The Broken Window and the Recession

Miscellaneous General
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I don’t think you understand the context of this argument, look up “the broken window fallacy” or ‘the parable of the broken window’ on this site. The point is not windows the point is demand creation which could be achieved through breaking windows and the resulting transfer of money to fix it, and furthermore I believe that the window in the parable is supposed to be the window of a house.

Even if the repair person spends just a fraction of the money he receives, then net spending has increased and businesses will do slightly better, but once again, it’s about demand creation in general with things like stimulus, not just a broken window.

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Neodoxy,

In a market where all aggressive intervention is absent, wouldn’t a situation where sticky wages/prices/interest rates/et al. persist be a product of voluntary human interaction? If so, wouldn’t it be inefficient from a Pareto standpoint to try and increase total spending in an effort to reverse this state of affairs?

23

“I don’t think you understand the context of this argument, look up “the broken window fallacy” or ‘the parable of the broken window’ on this site.”

I know the parable, but I have my concerns as to how well you understand it, evidenced further by a subsequent statement of yours:

“…furthermore I believe that the window in the parable is supposed to be the window of a house.”

For some reason I don’t think Bastiat was being ambiguous when he wrote, “Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass?” Nor do I think Hazlitt was wrong in his retelling of the parable as, “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.”

“Even if the repair person spends just a fraction of the money he receives, then net spending has increased and businesses will do slightly better…”

Again, who says so? Your conclusion relies on the assumption that one instance of demand creation will (indeed, must) produce a flow of demand creation across all “businesses”, when there’s no logcial reason to believe that should be the case.

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I understand the basic idea of Pareto Efficiency, but I’m not certain how it applies in the way you’re using it here.

At any rate, while you’re perfectly right that it would be an outcome of individual behavior and decisions, but you could also make the argument that the entire scenario is a collective goods problem. It makes sense for everyone to spend and revitalize the economy. It doesn’t make sense for anyone to spend, however.

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@myhumangetsme

Please forgive me for my mistake.

Are you denying the multiplier effect and the circular flow diagram? And yes, there is a very good reason to believe that money circulation to one person creates eventual demand to a host of other areas. If this wasn’t the case money would be useless. It’s inherent in its nature that the acquisition of money is meant for future consumption.

26

Neo, I have two questions:

  1. Are you saying that stimulus in recession really does revitalize the economy in the sense of resulting in a greater satisfaction of wants? And over the long-term?

  2. Is it necessarily the case under the Keynesian paradigm that there is a recession in all areas of production and not, during the overall recession, any room for investment in any line of production? I can see how this would be the case under Keynes’ theory as it followed from his conception of the propensity to consume, but if the problem is merely ‘sticky’ prices, are all prices necessarily sticky across the board?

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“1) Are you saying that stimulus in recession really does revitalize the economy in the sense of resulting in a greater satisfaction of wants? And over the long-term?”

Oh lord now there’s a tough question. At any rate, I’m increasingly having a hard time posing really strong objections to stimulus spending on theoretical grounds as such. That is to say in a world where the government acts perfectly, I’m having a hard time criticizing stimulus. I think that there’s a lot of stuff that goes into this, a lot of it dealing with expectations and a shortfall in demand that results from the end of spending. At any rate, yes, I do think that it is POSSIBLE for stimulus to do everything you described above, but I think that it’s a very small chance because of one thing; GOVERNMENTS ARE STUPID

This is honestly, and ironically the largest area where libertarians are lacking today. They deal with each and every specific case of government intervention on theoretical or historical grounds, but the fact is that the government could theoretically do a lot of good in the areas of collective goods and externalities, but with this said… They won’t, because the incentive structure of the government is god awful. A world in which there is no government failure is a world in which there could be no market failure in the first place.

Any way, back to the question is yea, they could, but it’s not likely for a whole host of reasons, but it’s important to remember that most of the spending which comes about as a result of stimulus spending is not from the government, but from individual citizens within the market who receive the money somewhere down the line… Multiplier n such…

“Is it necessarily the case under the Keynesian paradigm that there is a recession in all areas of production and not, during the overall recession, any room for investment in any line of production?”

No, not as such. That could or could not be the case, but I think it’s assumed that at very leas in areas of high elasticity of demand that they will be recession proof unless things get reeaallly bad.

“but if the problem is merely ‘sticky’ prices, are all prices necessarily sticky across the board?”

