The Broken Window and the Recession

Miscellaneous General
81

This isn’t the BWF, this is an argument against sticky wages, the long term effects of stimulus upon the production structure, and the impossibility of government omniscience. It is not the BWF. You even admitted my point in the bolded area.

What precisely do you think the BWF consists in, honestly? He iddn’t even bring in “sticky wages”. The long-term effects of the stimulus on the structure of production are, in essence, what the BWF is concerned with…

This loss would be irrelevant if the Keynesian assumption was true and stimulus would cause the economy to recover.

To whom precisely would it be “irrelevant”? In what terms do you measure an “economy” recovering and how do you balance this alleged recovery against the costs misallocations pose on the structure of production?

Re the “Says who?” I meant regarding the BWF magically becoming inapplicable during a recession. Why would it? Actions stop having unseen costs… because some resources lie idle?

82

How do you define an economy “recovering”? Simply getting those GDP numbers up or aligning production with consumption?

83

Jon,

I’m not going to restate all of my arguments on this thread just for you, please read through some of what has been said here first.

“He iddn’t even bring in “sticky wages”. The long-term effects of the stimulus on the structure of production are, in essence, what the BWF is concerned with…”

  1. He was explaining why labor was idle, and therefore defending/criticizing the Keynesian idea of sticky wages

  2. The BWF is not concerned with long run changes, it says nothing about the long term, it merely talks about short term changes in employment and wealth creation.

“To whom precisely would it be “irrelevant”?”

Everyone who benefited more from the economy recovering than having whatever it was destroyed.

“In what terms do you measure an “economy” recovering and how do you balance this alleged recovery against the costs misallocations pose on the structure of production?”

Problem of the limited nature of government knowledge and of the impossibility of comparing interhuman values.

“I meant regarding the BWF magically becoming inapplicable during a recession. Why would it? Actions stop having unseen costs… because some resources lie idle?”

Please see the end of my last post to Xarhx.

In short, however, if everyone was just sitting around idly and unemployed because no one was spending money and wages were too high then increasing demand would result in increasing unemployment and spending until eventually things were employed again. If resources are unemployed then using them in such a way that it will bring about a positive result, economic recovery, is one in which its use was not wasted. That’s the argument in an amazingly oversimplified way.

EDIT

Wheylous,

I don’t know, I’m not god. It would have have to be a measurement which took into account the employment of machinery and labor up until the point where employing them much more would start leading to a fairly vertical point on the AS curve.

84

Well, AS is vertical in the short term. Do you speak of long term? Because in the long term we don’t have recessions. We have full employment.

85

Sorry if you’ve addressed this already, but you say

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.

What at all guarantees that the glazier’s propensity to consume is higher than that of the baker?

86

Huh? No it’s not, in the long run it’s supposed to be vertical at full employment,

And I’d also like to point out (this is economics not you) that in the long run there theoretically is no AS, or rather AS is infinitely low approaching 0 on the Y and infinitely to the right approaching infinity on the X so long as we assume perpetual growth… But anyway…

87

Of course, I’m an idiot.

As to my propensity to consume question?

88

I think Neodoxy’s still being strawmanned in this thread, partly due to confusions arising out of the original post, which I myself only finally clarified when he said this (emphasis is mine):

I really thought it needed to be repeated. To me it looks like most of the thread has been people talking past eachother.

In conclusion it doesn’t matter for the Austrian that the BWF doesn’t address Keynesianism, since ABCT, for example, does.

89

I think most people are just assuming he’s arguing that part of Austrian Economics is wrong when he is merely arguing that the BWF doesn’t address a specific aspect of Keynesianism while other parts of AE do (parts which he is not even addressing, as he said, such as malinvestment).

I think that the place to call him is not that the BWF isn’t potent during unemployment but that the malinvestment created by government spending doesn’t “fix” a recession as he claims it would. His claim is that government spending when below full employment can help “end” a recession. Well, if it’s malinvested, then no.

90

…we’re working under Keynesian assumptions of no malinvestment…

You must mean no malinvestments in the past, leading up to the recession. Because breaking a window in order to fix it, and digging a ditch in order to fill it, constitute malinvestments right there. And they bring with them all the bad news all mals do.

But maybe you mean that in the Keynesian world breaking a window [and all random destruction] is not a malinvestment, by definition, and has no bad effects, by definition. In which case Keynesianism is exposed as nonsense by that alone.

91

But that’s the ABCT and not the BWF, correct?

92

But that’s the ABCT and not the BWF, correct?

Not exactly. The ABCT is concerned with how recessions are created. By Neo’s rules of the game, that question is not to be asked. OK, we’ll go with it.

The BWF points out that destruction, even when used to “create jobs”, is not good for an economy, recession or no recession, because it destroys valuable resources. Even if destruction of resources is assumed not to have created a given recession, and Animal Spirits hoarding their wealth did it instead, it must be recognized that shooting yourself in the foot will not cure anything.

