked out of private health insurance due to the business model of insurance. Why did Medicare come about? Because insurance companies declined the privilege of insuring the most expensive sector of the population – the elderly. (http://bit.ly/1xkirNz; http://bit.ly/1nLU9ed)

According to a Kaiser Family Foundation article, the costs of health insurance (not just the cost of a vaccine, etc. – the cost of insurance) rose 138% from 1999 to 2010 (pre-ACA). http://bit.ly/1mgphQl

If policy makers are looking to solve this only as a “federal budget” issue, without an exploration of the underlying inefficiencies and irrational behaviors within the insurance/healthcare markets, they’re being stupid. And quite frankly, I have no idea why those highly paid CEOs of Fortune 500 companies like Walmart and the like are not more outraged by the high cost of the American healthcare system. Oh wait. Companies like WalMart don’t provide insurance to many of their employees, leaving them vulnerable to economic catastrophe, should a healthcare crisis rear its ugly head.

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Thornton Hall 07.27.14 at 3:29 pm

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.

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Bruce Wilder 07.27.14 at 4:44 pm

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

One would think this would follow from the Keynesian insight that effective demand is demand backed by money.

The reactionary response is that any “quantity” of money can be sufficient to the case, if prices adjust accordingly: then money becomes nothing more than a unit of account, a numéraire, stripped of its dark power of maya, illusion, revealing the “real” economy in its fixed relations of Walrasian barter and general equilibrium — not incidentally, a Panglossian world of economic virtue triumphant, every factor receiving an income equal to its marginal product, where no one could be made better off without making someone else worse off. But, I digress.

It’s pathetic, really, that economics should be trapped in this explanatory Groundhog Day, where such tripe as Hazlitt’s pamphlet should never be out of print. But, trapped it is.

Keynes, himself, in the General Theory, could not escape from the swamp of the “real” economy, and so bears much of the blame. The post-war neoclassical synthesis compromised, identifying an alleged and somewhat arbitrary downward stickiness of prices — especially wages — as the culprit, the factor, the friction, which converted money from maya into an engine of socialist destruction or socialist redemption, depending on your political persuasion.

Professor Quiggin reiterated the sterile dispute, recently, in his In Search of Search post, where he identified the “puzzle” as:

Why doesn’t competition between unemployed and employed workers work quickly to reduce wages to the point where demand equals supply and where there is no involuntary unemployment?

I will disagree with Thornton Hall a bit. Locking economics into this sterile argument is not totally useless, politically. The point is to paralyze the democratic process. Hazlitt is encouraging the crowd to doubt its common-sense, as a political means of discouraging public policy from acting on that common-sense view.

It is Hazlitt, who injects determinacy into the argument, by asserting that the baker for unspecified reasons, must forego buying something in order to pay for the window replacement. The economy we live in, though, is more loosely coupled, and, if you will, indeterminate. Which is why an injection of expenditure could, conceivably, have the multiplier effect, which Hazlitt is at pains to deny.

It would be helpful, if intelligent deliberation could bring a democratic society to a consensus about whether it was the case, at any particular moment, that some combination of monetary and fiscal policy — that is, policy regarding either the administration of the public good known as money and the financial system, or the provision of other public goods — might make some or all of us better off.

There’s no matter of logical necessity barring the discipline of economics from equipping the public mind with such a power, any more than astronomy and meteorology are barred from helping us determine whether it is at any particular moment, Summer or Winter, raining or snowing or dry, night or day.

If there’s an obstacle, it is political, not logical, rooted in conflicting interests regarding the distribution of income, wealth and power.

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Billikin 07.27.14 at 5:41 pm

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”?

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Thornton Hall 07.27.14 at 7:12 pm

@Bruce Wilder

I don’t care to learn enough econ to be able to be absolutely precise with my terminology, so I’m not sure if my target is properly called “economics”, “neoclassical economics” or what have you. But I’ll go with “neoclassical” here.

Isn’t it the case that “determinacy” is baked into the cake of neoclassical economics? If so, then the fact that everything interesting that happens in the world is a result indeterminate dynamic forces means that, as a matter of logical necessity, neoclassical economics can not help us understand anything interesting about the world.

One of the aha moments for me came in reading about how banks don’t loan out deposits but instead create deposits/money, when they make a loan. When do loans happen? When a person has an idea about how to spend money in a way that will generate more money than the loan plus interest.

Thus it’s clear that the total amount of loans made at any moment is a result of the total amount of human creativity at that moment. So all macro prediction rests on the assumption that mechanical pre-conditions reaching equilibrium can be set that forecast human creativity. That assumption is obviously false. Therefore…

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Thornton Hall 07.27.14 at 7:16 pm

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.

