The Broken Window and the Recession

Miscellaneous General
1

Well I’ve thought that traffic on this site has been a little sparse so this is the first in a number of threads I’m planning to help Spur discussion of Mises.org!

Now my basic thesis here: The broken window fallacy (the creation of additional demand for its own sake) is economically inefficient and does not increase human welfare or employment because it only takes employment and money from areas where it would have otherwise have seen demand. This is Mises.org 101, why government spending cannot increase employment. With this said this is only relevant at full employment, and during an economic downturn with significant amount of unemployment it might not be the case.

In short the broken window fallacy and the usual explanation of it does not, in and of itself, refute the Keynesian paradigm. This is important because stimulus spending to end the recession is one of the biggest areas where government spending is demanded today. The Broken Window Fallacy, in its basic state necessitates that the money which would be spent on the broken window, would otherwise have been spent on something else, either invested on producer’s goods or spent on consumer’s goods. However, if we grant the usual Keynesian assumption that money is merely hoarded during a recession and prices are sticky, then this is no longer the case.

If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window. If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money, thusly boosting the economy from what it would have been. If we assume this on a mass scale, then unemployment will be reduced and output would increase from an increase in general demand, from many broken windows.

If we did not break the windows, and increase aggregate demand, then we’re stuck in the recession and below full employment, UNLESS we can prove that there is another way to get out of the recession, and that the market will adjust in some other way or there is another negative aspect to spending, but the movement of resources from a market provided use to a state provided use, and thusly the absence of a gain in net productivity, is not an argument during a recession as such.

So for once and for all, the broken window fallacy in and of itself cannot even touch Keynesianism by itself, and it does not apply during a recession. It is a good mental exercise and an important part of government lies, but it is not a compelling counter argument to normal Keynesianism.

EDIT In order to reduce the astounding amount of confusion on this thread I would like to make this very clear: I AM NOT ARGUING IN FAVOR OF KEYNESIANISM, I AM MERELY STATING THAT THE BROKEN WINDOW FALLACY BY ITSELF AND UNAIDED BY OTHER ARGUMENTS DOES NOT ADDRESS KEYNESIANISM, however effectively other Austrian arguments can. There are very good Austrian objections to Keynesianism, but the broken window is not so long as we’re dealing with the heart of Keynesian work: Recessionary macroeconomics.

The broken window fallacy does not always hold true (Debate Case)
Is the Draft Constitutional - read this madness
The Pursuit of Truth
2

This is not the case at all:

“this is only relevant at full employment, and during an economic downturn with significant amount of unemployment it might not be the case.”

It assumes that labor is completely generic where any unit of labor can be substituted for any other. This could not be further from the truth. Labor in any complex economy is extremely specialized. It can months to years for employers to determine if the crop of those seeking to provide labor is the most profitable. Furthermore, it takes weeks to months (Probably lots of months) for laborers to train up to the point that they are profitable for their employers.

But also the whole arguments misses the relevance of the Entrepreneur and of Economic Calcuation.

3

I don’t see how the non-specific nature of labor changes the argument.

“But also the whole arguments misses the relevance of the Entrepreneur and of Economic Calcuation.”

The broken window fallacy does not take this into consideration either.

I want to make it very clear I’m not arguing for Keynesianism, merely the irrelevance of the fallacy in response to Keynesianism.

4

The fallacy is good for refuting world war 2. (u know what i mean)

i think the debate is more of short term vs long term, sometimes if you use stimulus you will see some temporary short term growth (That which is seen, the bubble), but in the long run it isnt any good because inflation will just make everyones money worth less (which is not seen, when interest rates rise again and that new employment is wasteful, and not needed).

Of course we cant ignore the short term, but we cannot also ignore the long term effects.

I think thats right…

5

Why grant the assumption of sticky prices? Are these being taken as a necessary phenomenon of the market?

6

“And now, folks, for the true cause of our unemployment… lack of government spending! Step right up and buy bonds, let’s all chip in our part to support the war effort, our boys overseas deserve nothing less than the best! Things might be tight for awhile during this difficult time of credit restructuring and post-structural crisis but rest assured that your government is doing all it can to save the economy and daggumit we’ll spend the Moon if we have to in order to get this economy out of this damn slump.”

applause

(Meanwhile, backstage, Uncle Sam and his thugs actually cause unemployment with minimum wage, union protections, mandatory benefits and other labor demand-killing regulations…)

If you want to cure a patient with an infectious disease, the answer is to stop the infection, that is, to remove the causal factor which is bringing about the diseased condition. Performing rain-dances or sticking pins in a voodoo doll might be a desperate last measure to make the patient feel better but so long as the infection is in operation, the diseased condition will not heal. The government - or its lackeys in academia - cannot credibly prescribe measures to heal unemployment on some speculative theory whilst it is at the same time persisting in actually causing unemployment. Repeal your MW laws, remove union protections (and corporate subsidies while we’re at it), end mandatory employment benefits and other labor demand-killing regulations. Then and only then can we talk about whether rain-dances or stimulus spending might or might not further heal the economy.

Clayton -

7

Sticky prices are merely friction. Friction is a basic “fix” to perfect neoclassical models, something Austrians do not object to.

