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« Does the Past Have a Useful Economics? Natural Disaster Edition | Main | A Virtual Seminar on Austrian Economics »

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Of course, if the "broken window fallacy" was, in fact, true, surely the most prosperous country in the Western Hemisphere right now would be Haiti!

And the people in Haiti would have wonderfully high wages since the earthquake, there, had it reduced labor competition by "eliminating" three hundred thousand "excess" workers who had been "unfairly" putting downward pressure on wage rates.

Richard Ebeling

Steve

Can you give a more detailed explanation of this? As far as I can see, one can acknowledge the broken window fallacy, but this is not in itself a refutation of the possible benefits (still far outweighed by the costs) is it?

Surely there will be no meaningful economic growth in the next few years as a result of this disaster. But if the people who are currently involuntarily unemployed can get back into employment quicker, then isn't that a benefit? If there wasn't a disaster then it would have taken longer for the capital structure to re-adjust. Is there any reason to believe that the employments created by the disaster will be "boom-like" in that they are further distortions to the capital structure?


As a somewhat related point, I still don't quite understand the explanation of how the USA recovered from the great depression. I know that there wasn't growth during WWII. But as far as I can tell, the liberal (Austrian) story does not explain why the economy recovered post-1945. Wasn't it helped by the fact that people were back in work, even though millions were in the military and other basically parasitic industries. Wasn't it better for millions to be employed and let the capital structure slowly adjust, than for the capital structure to slowly adjust while unemployment stayed very high?

So, Nathan Gardels thinks that in more affluent societies people demand less? I think that's where we can stop reading.

"Of course, if the "broken window fallacy" was, in fact, true, surely the most prosperous country in the Western Hemisphere right now would be Haiti!"

Richard, surely you know that this does not follow because Haiti doesn't have the infrastructure. Japan can rebuild the areas which have been devastated because (1) it has the technology, (2) it has the other institutions to support a successful economy, and it has a background of being an ongoing successful economy, and (3) other areas of Japan have not been destroyed.

Isn't it possible that under these conditions there will be some stimulus? Yes there will not be real meaningful economic growth, but you take people out of the cycle of poverty and long-term welfare dependence etc. If the economy is taking a long time to adjust capital structure to get jobs for these people, then broken windows may be good, under some longish run macroeconomic criteria?

It's a comparative institutional analysis.

First, there's no question that cleaning up adds to GDP. The problem is that additions to GDP that add to net wealth are indistinguishable from ones that simply "catch us back up." Gains in GDP do not equal "economic growth."

Second, on the comparative point: the question is which society is wealthier - the one that has the disaster and sees low unemployment and high GDP while cleaning it up or the one that never has it? The point of the fallacy is that the answer is the second not the first and to call the gains post-disaster "economic growth" is an abuse of the language.

Even Bastiat recognized that the broken window generates economic activity. He just refused to call that a gain in wealth.

Take out journalists and talking heads. Then the only people who are supposedly committing the broken window fallacy are just like Bastiat, but have a different perspective on employment. They realise that people need jobs. Then unfortunately the opposing side resorts to the red herring that economies want to do more with less, we want more productivity not more employment etc. Well yes it's more fun to earn $100k for 40 hours per week, than $40k for 100 hours per week. But this has no bearing on the fact that people need jobs.

Just quickly scanning the quote above, I'm not sure Gardels would disagree with Bastiat (he doesn't seem to say gain in wealth, but even if he does, he certainly makes points which don't rely on it). Do you think there could be a conflict between gains in wealth and employment? I think this is the issue. I'm not sure the answer is obvious one way or the other, but I haven't seen it addressed.

"The result of all the new wealth creation will be money in the pockets of Japanese to buy global goods and services."

OK so this is the offending sentence. Say it is untrue in the aggregate. But it is true for the marginal worker (currently unemployed, soon to be employed rebuilding). And then if nothing else is able to almost eliminate involuntary unemployment (is there any evidence on whether unemployment would be solved in a free market - how seriously do you take "Why Don't Wages Fall in Recessions" for example), then in the long run it may well create a gain in wealth.

Taking Summers, Krugman and fellow Keynesians argument to the idiotic extreme, evacuate our major cities and call out the Air Force for some domestic urban renewal and wait for wealth to occur. How could anybody take these morons seriously?

Bastiat's point, as Steve brings out, is that when the window is broken, it does create work for the window repair man.

But the store owner (and the society in general) is poorer. Before there was the window, and now scarce resources have to applied to replace it. Resources that, otherwise, would been available to produce more and/or different goods. The society would have had these, plus the unbroken window.

The infrastructure example in Haiti vs. Japan does not, I would argue, in any way change the logic of Bastiat's argument.