Okay, this is sort of off topic but I’ve actually heard it said before that price stickiness was not an essential part of Keynes’ model as he developed it within the general theory. Having never read the work, I cannot verify or falsify this. It was only when Keynesianism as a whole swept over the economics profession that this became a standpoint of the ideology… Ironic, I know. I would also bet that post-Keynesians also have a thing or two to say on the matter.

At any rate, I’m pretty sure that prices in general are not assumed to be very sticky, fairly sticky, but not amazingly so. It’s mainly wages which are assumed to be sticky, and that’s the whole problem, so no, not all prices have to be sticky.

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In that case, wouldn’t the Broken Window Fallacy still apply to a certain extent?

It’s true, and that’s what I was getting at: Keynes’ General Theory is correct assuming his concept of the propensity of consume is correct (which it isn’t), but here we are talking about something different and less clear-cut, as you admit (i.e. price stickiness).

Just to clarify, by what means does stimulus counteract this wage stickiness? Surely not by tricking the wage earners through rising nominal (but falling real) rates? That can only be a very short-term stop-gap ‘solution’.

In order to address the other issues in your last post, I have to clarify the ones presented here first.

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“In that case, wouldn’t the Broken Window Fallacy still apply to a certain extent?”

Yes, but not to a great degree.

“Just to clarify, by what means does stimulus counteract this wage stickiness? Surely not by tricking the wage earners through rising nominal (but falling real) rates? That can only be a very short-term stop-gap ‘solution’.”

It works in two ways. If we assume money printing then what you’re talking about will take effect, and to the contrary that is much more likely to work, simply because people have a tendency to look at nominal, and not real wages. If the government taxes/spends money they have stored up then it merely puts more money into the economy so that the old wage levels can be justified on a full employment basis, for instance if it takes 500 dollars to employ everyone in the economy at set wage rates, then consumers must spend that much.

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Hmm, perhaps some amendments to the original argument are in order, then? (see below)

But this isn’t necessarily the case at all. By comparing the rise in their wages vs. the rise in other prices, they may demand even higher wage rates to make up for this. In fact, it could make the situation worse, with higher real wage rates being demanded than before due to the forecast of even more stimulus and price rises, exarcebated due to the illusion of nominal vs. real wage rates. Not to mention, of course, that ‘labour’ is not homogeneous. Again, the effects of the stimulus being discussed in this thread only apply in the extreme short run.

Hazlitt, The Failure of the New Economics p. 18:

p. 23:

I think that what you’ve said in the original post is correct in regard to what Keynes laid out in The General Theory (but again, the cornerstone of his thesis - the propensity to consume - is fallacious). It doesn’t, however, apply in all cases in the Keynesian paradigm which emphasises sticky prices, as you admitted in your last post. It still can have a Broken Window Fallacy effect, and its effect on increasing overall employment more than would have existed otherwise only applies in the extreme short term. What do you think?

I really like this thread, and it’s good to be able to have such a discussion with intellectually honest users - debating trolls gets tiring after a while. Also Neo, any chance of getting around to the ‘Knowledge and Calculation’ thread?

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If sticky wages and correspondingly a higher level of unemployment are results of the market then forcing movements away from this scenario are Pareto inefficient because they would benefit one set of market agents over another. For example, if deficit spending was achieved through monetization then this would penalize individuals trying to achieve a higher real cash balance.

Why is it a problem if it’s a voluntary scenario? How can the economy be a good?

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Aristippus: Is it necessarily the case under the Keynesian paradigm that there is a recession in all areas of production and not…any room for investment in any line of production

Neodoxy: No not as such…

Aristippus: In that case, wouldn’t the Broken Window Fallacy still apply to a certain extent?

Neodoxy: Yes, but not to a great degree.

If I might interject… :slight_smile: I agree with Neodoxy on everything until his last response. I would have said “No” or at least “Probably not”.

I think the essential insight of the BWF is about the importance of opportunity cost. In the typical BWF story, by devoting resources to fixing a broken window you are losing all the other things that could have been produced by those resources.

However, during a recession, you have many workers and other resources that would be sitting idle. By devoting those otherwise idle resources to fix the window, you can still produce everything you were producing before the window was broken plus a new window. This should be true regardless of whether all areas of production are “depressed” or only a handful of industries. The important thing is that you would be employing otherwise idle resources.

