“If you believe their relevance to be so self-evident, you can troubled to write it down and prove it.”
I already did and you haven’t addressed it. Either address how the multiplier and circular flow do not disprove your statement that there is no reason to believe that spending will create additional spending or stop posting on this thread. I’m not going to be question dodged and asked to explain basic macro to someone who can’t be bothered to respond to what I’ve already posted.
Ok, so you’re talking about the end of a recession vs. never ending recession? In that case I understand completely. I was thinking more of the scenario of recovery in a few months (plus extra malinvestments etc.?) vs. recovery in a few years. Hence why I didn’t see stimulus necessarily being beneficial in the long term.
Well I’m not sure if what you’re referring to is in fact the problem of economic calculation under Socialism (which is essentially the inability to calculate opportunity costs). But we should leave this for the other thread.
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.
This is a different way of saying the same thing. A hint can be found in the title of Bastiat’s original essay, “That Which is Seen and that which is unseen”.
We see the value of the window being created, but we do not the see the value of the goods we could have produced with the same resources being destroyed. The value of those unseen and foregone goods is the opportunity cost of the window we have to fix.
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.
Actually, the notion that people spend their income isn’t really a “Keynesian” assumption, it is a “Classical” assumption (if we really want to try and label these things). Every dollar you spend on goods and services is recieved by someone else as income. What do people do with income? They can spend it now or they can spend it later. Those are really their only two options (unless people started eating money). If they decide to spend it later, they can put it into a bank and the bank will loan it to someone who will spend it now.
An old-school “Keynesian” adendum to this story would be that people don’t have to put their money in the bank if they want to spend it later, they can keep it in cash holdings. In that case, NO ONE spends the money now. And this has consequences for aggregate economic activity that Neodoxy has already tocuhed on. That is actually closer to the sentiment in your last sentence (bolded above). So maybe you are more of a Keynesian than you thought.
The irony is that the recession itself is a case of systematic window-breaking (metaphorically speaking).
Edit: Let me amend this. The preceding boom itself was really the case of systematic window-breaking, as resources were systematically allocated along lines that weren’t as conducive to people’s preferences as other lines presumably would’ve been. The recession is the period where the broken windows get fixed. Breaking and subsequently repairing other windows during that time draws resources away from this.
It’s interesting to me that so many people see the recession as the problem, when the problem is actually the preceding boom. The whole point of Keynesian economics is to preserve/restore that boom. Why would this be? Because businessmen don’t like losing their shirts. Gambling addiction may be an apt analogy here.
i think we might be trying to stretch the metaphor a bit too far 
Care to elaborate?
Do you ever watch zeFrank? In his invocation for beginnings video he had a line i liked which went something like “let me find metaphors that help me undersand the world around me, and let me have the wisdom to see when they no longer work.”
Well, I think the entire point Neodoxy was making in the OP was that the BWF metaphor doesn’t work for understanding Keynesian economics because it leaves so many things out that are essential to the Keynesian story (liquidity preference, sticky prices, the circular flow of income, etc).
It isn’t that the Keynesian story is inconsistant with the BWF story, you can ammend the BWF metaphor to fit if you really wanted to (talking about a shopkeeper’s cash holdings, assuming idle resources in the economy, etc), but I think you wind up with a story that really looks nothing like the original BWF story. And, in fact, the new story makes it harder to understand both Keynesian economics and the original intent of the BWF.
Similarly, I don’t think we want to over stretch the BWF story further by trying to change it to fit the ABCT story. I mean it leaves out the informational role of prices, the response of the capital structure to a credit expansion. All kinds of things that are essential to the ABCT story. You can try to add them on top. But why would you want to?
The broken window parrable is only 1 part of a longer essay that a French economist wrote 160 years ago that was supposed to be about illustrating the concepts of opporutnity costs and unintended consequences. Business cycles appeare to be far away from Bastiat’s mind when he wrote about the Broken Window. So why are we twisting that story to get at something totally different?
As a funny aside, Brad Delong thinks that if you want Bastiat’s opinion on temporary fiscal stimulus, you shouldn’t stop at the Broken Window parrable, you should keep reading the same essay.
