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

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Jargon replied on Fri, Oct 21 2011 2:51 PM

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HeathieAK:

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

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

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

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

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

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

First of all it seems like he doesn't understand the broken window fallacy. The Glazier is not spending his money on the window, the widget-maker is hiring the Glazier to fix the window. The widget-maker then cannot afford a tailor.

OK so he agrees that destruction-for-demand is not economically desirable...

Secondly it seems that he is ignoring the adverse effects of introducing 'new money' into an economy. If you, as he suggests, dump unemployment checks onto the economy, then you are paying the wages of people whose productivity is zero. This is a drain on the productive sector and will hamper their ability to produce. If you dump it into businesses as a subsidy, there are a few things. One is that these are likely politically motivated actions, and everyone can see how that turns out to be a problem. Two is that should a business require a subsidy, its products are unwanted and to prop it up on public money is a destruction of wealth. Third if it does not require that subsidy this creates an incentive conflict in the company: they are less responsible for their own survival and will  either not lower prices, wherein the subsidy is a waste of money, or will lower prices. The latter is held commonly morally objectionable and anti-competitive, creates market price distortions with undesirable consequences (High Fruc, Ethanol, etc.), and bears risk to misallocation of wealth.

I feel like when he said that inflation shouldn't be counted in the scenario he lost the argument. How could inflation be irrelevant?

And, as wheylous said, aid can only (if utilized optimally, which is unlikely) bring a ruined environment back to its pre-disaster state.

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Fool on the Hill replied on Fri, Oct 21 2011 6:41 PM

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Your "challenge" is a clear-cut example of the nirvana fallacy.

If Hazlitt can create a hypothetical example, why can't I?

Is that supposed to be a joke?  I didn't really read the rest of the thread, but skimming over it doesn't look like anyone even addressed it, so I guess they assumed it was?  Are you serious with that scenario stuff?

Is this supposed to be a rebuttal?

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John James replied on Fri, Oct 21 2011 6:54 PM

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Fool on the Hill:

Is this supposed to be a rebuttal?

No.  I'm trying to determine if was even intended to garner a rebuttal.

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Fool on the Hill replied on Fri, Oct 21 2011 7:04 PM

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I probably should've asked that question of Hazlitt's book.

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John James replied on Fri, Oct 21 2011 7:15 PM

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oooOOoo.  Strong words.  I guess I'll take that as a "no, I was completely serious when I posted that challenge."  So I'll go ahead and reproduce your scenario here for easy reference:

Fool on the Hill:

Let's assume that all the characters have the following possessions, abilities, and desires at the beginning of the scenario:

Baker:

• Possessions: 1 window, $250
• Ability: making baked goods
• Desires: 1 suit, money

Glazier:

• Possessions: None
• Ability: making windows
• Desires: 1 suit, money

Tailor:

• Possessions: None
• Ability: making suits
• Desires: baked goods, money

Now let's look at two possibilities: whether the window is not broken or broken.

 

Possibility A: No broken window

If the window is not broken, then the baker pays the tailor $250, the tailor makes a suit for the baker, the tailor gives the baker $250, and the baker makes baked goods for the tailor. All desires capable of being fulfilled having been completed, the transactions stop. The gains and losses in possessions can be expressed as follows:

Baker:

• Gains: 1 suit
• Losses: None

Tailor:

• Gains: 1 baked goods
• Losses: None

Glazier:

• Gains: None
• Losses: None

Now let's look at possibility B.

Possibility B: Broken window

If the window is broken, the baker acquires a desire for a window that supersedes his desire for a suit. The baker gives the glazier $250, the glazier makes a window for the baker, the glazier gives the tailor $250, the tailor makes a suit for the glazier, the tailor gives the baker $250, the baker makes baked goods for the tailor, the baker gives the tailor $250, the tailor makes a suit for the baker. The transaction thus ends, and we are left with the following gains and losses:

Baker:

• Gains: 1 suit
• Losses: $250

Tailor

• Gains: 1 baked goods, $250
• Losses: None

Glazier:

• Gains: 1 suit
• Losses: None

Let's look at the two predictive claims that Hazlitt makes and compare the outcomes of the two possibilities.

(1) Which possibility produces more goods?

Final goods in possibility A: 1 window, 1 suit, 1 baked goods, $250

Final goods in possibility B: 1 window, 2 suits, 1 baked goods, $250

The only difference is one extra suit in possibility B. So breaking a window produces more goods than not breaking it.

(2) Which possibility would the majority of the people prefer?

Baker: gains 1 suit in both, but loses $250 in B. Prefers Possibility A.

Tailor: gains 1 baked goods in both, but also gains $250 in B. Prefers Possibility B.

Glazier: gains nothing in A, but gains a suit in B. Prefers Possibility B.

Thus, a majority of people prefer the result that breaking a window would produce.

Conclusion: Hazlitt's prediction is false for Scenario 1.

How about we continue this game a little farther?