To give a medical analogy, say we have a patient bleeding to death before us. Mises says he is bleeding from a knife slash. Keynes says he is bleeding from a magic spell. Keynes then says the cure is for the patient to have his neck slit open with a knife. Mises replies, “Maybe he’s bleeding from black magic now as you claim, but if you slit his throat that’s not going to cure him. He will then certainly bleed to death from the knife cut to his neck.” Mises then suggests another cure, bandaging the bleeding area.

93

I don’t think Neodoxy is being strawmanned at all. I think, as I have tried to convey, that he (and Student) have essentially redefined the meaning of the BWF to suit his basic thesis. The BWF was never meant to focus on particular concepts behind Keynsian policy decision-making or any other similar economic policy decision-making, but on what those methods can generally be relied upon to produce, as solutions to problems and as actual results. Despite the BWF not specifically addressing “liquidity preferences” or “sticky prices” is there really an argument that, in the bigger picture, the solutions proposed and results therein of Keynesian economic policy prescriptions are ultimately not consistent with that which the BWF points out?

It’s apples and oranges.

94

Alright triple response up in here!

@Wheylous

  1. You’re not an idiot

  2. Government omnipotence will assure that the money will go to everyone with the highest MPC because the government is teh greatest!!!111. But any way this is only the case if there is taxation to bring this about, in most Keynesian worlds there is either net hoarding by the government in good times, or there is credit expansion to finance government projects or to stimulate investment. If the money is printed out of midair the MPC is increased so long as everyone isn’t hoarding it. Keynesians also assume that there’s some base rate at which everyone spends (I think there’s a name for it which I forget), but at any rate that’s where the constant comes in when calculating the multiplier.

  3. I am arguing that the BWF doesn’t address recessionary Keynesianism, and any Keynesian who isn’t a total idiot only advocates spending within depressions. I hope by now I’ve demonstrated that this is the case, because if not I might go crazy. Other arguments from AE tackle Keynesianism perfectly, but I’ve heard many people argue against Keynesian policy many times because “it’s a broken window fallacy”, but this is not the case in a deep recession. This is why I’m “not addressing them”, because these aspects of keynesianism are flat out wrong, but you have to deal with them with something other than the usual BWF story or you will fail.

  4. Once again, that is not to do with the BWF and therefore it is not my problem to respond to here and now! :smiley: At any rate, I would think for a moment before calling government spending a malinvestment simply because that is not how it is usually defined by Austrians. Government spending may be wasteful, but it is not a malinvestment in the same way that others are. I think that this is an interesting and not entirely straightforward discussion topic, but not one that I’m interested in dealing with here (another thread perhaps?) because right now I feel like I’m knee-deep in misunderstanding with no way out.

@Aristippus

Congratulations sir! Fanfare plays You are the only person besides student to have apparently understood what I’ve been trying to say this whole f***ing time on this thread. Congratulations! You are incredible! :smiley:

@RobinHood

  1. You’re using the fallacies of intuition and false analogies to justify your position
  2. The question of how the recession arose ISN’T a part of ABCT, the BWF does not ask it. Where in Bastiat’s work, or indeed Hazlitt’s surrounding the fallacy do they talk about malinvestment?? Bastiat had no conception of such a thing, and the idea of a non-real business cycle was rare to say the least, Hazlitt never related the two because there is no relationship, he used properly constructed arguments against Keynesianism revolving around flaws within the system and ABCT, not the BWF
  3. If resources are idle and only destruction can bring them to be used, then destruction could be warranted so long as the destruction lead to greater growth than there was destruction.
  4. Animal spirits mostly refers to entrepreneurs and the reason for the business cycle and investment patterns NOT hoarding. It makes sense to hoard if you just lost your job and many places are going out of business so you might be unemployed for a while. It is rational human behavior, not something decided by “spirits”. ROTHBARD ASSUMED THIS WOULD HAPPEN, he assumed a model in which hoarding resulted due to the bust. I can’t say the same for Mises and Hayek but I must assume that they did. It does not make sense to start a business because you feel optimistic about life based off of no evidence. of the future

Even if destruction of resources is assumed not to have created a given recession… it must be recognized that shooting yourself in the foot will not cure anything."

… Well that’s really good to know

… That’s really good to know. Also, Animal spirits mostly refers to entrepreneurs and the reason for the business cycle and investment patterns NOT hoarding. It makes sense to hoard if you just lost your job and many places are going out of business so you might be unemployed for a while. ROTHBARD ASSUMED THIS WOULD HAPPEN. I can’t say the same for Mises and Hayek but I must assume that they did.

95

You’re using the fallacies of intuition and false analogies to justify your position

No. I was using an analogy to help Aristipuss see what my position is, not to justify it.

The question of how the recession arose ISN’T a part of ABCT…

Maybe in Bizarro Austrian Economics, but in Earthly AE it is the very heart of ABCT.