Frederic Bastiat channels his inner Larry Summers and declares himself in favor of the ARRA–a timely, temporary, and targeted fiscal stimulus program in a depression:
"There is an article in the Constitution which states: “Society assists and encourages the development of labor… through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands.” As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects… as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times.As a permanent, general, systematic measure, it is nothing but a ruinous hoax…"
http://delong.typepad.com/sdj/2010/03/two-more-economists-support-the-obama-fiscal-stimulus-the-arra.html
I already did and you haven’t addressed it.
This is extent of your writings on the subject:
Are you denying the multiplier effect and the circular flow diagram?
Now what pray tell am I supposed to address? And how am I supposed to address the relevance of those things back to your main point when you haven’t even defined it? You are being unncessarily evasive about having to answer for your own assertions.
We see the value of the window being created, but we do not the see the value of the goods we could have produced with the same resources being destroyed. The value of those unseen and foregone goods is the opportunity cost of the window we have to fix.
It’s not an example of opportunity cost, IMO, because the point of the BWF was that the shopkeeper was left with essentially a forced choice. Notice that there is never a question in the BWF as to whether or not the window will be replaced whereas in reality there would always be a choice; I do not believe this to be an incidental in the story.
Actually, the notion that people spend their income isn’t really a “Keynesian” assumption, it is a “Classical” assumption (if we really want to try and label these things). Every dollar you spend on goods and services is recieved by someone else as income. What do people do with income? They can spend it now or they can spend it later. Those are really their only two options (unless people started eating money). If they decide to spend it later, they can put it into a bank and the bank will loan it to someone who will spend it now.
Where did I ever say people don’t spend their income? The point of Keynesian policy prescriptions, particularly in a recession, is because people are not spending “enough” of their income, thus they are going to “stimulate” spending. And “If they decide to spend it later, they can put it into a bank and the bank will loan it to someone who will spend it now.” is a circular assertion. You haven’t proven that the fact that someone would put the money in the bank means that the bank will just immediately loan it out to whomever, and as this last crisis has shown, the banks largely were not loaning until they too were properly “stimulated” (and even then it was quite the chore), which speaks more to my point than yours.
That is actually closer to the sentiment in your last sentence (bolded above). So maybe you are more of a Keynesian than you thought.
Actually, it’s not even close at all. So maybe you’re a little more proud of your ignorance of my position than you should be.
Aristippus,
No, that was more or less what I was talking about. Once again we’re working under Keynesian assumptions of no malinvestment. However, we are working under the admission that a recession is an undesirable state of affairs. By this admission any time spent within a recession is negative, and any time spent within it decreases, all else equal, the wellbeing of people at any one time, so long as the economy continues to progress. Think of it like two linear graphs representing living standard and they have the same slope but one is two units higher on the Y axis at any point on the X axis. Everyone would rather be at the point where real incomes are higher, or in the timeline where the recession was ended swiftly.
Student,
Wow that throws a wrench into the works for the normal Austrian use of the BWF.
EDIT
Yayyyy!
myhumangetsme,
you’re free to read the story any way you like. though i will note that my reading is hardly unique. below you will find the first three links from a google search that may help you see where i am coming from.
http://worch.leap-link.com/articles/Opportunity%20Cost%20and%20the%20Broken%20Window.pdf
http://en.wikipedia.org/wiki/Parable_of_the_broken_window
http://economics.about.com/od/output-income-prices/a/The-Broken-Window-Fallacy.htm
as far as the rest, i’m not really sure what you’re driving at.
i was just responding to a direct comment you made to me (and if i misread you i am sorry) and now you’re asking me to defend the notion that banks immediately lend out deposits? I never asserted that they always do. so how did we get here? and why should we continue?
Oh ok, now I get it. Maybe edit that into the original post?
i was just responding to a direct comment you made to me (and if i misread you i am sorry) and now you’re asking me to defend the notion that banks immediately lend out deposits? I never asserted that they always do.
I didn’t ask you to “defend” anything, I pointed out that this statement in your argument:
If they decide to spend it later, they can put it into a bank and the bank will loan it to someone who will spend it now.
Is a circular assertion because you’re using an example of the concept you want to prove as a proof of the concept.
And the real problem in mutual understanding seems to lie right here:
…the BWF metaphor doesn’t work for understanding Keynesian economics because it leaves so many things out that are essential to the Keynesian story (liquidity preference, sticky prices, the circular flow of income, etc).