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J Thomas 07.28.14 at 2:49 am

#113 Billikin

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

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.

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

How about this — increased supply of X creates more demand for Y but decreases the price of X itself. The amount of decrease depends on elasticity of demand, which is a variable whose value can only be found by observation.

Demand for X may sometimes have a hard-wall cut off point. Like, no matter how many brain surgeons are available to do brain surgery, demand for brain surgery will not go above the number of people diagnosed with conditions that are thought to benefit from brain surgery. And if the people who do diagnoses are honest, that number will not rise at all due to an increased number of brain surgeons.

In that case, increased supply of brain surgeons will not create demand for anything.

Or possibly brain surgeons might reason that somebody who needs brain surgery needs it *bad*, and so they all raise their prices so each of them can get by doing fewer brain surgeries per year. If increased price does not reduce demand….

I guess it could go lots of ways. Maybe you’re right part of the time in spite of everything.

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Billikin 07.28.14 at 12:47 pm

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.

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TM 07.28.14 at 5:10 pm

Thanks, Widmerpool 104.

MSM 102, 107 I wish you would read more attentively before batting at strawmen. My point, as I clarified in 78, is not that I am in favor of spending more on health care. My question is how do you reconcile the view that health care costs are “too high” with the Keynesian view that more demand (whether caused by vandalism or war or, I would suppose, by an inefficient health care industry) is always a good thing, and more generally with the economic growth paradigm? And nobody has addressed that.

My argument is of course not new. Recall the bonmot:

“The ideal economic or GDP hero is a chain-smoking terminal cancer patient going through an expensive divorce whose car is totaled in a 20-car pileup, while munching on fast-take-out-food and chatting on a cell phone. All add to GDP growth. The GDP villain is non-smoking, eats home-cooked wholesome meals and cycles to work.” (http://www.demographic-research.org/volumes/vol16/15/16-15.pdf) The argument has never been addressed by mainstream pro-growth economists.

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J Thomas 07.28.14 at 9:46 pm

#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.

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Matt 07.28.14 at 10:15 pm

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.

This is putting it too strongly in the opposite direction. To re-quote that excellent upthread extract from John Maurice Clark,

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.

It is risky to supply something new and hope that demand follows. But it is also risky to supply more of something old and hope that the demand is sufficiently elastic to realize a positive return on the increased supply. In the period since the Industrial Revolution, the expansion of market logic to more societies and the growth of human population within marketized societies have shored up the returns on supplying more-of-the-same. But market logic has already encompassed almost all nations, and human population will likely peak later this century. Whither market competition then? Will it become nothing but a churn of novelty re-allocating a very slowly growing or even shrinking world economy, some new things really superior (improved anti-retroviral drugs) and some illusory (“this season’s fashions”)?

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reason 07.29.14 at 1:42 pm

“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).

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reason 07.29.14 at 1:47 pm

TM
“The ideal economic or GDP hero is a chain-smoking terminal cancer patient going through an expensive divorce whose car is totaled in a 20-car pileup, while munching on fast-take-out-food and chatting on a cell phone. All add to GDP growth. The GDP villain is non-smoking, eats home-cooked wholesome meals and cycles to work.”

This is actually quite easy to address.
1. If he invests in solar panels on his roof, he suddenly becomes a hero again (for this year anyway). And when next year he add a heat pump, and the next year a methane recycling system to his toilette again and again. Investment is also part of GDP.
2. “Bio” food costs more than standard food, so on a by weight basis it adds more to GDP. Price indices reflect quality.

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TM 07.29.14 at 2:08 pm

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.

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reason 07.29.14 at 2:17 pm

Another way to put my answer to TM is:

Inefficiency in consumption is still inefficiency. But he is right, inefficiency in consumption, unlike in production is neutral (not negative) in its effect on GDP. We need another measure to capture this very important and completely ignored source of inefficiency.

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Thornton Hall 07.29.14 at 2:27 pm

@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.

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J Thomas 07.29.14 at 6:53 pm

#117 Matt

“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.”

This is putting it too strongly in the opposite direction.

Wait a minute! I do not accept responsibility for explaining how demand is created, what demand really is, etc. I only argue that the other guy is wrong. Supply does not create demand except in the most tautological, non-real-world definitional way.

You can imagine markets and say that for everything which gets sold something of equal value most have been bought, therefore if you produce something and sell it then you have increased demand because without extra product for sale there can only be demand for less stuff. If there are only N items for sale then there can be demand only for N items.