Of course, employing only otherwise idle resources is easier said than done. How do you know which resources are truly idle? What if there are few unemployed window smiths? How easy would it be for an unemployed brick layer to take a job fixing windows? Those are good questions. And imo they are solid reasons to tink that breaking people’s windows is a piss poor way to restore emplyment. But as Neodoxy noted earlier, none of those things are essential parts of the original BWF problem. They also go unmentioned in the way BWF is typically used to critique to Keynesian economics (as here: http://www.youtube.com/watch?v=FMcGTZ6Mc_c).

So, in the end, I think Neodoxy’s original point stands. Invoking the BWF in and of itself isn’t a solid way to “refute” Keynesian policy perscriptions.

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Well I think I can agree with that. Bringing up the BWF as a core argument against stimulus in a recession isn’t really relevant. Even if the stimulus inhibits certain lines of production as in the case of the broken window, it is taken that the goal of restoring employment is more pertinent than is avoiding broken windows. I just wanted to note that some windows can, in fact, still be broken in the process.

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“I think the essential insight of the BWF is about the importance of opportunity cost.”

I really am starting to wonder if I’ve missed a better version of the BWF than those of Bastiat and Hazlitt, because in their writings, the essential insight seems to be that you cannot create wealth by destroying it. That stimulus, and indeed most Keynesian policy, destroys wealth in an attempt to create it is not even in question

And as I pointed out before, there’s no reason to believe the Keynesian assumption that, in a recession, a policy that creates spending in one place will in turn snowball into all manner of spending in the market; the mere fact of being the recipient of such spending does not necessarily mean that they, too, will become a spender. The only way such policies could be assured of anything approaching success is, well, to continually destroy so people will continually spend. Are we really wealthier at the end?

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Aristippus

“Hmm, perhaps some amendments to the original argument are in order, then?”

I don’t think it’s worth mentioning, just as, for instance, perhaps after having his window broken the store owner some sort of revelation about how great his life really is because most of his windows weren’t broken which he wouldn’t have otherwise had. It’s a possibility, but not really likely and not incredibly relevant.

Unions are important but somewhat different than what we are talking about. It really is impressive exactly how much mass unionism really changes the labor market. We’ve been talking about a “normal” decentralized labor market. While unions have the power and will to restrict the supply of labor while under non-unionized circumstances this does not exist. Indeed as we know the reason for sticky wages is often specifically that people don’t really realize that real wages in relation to monetary wages have risen, or that they are not fully able to adapt to this fact.

Also, when you say that the marginal propensity to consume is fallacious, you’re talking about the idea that there is some uniform rate at which each individual will receive and spend money, correct? Not that the basic idea of the multiplier?

And I agree that it’s good to really get down to talking about real economics for a change. I’ll get around to responding to the knowledge and calculation thread, I’m sorry I’ve put it off so long but it partially just really has me stumped (it would be nice if Mises would explain something instead of just stating fact and then waiting for his reader to catch up.) and at the same time it’s going to require some reading. His thoughts in his original paper on calculation actually seem to me to be contradictory to what he said about market socialism in Human Action.

Rcder,

I have to concede that from a Pareto point of view it would be inefficient, but by the same token decreasing spending, or indeed most government or individual actions would be pareto inefficient. It’s also important to note that the vast majority of people would, both in the short and long term, gain from government intervention to end a recession. I realize that you can’t compare values, but nonetheless the fact is that very few people gain from the continuation of a recession. Even people who are seeking a higher real cash balance are likely to be better off when profits are higher, real output is increasing, rents are higher, it’s easier for them to find employment at increasing real wages, and the interest rate has increased. In other words most of the ways that people receive an income has become more lucrative in the post-recession world.

Implying that voluntary human action cannot end in some sort of a bad situation is to imply two things. Firstly it implies that humans are omniscient in relation to achieving their ends, secondly it denies methodological individualism. I assume that you are familiar with the basics of the collective goods problem. The economy can be conceived of as a good for the whole of society, or indeed for any individual. While the economy is inevitably a process, the fact is that everyone benefits from living within society and in a healthy economy. This is division of labor, Misesian model 101. Even if you don’t want to conceive of the market as a good, do you deny that almost everyone would prefer a growing, rather than recessing economy?

@Student

Excellently put. You’ve stated my basic point much more eloquently and simply than I have, and simply relating the whole matter to a problem of opportunity cost infinitely refines the issue.

You also hit on my basic reason for making this thread, which is that many times Austrians will use BWF against stimulus and Keynesianism when it simply does not apply for the reasons shown here.

@myhumangetsme

Have you read the entirety of Bastiat’s writings based around the work?

