Reframing the Broken Window question

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Wheylous Posted: Tue, Aug 7 2012 10:57 PM

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I think I might have come upon a sharper question we need to answer.

So, about the broken window:

The question is actually not whether government redistribution of wealth can increase production.

Why? Because to the system as a whole, the baker is a black box. It doesn't matter to the system whether he voluntarily chose to spend the money (free market) or whether the government made him spend it (intervention). The money multiplier aspect (the glazier and the people downstream) doesn't really care.

The question, rather, is whether an increase in spending can improve production ceteris paribus. Not free market vs. government spending. The type of spending doesn't matter. Do note that I am not addressing malinvestment. Government spending might well lead to malinvestment (ok, it does). The question is whether production increases due to increased consumption. If yes, then the BW parable doesn't apply because the economy doesn't care why the baker spent the money (this is a simplifying assumption I hope you'll grant, though I guess this outright rejects the idea of regime uncertainty causing a slowdown in production and investment).

Do I make sense?

And yes, I am not even touching on whether an increase in production caused by government intervention would "fix" a recession - since we know that recessions are caused by artificial inefficiencies in matching up supply and demand.

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RobinHood replied on Tue, Aug 7 2012 11:29 PM

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I think that's a great question, Wheylous.

And I have a second, similar, q for consideration. Does it matter who does the demanding, and what he demands?

From what I got from Keynes, the answer is demand is demand. In which case he should agree that the govt can save everyone a lot of trouble by just confiscating everyones money and having a huge expensive cocaine party for Obama and his friends. No need to dig ditches, no need to break windows, no need to "create jobs". Then the Great Fairy Godmother, the Multiplier Effect, will crash the party and make all men rich and happy.

Certain primitive tribes had chiefs who started out as warriors, helping their people, and the moment they became top dog it was considered their duty to get as big and fat as possible. I used to wonder, what were they thinking? Now I understand that they were Keynesians out to end a recession.

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cab21 replied on Wed, Aug 8 2012 12:50 AM

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yes

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Neodoxy replied on Wed, Aug 8 2012 12:59 AM

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Well it depends upon what you mean by "improve production" It can definitely increase output, no one has argued to the contrary. This is the heart of your question and the answer is yes, no Austrian economist has denied this because it is true. To say that an increase in government spending cannot increase output, so long as there is no crowding out effect, is to deny the law of supply and demand. The market does not care who it sells to, firms provide to anyone, the government or another firm is irrelevant to them so long as nothing exceptional in terms of the relationship between the government and the firm develops.

If, by improve production, you mean can it make people happier and better off, then at full employment the answer is irrevocably NO, otherwise socialism would be justified...

However, you have given me a thought, and it is a dangerous thought. If we consider a graph of macroeconomic supply and demand, then even in the short run you hit a point on the AS curve where it is vertical... An increase in AD, a boom, would shift AD to the right, to a higher point on the AS curve, perhaps to part of it where the slope is fairly high. So if the business cycle is overoptimism and an increase in general demand as the mainstream says it is, then why is it that booms are not characterized by mass inflation? This idea could use fleshing out but it might have potential...

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Bogart replied on Wed, Aug 8 2012 1:40 PM

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In the short run the ability of violent agents to increase production depends on what you consider production and certainly in the longer run the ability of violent agents to plan or assist in planning entrepreneurial activities will only result in less production.  If you define more production as the usage of more currency, the employment of more people, or some aggreagate measure of aggregates then yes a violent gang can increase production in the short run.  If you use a more Rothbardian definition of waste which is production that does not ultimately satisfy the demands of a consumer then the answer is maybe if you are REALLY REALLY SMART and most likely no, a violent agency can not even increase production in the short run.

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xahrx replied on Thu, Aug 9 2012 2:26 PM

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The question, rather, is whether an increase in spending can improve production ceteris paribus. Not free market vs. government spending.

Why does it matter?  What do you mean by improved?  Does 'improved' production now and for a short but foreseeable future followed by inevitably less production in the future mean any increase is cancelled out, or does it still count as more?  What does 'improved production' even mean?  Is it just more stuff in general?  What if it's stuff no one wanted, or wanted less than other stuff that wasn't produced?  Does that count as a wash, more, or less production, and is it an improvement?

Yes, if spending goes up, all else equal, more 'stuff' will be made.  So what?  Technically you can get unlimited power out of a gas engine if you keep upping the RPMs, provided you don't bother with that pesky friction issue, or the whole eventually the engine will melt and/or explode problem.  Malinvestments can't be left out of the analysis because they are what is lost to the future.  The whole point of production is to produce something that people want, in the amount they want it, and at the time they want it, not to just pump random widgets out at an ever increasing pace.  What people want, how much of it they want, and when they want it, are the demands people are attemping to solve via production.  So to ask whether or not production can be 'improved' can't be answered unless you define 'improved', and you can't do that without addressing the whole reason for production, which means no, production can't be improved by increases in spending.  It can be temporarilly increased by increases in spending, but it will not be improved, it will be damaged.

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DD5 replied on Thu, Aug 9 2012 2:52 PM

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Wheylous:

The question is whether production increases due to increased consumption.

Will the chicken lay more eggs if you eat more eggs?  (You can assume it's a very smart chicken if you like)  Does the question even make sense?  because that's what you are asking...

How are you even able to consume more then you had previously produced?