But in the real world, this has zero predictive value. Imagine for example that in your community there are 100 rich people who eat caviar and 99,900 poorer people who don’t. The rich people eat a total of 1000 pounds of caviar a year. Then you come along and you find a way to catch an extra 1000 pounds of caviar. But the rich people do not want 2000 pounds of caviar this year, they only want 1000 pounds. The bottom drops out of the caviar market, and you find the selling price has gone from $5/pound to 50 cents/pound. But still nobody wants caviar except the .1%. You have done nothing to increase demand. People who could get $5000 before for their catch, now get at best $500. Maybe you get $500 too for your new caviar too. Physical demand has not changed while monetary demand is cut way back.

OK, how about this one. You catch the bank president in a compromising position, and to ensure your silence he gives you a $50 million loan for 80 years. You go out and buy caviar, find out you don’t like it, and throw it away. You buy a cadillac. You put some expensive prostitutes/masseuses on retainer. You buy furs, some gold chains, a cane with a gold knob on top, and a floppy hat with an ostrich feather. The loan has created a whole lot of demand, and yet fundamentally it did not increase the supply of anything except promises. You promised to pay the loan back with interest in 80 years, though you have no intention of doing so.

If in each case we could look at what was produced and bartered, we could after-the-fact argue that each item of supply resulted in an item of demand. It’s a fake claim. We could just as well argue that production is Good and consumption is Evil and so Good creates Evil and Good is Evil.

It doesn’t really mean anything of importance. It does nothing to help you predict demand, because even if you think you know the supply, you won’t find out which parts of the supply are actually *really* supply until you see what sells. (And what it sells for.) If you think you know the demand, that tells you nothing about what the supply will be. It’s entirely an exercise in futility.

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TM 07.29.14 at 9:50 pm

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.

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Ogden Wernstrom 07.29.14 at 11:35 pm

J Thomas and Thornton Hall, in a thread about Hazlitt’s straw arguments built on feet of clay*, I think you are wasting your time responding.

Widmerpool 07.27.14 at 2:23 pm, to MSM @102:

You mock “economists” for viewing health care as a “textbook market,” yet you invoke “efficiency,” a textbook market ideal.

In this binary world Widmerpool inhabits, anyone who espouses efficiency must adopt the entire textbook, apparently. I think this means that economy-car owners may be signaling their Schumpeterian outlook.

TM 07.28.14 at 5:10 pm first complains:

MSM 102, 107 I wish you would read more attentively before batting at strawmen…

…then, in the same paragraph, props up a strawman:

the Keynesian view that more demand…is always a good thing…

*Not to be confused with jumping out of the frying pan and landing nose-first on the grindstone.

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Damien 07.30.14 at 12:22 am

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.

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Bruce Wilder 07.30.14 at 12:44 am

Thornton Hall @ 111: Isn’t it the case that “determinacy” is baked into the cake of neoclassical economics? If so, then the fact that everything interesting that happens in the world is a result indeterminate dynamic forces means that, as a matter of logical necessity, neoclassical economics can not help us understand anything interesting about the world.

I’m not sure what “determinacy” means in that context. I would say three things. First, almost all economists recognize that they are studying the social behavior of intelligent, strategic actors, and they don’t hope for more than understanding a social ordering that shows up as statistical tendencies.

Second, academic economists focus on finding cases where an equilibrium solution exists, so in a narrow technical sense, they probably do introduce a degree of determinacy to their thinking, by not giving enough weight to the existence of problems in the economy, which do not actually have equilibrium solutions. In my old field of industrial organization, this was a recognized problem. The game theory revolution established that industry structure (aka the institutional rules of the game, technology, number of firms, etc) did not determine firm behavior — no matter what, how the game was played affected the rules. In practice, this doesn’t mean total chaos or that economists have to be useless — it means that economists are engineers and managers, and their predictions are not the detached projections of a guy in a white lab coat or a priest pontificating for the ages, but, rather, a matter of strategic leadership, management and control, responding to the emergence of emergent phenomena with institutional innovation. Economic regulation has to be strategic to be effective — that’s all.

Third, and this is the most damning thing one can say, neoclassical economics, as codified by Samuelson, assumes that the economy is an ergodic system, and analyzes the economy accordingly. If by “determinacy”, one means ergodicity, then, yes, neoclassical economics systematically and profoundly misunderstands the world.

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reason 07.31.14 at 8:49 am

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”.

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John Quiggin 07.31.14 at 10:04 am

To restate my favorite aphorism: there are only three things wrong with GDP as a measure of economic welfare
1. It’s gross
2. It’s domestic
3. It’s a product

http://theconversation.com/theres-more-to-good-policy-than-increasing-gdp-7867

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