Let's stick with possibility A, but this time, we'll have the same number of transactions take place, as took place in your former possibility B.  In Possibility B, you had:

       0. Broken Window

1. the baker gives the glazier $250, the glazier makes a window for the baker,
2. the glazier gives the tailor $250, the tailor makes a suit for the glazier,
3. the tailor gives the baker $250, the baker makes baked goods for the tailor,
4. the baker gives the tailor $250, the tailor makes a suit for the baker.

Now let's have the same number of transactions without a broken window:

       0.  intact window

1. the baker gives the glazier $250, the glazier makes a window for the baker,
2. the glazier gives the tailor $250, the tailor makes a suit for the glazier,
3. the tailor gives the baker $250, the baker makes baked goods for the tailor,
4. the baker gives the tailor $250, the tailor makes a suit for the baker.

Final goods in possibility A: 2 windows, 2 suits, 1 baked goods, $250

Well whattya know.  In the non-broken window situation, everyone gets the same amount of stuff...except we have two windows instead of one!  Imagine that!  When you produce stuff, and don't destroy it, you end up with more stuff.  Amazing.

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Fool on the Hill replied on Fri, Oct 21 2011 7:23 PM

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But the problem is that the baker doesn't want a second window. He wants a suit. So that series of transactions wouldn't happen.

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John James replied on Fri, Oct 21 2011 7:37 PM

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Before I determine the best way to explain this to you, can you tell me, if breaking windows actually does create a better situation overall, why don't we do more of it?

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Wheylous replied on Fri, Oct 21 2011 7:55 PM

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FotH, in your scenario B you have the baker get a suit from the tailor anyway. This would actually not happen if he has already spent his money on the window.

If you do allow it to happen, then you have to allow the same to happen in A, so you actually would​ have that second suit.

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Fool on the Hill replied on Fri, Oct 21 2011 8:28 PM

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Before I determine the best way to explain this to you, can you tell me, if breaking windows actually does create a better situation overall, why don't we do more of it?

1. I'm not saying it ever creates a better situation. I'm not even saying that it meets the two criteria in every case, or even in most cases.

2. According to Hazlitt, the state already does a lot of it.

3. The state forbids everyone else from doing it.

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Fool on the Hill replied on Fri, Oct 21 2011 8:32 PM

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FotH, in your scenario B you have the baker get a suit from the tailor anyway. This would actually not happen if he has already spent his money on the window.

If you do allow it to happen, then you have to allow the same to happen in A, so you actually would​ have that second suit.

He gets the money back in B by selling baked goods to the tailor.

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John James replied on Fri, Oct 21 2011 8:38 PM

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Fool on the Hill:

1. I'm not saying it creates a better situation.

2. According to Hazlitt, the state already does a lot of it.

3. The state forbids everyone else from doing it.

1) Then what kind of situation does it create?

2) If the notion is that it provides economic stimulus, obviously they aren't doing enough.  So again, why not ramp it up and evacuate a few cities, and bomb them?

3) See #2

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Fool on the Hill replied on Fri, Oct 21 2011 9:01 PM

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1) Then what kind of situation does it create?

It doesn't create any particular situation all of the time. In my scenario, it creates a situation that the majority would prefer and where more goods are produced.

2) If the notion is that it provides economic stimulus, obviously they aren't doing enough.  So again, why not ramp it up and evacuate a few cities, and bomb them?

Again, I don't claim that it has these outcomes in every scenario. I also noted that there could be more efficient ways of achieving the same effect, such as the baker freely giving the money to the glazier or the glazier stealing it. Those who want to achieve such an effect don't always have the ability to do it, and vice versa. If the baker has the ability to shoot the person who breaks the window, then it's not going to happen. Plus, people may oppose such an action on moral grounds even when it has utilitarian ends.

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Clayton replied on Fri, Oct 21 2011 9:11 PM

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Desires: 1 suit, money

Note that the "scenario" is inherently flawed from an Austrian PoV since no one except a coin/currency collector desires money (not even a miser desires money, he just has really, really low time preference and this evinces itself in the size of his bank accounts).

Clayton -

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John James replied on Fri, Oct 21 2011 9:19 PM

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Fool on the Hill:

It doesn't create any particular situation all of the time. In my scenario, it creates a situation that the majority would prefer and where more goods are produced.

You mean in your single iteration scenario in which there exist only 3 people, all of whom only desire 1 thing, (two of whom's desire is something they can't even eat), and once they get that one thing, all human desire will be satisfied, leading to no further human action for all eternity.  Yes, this is a very great analogy.

Again, I don't claim that it has these outcomes in every scenario.

Why not?  What's different?  A broken window is a broken window, is it not?  What makes one situation different from another?  Why would there be stimulus in one situation and not in another?  Please explain.

If the baker has the ability to shoot the person who breaks the window, then it's not going to happen. Plus, people may oppose such an action on moral grounds even when it has utilitarian ends.

That's completely irrelevant.  The government could easily order everyone out of town so that the city might be bombed to improve the overall economy.  Just like evacuating for a hurricane.  Why is this not done?

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Wheylous replied on Fri, Oct 21 2011 10:15 PM

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He gets the money back in B by selling baked goods to the tailor.

But he could have done that in A as well. Why didn't you let him?