From yours (and Neodoxy’s) perspective, these details are relevant to invalidating the BWF, but from mine they are not, because the BWF was never meant to address the specific knowledge or techniques of Keynesian policy, but the general methods they employ and the effects they produce. The fact that the BWF does not address aspects of Keynesian policy specifically does not mean it does not address them generally.
No, I’ve never seen zeFrank, but thanks for the heads-up.
The notion of the circular flow of income is hardly unique to Keynesian economics. It’s also at least implicit in Austrian-school economics, for example. Likewise for liquidity preference and sticky prices.
In my earlier post, I wasn’t really trying to make better sense of Keynesian economics. I was relating Bastiat’s parable of the broken window to Austrian-school economics’ theory of the business cycle.
You seem to believe that I think the ABCT can be explained simply in terms of Bastiat’s parable of the broken window. Why is that? My real point in my earlier post was to show how government stimulus in a recession is essentially - metaphorically speaking - breaking more windows and then fixing them, while there are other windows that have already been broken. Do you not see the point there?
As I understand it, the point of the parable of the broken window was to refute the notion that economic destruction generates wealth and is therefore good for people.
In my earlier post, I wasn’t really trying to make better sense of Keynesian economics. I was relating Bastiat’s parable of the broken window to Austrian-school economics’ theory of the business cycle.
Well, in the portion of my post that you quoted, I was referring to Neodoxy’s OP and not anything you wrote. Like I was saying, I think Neodoxy’s point is was that critics that try to critique the Keynesian story using the BWF don’t see how much of the Keynesian story they are leaving out.
I understand that the point you were making was to relate Bastiat’s parable to business cycle theory. But I am not sure why we would want to. That’s why I said we might be stretching his simple story too far.
My real point in my earlier post was to show how government stimulus in a recession is essentially - metaphorically speaking - breaking more windows and then fixing them, while there are other windows that have already been broken. Do you not see the point there?
I have to admit that I am having trouble.
So the government is breaking windows to create jobs, but there are other windows that are already broken??? Why aren’t window-smiths already fixing them? And if they are fixing them, why do we have involuntary unemployment to start with? Or, if we don’t have involuntary unemployment, why are we calling this a recession?
And what are these already broken windows supposed to represent? And who broke them? It is fuzzy to me.
As I understand it, the point of the parable of the broken window was to refute the notion that economic destruction generates wealth and is therefore good for people.
I think this is a disgreement over language so I don’t think we need to take it too far. But this is the second time someone has balked at the notion that the BWF is about opportunity cost, so I will at least type one good reply and we can drop it.
First let’s not talk past each other. I agree that the conclusion that Bastiat reaches is that breaking windows does not lead to net wealth creation. But was that “the point” of the story? I don’t think so. I think the point was to illustrate the concept that led him to this conclusion, which was the concept of “opportunity cost”.
If you check out the introduction of the original essay that includes the parable (That Which is Seen and that which is Unseen), you will see Bastiat states that the essay is supposed to be an “examination” of the “seen” and “unseen” components of “certain economical phenomena”. The parable of the broken window is just one of several stories that are meant to illustrate this distinction betwee seen/unseen consequences.
http://bastiat.org/en/twisatwins.html
In modern parlance, we call the “unseen” component of the broken window story the “opportunity cost”–it is the value of the goods the shopkeeper could have purchased if his window had not been broken. So I don’t think it is unfair to say that “the point” of the broken window story is about illustrating the concept of “opportunity cost”.
Honestly, if his primary aim was just to adress people like M.F. Chamans (who only gets a one sentence shout out at the end of the story) that claimed burning paris ot the ground wound benefit the French economy, I’m not sure why he bothered writing the rest of the essay.
And, again, this interpretation isn’t unique to me. Here are three links that pop up on the first page of google when i search broken window and opporutnity cost. They all seem to talk about the BWF in the same fashion.
http://worch.leap-link.com/articles/Opportunity%20Cost%20and%20the%20Broken%20Window.pdf
http://en.wikipedia.org/wiki/Parable_of_the_broken_window
http://economics.about.com/od/output-income-prices/a/The-Broken-Window-Fallacy.htm
But now my reply is way to long. And it is all really beside the point anyways. I am comfortable with my interpretation and yours. I don’t see them as being in conflict. So I will just drop it here.