Where in Bastiat’s work, or indeed Hazlitt’s surrounding the fallacy do they talk about malinvestment…

Let us get on the same page here. ABCT = Austrian Business Cycle Theory. It explains how recessions arise. Short short summary: Money printing leading to wasting of resources, aka malinvestment. BWF = Broken Window Fallacy. It explains how destruction of resources [the ultimate malinvestment] does not improve an economy. Short short summary: An economy is better off if there are more available resources, not less.

Now malinvestment usually means resources wasted in a particular way, by someone wasting them in wasteful production. But sheer destruction of resources, like nuking a city or breaking a window, is even more wasteful than using it for wasteful production. It thus was not called “malinvestment” by Bastiat and Hazlitt, but the problems malinvestment creates are created even more powerfully by sheer destruction. Thus it is perfectly correct to call breaking windows and nuking cities and digging ditches only to refill them the ultimate malinvestment.

Hazlitt never related the two because there is no relationship, he used properly constructed arguments against Keynesianism revolving around flaws within the system and ABCT, not the BWF.

Aww, now you are making me go ahead and do research. What did Hazlitt say about digging ditches and refilling them, I wonder?

From Failure of the New Economics:

The “contribution” of Keynes that his disciples most often insist upon as valid and “permanent” is the substitution of “full employment” as the goal of economic activity rather than the “maximum production” of the classical economists.

Well lo and behold. Look what he’s saying. The goal of economic activity is “maximum production”, not “full employment” as Keynes thought. Go to Chapter 26 to see why Hazlitt thinks Keynes is wrong. So, armed with this knowledge, let us look at breaking windows and nuking cities and filling freshly dug ditches. Do these labors maximize production? No, they do not, because they WASTE RESOURCES that could have been used in “maximizing production”.

Let’s see what else Hazlitt has to say about this fascinating topic:

Edwin Nourse, in the article from which I have previously quoted, declares that: “Ideally full employment would be such as promotes continuous maximization of production and real purchasing power for the people.” But this definition recognizes that full employment is desirable, not as an end in itself, but only as a means to much broader ends. Even the “maximization of production” must be understood, not in the sense of the mere piling up of physical things, but in the sense of the maximization of consumer satisfactions.

Let us put on our thinking caps. If I break someones window and then charge him money to fix it, have I maximized consumer satisfaction? If I dig a ditch and refill it, have I maximized consumer satisfaction? If I nuke a city, have I maximized consumer satisfaction? Let me help you along here. The answer to all three questions is “No, I have not.”

And guess what? Our old friend the BWF notes this very fact. Destruction of property has not maximized any consumer’s satisfaction, the BWF tells us. It has, on the contrary, decreased consumer satisfaction by breaking their stupid window! That is the whole point of the BWF. Look at the broken window, not the “job creation”.

More Hazlitt:

The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck. It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions.

All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans. Translated into national terms, this first principle means that our real objective is to maximize production…

Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods (which are both a cause and a consequence of a shortage of capital) and not unemployment. Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved. The slave labor in Russia had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment…

You see where Hazlitt is going with this. Keynes is wrong because he is barking up the wrong tree. Forget about creating jobs. Think instead about maximizing production. EXACTLY what the BWF is all about.

If resources are idle and only destruction can bring them to be used, then destruction could be warranted so long as the destruction lead to greater growth than there was destruction.

This might be the most foolish thing ever written in these forums, and that is saying something. Because destruction of perfectly usefull and serviceable things cannot possibly bring “greater growth”. Do the math. If I have 1,000 units of resources to to help me grow, but I then have to waste 10 of them to fix a window some idiot broke for no reason, then I have only 990 units of resources to help me grow. Less units available to grow with means less growth.

It’s not rocket science.

ROTHBARD ASSUMED THIS WOULD HAPPEN, he assumed a model in which hoarding resulted due to the bust.

No need to yell. In any case, do not confuse hoarding due to the bust with hoarding which, [according to Keynes only], causes the bust.

Let me help you out here. One happens BEFORE the bust. The other happens AFTER. One is a “cause” of the bust, according to Keynes. The other is a “result” of the bust. They are not the same, you see.

96

But if the BWF can be related to the ABCT, then what?

97

Are you sure that’s the only assumptions you’re working under? Because the malinvestments Keynesians assume do not exist are those very same windows they also assume are never broken.

Who’s admission? Yours?

The recession is the recovery. I think the recovery is very desirable.

98

…and as suspected, more Keynesian assumptions - Now, it is money that creates demand and not supply. So now we also reject Says law and not just the malinvestments cause recession argument.

99

Hmm, I think Neodoxy’s point is that using the BWF per se won’t work as an argument against Keynesians who argue in favor of economic stimulus during recessions, in the sense of convincing them otherwise, because they don’t see the preceding economic boom as breaking any windows (metaphorically speaking). That is, it won’t convince them that involuntary unemployment, reduced investment and spending, etc. during recessions aren’t bad things in and of themselves.

100

Neodoxy assumes that money creates demand. see above. So obviously, the lesson of the Brolen Window Fallacy is lost under such assumptions. I get his point. He’s just wrong.