Also, you did not in any way reply to my point. People must spend some money and the more money they have then the less they need to save any amount of it, and therefore an increase in general spending will result in an “economic snowball”. Please address/read up on the multiplier and respond to my previous response to you if you wish to continue making this assertion

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Yeah, that’s it.

I’ll look into this too.

Could you elaborate on this further? Do you think that prices are that ‘sticky’? What of the malinvestments? Also, even if this were the case from the point of view of economics, such intervention would still be undesirable from a political point of view due to the precedent of intervention it sets.

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Have you read the entirety of Bastiat’s writings based around the work?

That’s not relevant, unless you meant from the beginning to base your argument around BWF and “the entirety of Bastiat’s writings based around the work,” which it appears clear to me that you did not. So I would rather confine the discussion to the parameters you initially set forth.

So, are you saying that the point of the BWF was not, in the broader perspective, that you cannot create wealth by destroying wealth?

Also, you did not in any way reply to my point.

  1. You didn’t have a point, you had follow-up questions, 2) your follow-up questions seemed to involve me going to the trouble of disproving something you had yet to prove with regards to your conclusion. I don’t need to make your arguments for you, I trust you can do it.
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@myhumangetsme

I was responding to the question that you asked. I believe that’s one way of stating it, but it’s equally true to state that the point is that the creation of additional demand does not create additional wealth.

“1) You didn’t have a point, you had follow-up questions”

Are you denying the multiplier effect and the circular flow diagram? And yes, there is a very good reason to believe that money circulation to one person creates eventual demand to a host of other areas. If this wasn’t the case money would be useless. It’s inherent in its nature that the acquisition of money is meant for future consumption.

That’s a single relevant question and a point.

“2) your follow-up questions seemed to involve me going to the trouble of disproving something you had yet to prove with regards to your conclusion. I don’t need to make your arguments for you, I trust you can do it.”

I’m not going to argue in favor of Keynesianism when you should know them anyway. The basic ideas are very simple and I don’t understand why you’re arguing against something you haven’t heard about and the multiplier and circular flow diagram are about as simple as economic concepts get. You’re also not exactly responding to what I am saying to you, so either respond to some of these things or don’t bother responding at all.

Aristippus,

“Could you elaborate on this further?”

I’m sorry but I don’t see what within what you quoted requires elaboration. I think it’s clear that practically everyone in society would gain from the end of a recession. As I stated nearly all incomes would rise. There might be some people, perhaps bankruptcy lawyers and managers who like treating their employees like crap might lose from the recession, but the vast majority will gain because their incomes rise and conditions improve in every way. Therefore, if the government could end the recession, then ceteris paribus (used in a way that it usually isn’t) most people will be better off. You could say the same thing about the institution of the private property system. A handful of people would gain from “anarchy” but the overwhelming masses would lose.

You’re perfectly right that in the real world this would probably be negative because it may lead to further government intervention (in which case it would almost certainly be economically inefficient) but more importantly in the real world who knows whether or not the government could actually achieve this end at all.

And once again, I do not believe that prices are “that sticky”, or insofar as they are it’s because of government action either through stimulus, the federal reserve, and past precedent of a steadily increasing price level, I’m just dealing from the Keynesian paradigm as far as people will push me out there :stuck_out_tongue:

“I’ll look into this too”

Within the section he literally states that a large problem with market socialism is that socialism was always an excuse to plan outside of market demand and to impose the will of dictators and those in control of the state, but how could this be the case if he assumes the prices of consumer goods in his discussion of socialism! If socialists could calculate and there were consumer prices then they would have to do it in accordance to those consumer prices, in which case it is not “planning from the top socialism” at all and merely the dictates of the socialist market! This would mean that his statement that socialism was simply used in the way stated above was bunk from the get go… Mind f***

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…but it’s equally true to state that the point is that the creation of additional demand does not create additional wealth.

The point of the BWF is the means by which “additional” demand is (supposed to be) created, which is through the destruction of wealth. So no, it is not equally true to state that.

I’m not going to argue in favor of Keynesianism when you should know them anyway.

Well what exactly am I supposed to be denying about the multiplier effect or circular flow diagrams? That these theories exist? That they’re valid? What exactly are you looking for in your world of ambiguous phrasing?

You haven’t proven that either the multiplier effect or circular flow diagrams have any relevance to your argument that the BWF does not by itself refute the Keynesian paradigm, so again, you’re asking me to disprove something you haven’t bothered to prove in the first place, and I am not willing to accept them as self-evident to appease your ego. If you believe their relevance to be so self-evident, you can troubled to write it down and prove it.