That being said, a basic search for sticky prices turns up this:

http://mises.org/daily/4906/Are-Sticky-Wages-a-Market-Failure

http://mises.org/daily/4353/

http://bastiat.mises.org/2012/03/whose-afraid-of-sticky-prices/

http://archive.mises.org/9861/mankiws-differing-views-on-deflation/

There is also this thread:

https://forum.freecapitalists.org/t/the-myth-of-keynesian-sticky-wages/23730

8

Sure, but there are different degrees of ‘stickiness’. Austrians do not think that market friction prevents recovery. My questions were leading towards: why grant the assumption that it does? This doesn’t disprove Neo’s point concerning the broken window fallacy, but it does argue against the benefits of stimulus in all but the extreme ‘short run’.

9

This is impossible to prove without interpersonal utility comparison, which is, of course, impossible.

10

@Kelvin Silia

The biggest refutation of the WWII myth, is that after the war GDP plummeted with the end of spending, and the economy did fine, just as the unions decreased in status, government price fixing ended, and the labor force increased infinitely.

@Aristuppus

Make that argument by all means, it has nothing to do with the Broken Window Fallacy. I agree that those are the type of arguments that need to be made in more intellectual circles, because that comes to the heart of the matter and actually helps to deal with Keynesianism.

@Clayton

Agreed.

11

the labor force increased infinitely.

ಠ_ಠ

12

Sure, I agree with you. The reason I asked why you would need to grant any Keynesian assumptions was due to the fact that your point seems to be that the Broken Window Fallacy has nothing to do with stimulus in recessions even from an Austrian perspective**.** We therefore don’t really need to bring Keynesianism into it, do we? Maybe this is splitting hairs but I think it’s important since it isn’t that Austrian economics concedes this point to Keynesianism and therefore calls the Austrian assumptions into question, but rather that the point is correct even within the Austrian paradigm.

13

Ohh yeahh i see since gdp has government spending alo included in it. Tho wouldnt the private consumption part of the gdp calculation go up after the war?

14

According to Woods, private spending didn’t go up nearly enough to cover government cuts. I don’t exactly get how that would result in increased GDP, but that is a mystery for another thread.

15

All the soldiers would come back home and fuck their wives, then after a few years youd see lots of babies.

16

PM from Smiling Dave to my Reddit account:

17

Is SD having trouble reading mises.org also? I don’t see how the first critique is relevant to the topic at all, since Neo was only talking about the use of the BWF to make a particular point against Keynesianism. Furthermore, the second part appears to have a straw man:

No where that I can see did Neo say that the economy is ‘better off’ in the way you are talking about here. He was simply discussing the Keynesian argument concerning employment in a recession. You didn’t demonstrate that he is incorrect in this at all, you simply argued that there are bad consequences that have nothing to do with employment. If the options are either a permanent economic collapse or your scenario of breaking more and more windows, is not the latter preferable? It is for this reasion that Neo wrote:

It is because Austrians think that the recession as a stage of the business cycle is in fact part of the recovery that they would reject your proposal of breaking more and more windows. But this doesn’t say anything against what Keynesians claim are the immediate effects of stimulus in a recession.

18

Yeah, can we keep the cursing to only when necessary and not just random cursing?

19

Okay, Aristippus more or less covered the relevant points, but I feel obliged to respond myself, but I’ll keep it brief:

  1. He starts off his reply with a strawman: “Someone over at the mises.org forum came up with a critique of the Broken Window Fallacy, and how it does not apply in the real world”. Where did I say that? Nowhere. I should think that it was pretty obvious since it’s in the title of the thread, and repeated several times afterwards, that what I was saying only applied during recessions. The Broken Window fallacy is perfectly true, but only under certain situations, just as the economic theorem that inflation of the money supply will cause an increase in most prices is true, only if there is not net hoarding or large increases in productivity.
  2. Perhaps the above point is why his response has, as far as I can tell, absolutely nothing to do with anything that I’ve said. He talks about the creation of unproductive jobs, which is only relatively related, but more importantly he ignores the multiplier effect, semi-productive jobs, the metaphor of the broken window, and the Keynesian assumptions, E.G the crux of my entire argument. The broken window fallacy was used by Bastiat in the early 19th century to display that an increase in demand would not increase employment or all-around economic wellbeing. He uses the example of a child breaking a neighbor’s window as an example, to help show the absurdity of the idea, and then he goes into an explanation of actual policy suggestions which follow the same basic idea, increasing demand. Because Dave never talks about any of the above, he in no way deals with my argument. Let’s give him the benefit of the doubt that every government job is 100% unproductive, well this doesn’t matter if through the multiplier effect the government employing a lot of people causes a general increase in employment and output so that overall output and the number of, as he so eloquently puts it, “goodies” in the economy increases as a result of spending. You can argue this was or was not the case, but either way it has nothing to do with the broken window
  3. I agree with just about everything that he says about unproductive state jobs, and it’s a very important point to be made and to understand, and it does relate to the broken window fallacy, but not to what we’re talking about here, which is the existence of broken windows within a recession.
  4. I appreciate that Dave specifically pointed out my typo and poked fun at me while utterly failing to address a single point that I made.
  5. It’s nice to see someone who has the nerve to act like an ass to a Mises Institute member on their own site find a way to reply no matter what it takes…
20

“If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window.”

Windows are not a trivial asset to a business; they are typically a tremendous promotional tool as well as a source of risk. Given this value, if there is an assumption to be made about the broken window in a recession it is probably exactly the opposite of yours: the higher the unemployment and uncertainty, the more likely it is to be replaced.

“If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money…”

Says who? What’s to say the window repair person won’t hoard that money just as the business owner would have?