I think the answer to this is relatively simple. A broken window is not a gain to the economy, nor is employing someone to replace it. That the government may cause employment to rise by spending is true, but investment in nonhomogeneous labor is no different than investment into capital goods. Nor are we talking merely on one window, anymore than ABCT talks of one infusion of money. We are talking about a policy of continually breaking windows so they can be fixed.
So, if the aim of government spending is merely to increase employment, why not simply ‘hire’ people to pass money back and forth and give them a percentage to spend? Why not ‘hire’ people to do the classic digging holes and then refilling them? The answer is the same in essence as with ABCT; some of the wealth invested in the process will inevitably be lost, and lost time is not the least among them. To see that part of it more clearly, why doesn’t the government just periodically nuke a major city or two for the economic ‘stimulus’ of rebuidling it? Because, the subsequent increase in employment is spent trying to catch up to a level of wealth that had already achieved and then lost because of the destructive behavior of the government. And while people rebuild they lose resources, including time which can never be recovered, while trying to simply get back to where they were. It’s the difference between running in circles and a straight line, and when your goal is to get somewhere, the circle doesn’t help much.
So the original question misses the point, because increased employment due to government spending in Keynesian economics isn’t an end itself, its ultimate justification is supposed to be economic ‘growth’ and an increase in the wealth and well being of the people in the economy. That isn’t the result though. A policy of economic destruction can not be better than the sum of its individual destructive acts. It remains destructive. That people are ‘employed’ to do things which on their face ‘seem’ productive doesn’t change the fact that opportunities were destroyed to make that activity possible, time was lost while doing them, and it does not change the fact that their actions are not subject to the profit and loss test and so unproductive behavior will not be corrected over time. So in the end it’s really just a massive wealth transfer program, and if that’s your goal, why not just give the money to the people you think need help as opposed to ‘employing’ them for the purposes of essentially walking around and repeatedly kicking each other in the balls?
So the real question is why should increasing employment be a goal at all when the very nature of the crisis we’re in means that entrepreneurs don’t know what the best allocation of labor, among the other resources at their disposal, is?
The metaphorical notion of breaking windows doesn’t cover all of Keynesian or Austrian-school economics. So in that sense, it’s a leaky metaphor. But I don’t think that makes it entirely useless.
As I tried to point out, the main difference between Keynesian and Austrian-school economics seems to be that the former sees the recession as the real problem, whereas the latter sees the preceding boom as the real problem.
Neodoxy seemed to be arguing that Keynesian policies aren’t really bad at all for recessions, as long as they can be utilized effectively. In a larger sense, I was trying to refute this notion. As a follower of the Austrian school of economics, I understand that recessions aren’t the primary problem. Rather, I see the preceding booms as the primary problem.
The involuntary unemployment is due mainly (if not entirely) to the liquidation of malinvestments. In the preceding boom, resources had been allocated along lines that reflected the actual production/capital structure and actual consumer preferences less than other lines would have. Resources can’t always be re-allocated easily. “Economic stimulus” from the government not only keeps those resources from being re-allocated more easily, it also takes some of the resources and allocates them according to its preferences (so to speak) as opposed to the preferences of those who formerly possessed them.
To use the language of opportunity cost, the government imposes opportunity costs on those people that they wouldn’t have imposed on themselves. These opportunity costs are added to the total that are incurred as a result of the economic boom.
The involuntary unemployment is due mainly (if not entirely) to the liquidation of malinvestments. In the preceding boom, resources had been allocated along lines that reflected the actual production/capital structure and actual consumer preferences less than other lines would have. Resources can’t always be re-allocated easily. “Economic stimulus” from the government not only keeps those resources from being re-allocated more easily, it also takes some of the resources and allocates them according to its preferences (so to speak) as opposed to the preferences of those who formerly possessed them.
haha i still have trouble seeing that in your re-telling of the broken window story, though. 
but that is okay. i understand what you are getting at and business cycle theory hasnt been sparking my interests these days. so i will wonder out of the convo as rudely as i wondered in.
i wish there were more micro or price theory threads. 