Before there were, admittedly, low quality "shanty town" buildings housing people and serving as places where they shopped and worked. Any resources available (if the political institutional setting wasn't so anti-business, anti-competition, so corrupt and violent) would be available to "up-grade" where and and how people worked and lived, and/or proceed to construct (if that was the most profitable activity) an improvement in that current poor or non-existent infrastructure.

Now, those meager resources must be devoted to merely, again, replacing those places for living, working, and shopping. And much "up-grading" and improvement will be delayed due to this destruction.

Yes, people, as Bastiat emphasized, may be seen at work doing these construction jobs. But what is "unseen" are the construction and other types of jobs that might have been created for other purposes if those workers did not have to go about the business of rebuilding what had been there before.

Before, I had a home, a hammer, my labor, and some resources. Now, I have a hammer, my labor, and some resources, but no home. How am I better off?

Richard Ebeling

"War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest." (Nation, State, and Economy, p. 154)

Early in the 20th century, Mises could not even concieve of statements so nonsensical as those apparently being made in seriousness by some of the top economists today. Mainstream economics is in a very sorry state at the moment. Unhinged Macro has apparently destroyed the brains of many formerly very smart people.

One more thought: With Japan's debt level approaching 200% of GDP, if the politicans call for significant increases in fiscal spending in order to rebuild, it will be very interesting to see how the Japanese choose to finance these increased expenditures, and the result this will have on their credit worthiness. If the Japanese cannot find borrowers, will they increase taxes substantially in the face of a contracting economy, or will they try to print their way out of the hole?

Rather, if the Japanese cannot find willing *lenders*.

"Yes, people, as Bastiat emphasized, may be seen at work doing these construction jobs. But what is "unseen" are the construction and other types of jobs that might have been created for other purposes if those workers did not have to go about the business of rebuilding what had been there before."

I suppose the counter-argument mainly boils down to is it really enough to simply imagine the jobs which might have been created, if there are plenty of people unemployed.

"The infrastructure example in Haiti vs. Japan does not, I would argue, in any way change the logic of Bastiat's argument." I think this is right, but I don't think the logic is conclusive, and some empirical and institutional analysis is needed.
I think your caveat "if the political institutional setting wasn't so anti-business, anti-competition, so corrupt and violent" bolsters my point. Contrary to your original claim ("Of course, if the "broken window fallacy" was, in fact, true, surely the most prosperous country in the Western Hemisphere right now would be Haiti!") the broken window fallacy won't apply because Haiti is so backward. Surely the broken window fallacy will apply best to developed economies where there are more serious unemployment problems.

I suppose perhaps the best counter-argument to the position I am entertaining is that the unemployed really do have very low potential productivity. So there isn't much lost output if they someone aren't able to get jobs. But these people find other ways of imposing costs on us. Unemployed people cause lots of criminal damage and then are expensive to imprison. And lots more money is spent on private and public defence measures than might be necessary if crime were not so prevalent. These seem to me to be unseen costs. They should be considered as another factor here. If an unemployed man resorts to crime and goes to jail at a cost of $50k, or you smash your windows and pay him $20k to replace them, and he doesn't go to jail, which is a bigger cost, and which do you see or not see and why? This numbers could be reversed and there are plenty of other factors, so I think it is an empirical question and not simply one of logic.


All this, oh shouldn't Haiti be rich, just doesn't seem defensible to me, and I don't see how it is derived from Austrian economics, and it seems out of place in comparison to the erudition of Profs Ebeling and Horwitz.

What is an acceptable marginal cost, including loss of life, for putting an idled worker to work rebuilding houses, boats, factories, etc.?

See the same topic at The Daily Capitalist: http://dailycapitalist.com/2011/03/13/japans-struggle-to-recover/

Well at least this time you're not saying that Summers finds tsunamis and nuclear meltdowns "morally acceptable" the way you did in The Freeman.

You note above that disasters can add to GDP (this, of course, assumes that the capital stock isn't so badly damaged that production halts). Bastiat said this. Ropke said this. Keynes said this. This is all Krugman or Summers have ever said. There is absolutely no broken window fallacy here.

Bob -

re: "Taking Summers, Krugman and fellow Keynesians argument to the idiotic extreme, evacuate our major cities and call out the Air Force for some domestic urban renewal and wait for wealth to occur."

If you can find a place where Krugman or Summers has said this will make us WEALTHIER, it would be nice if you could furnish that citation. So far I haven't come across them making that claim. These are not very nice things to be accusing others of with such flimsy citation. The only thing I've ever heard them refer to is a growth in output, investment, or employment (differing from Bastiat, of course, insofar as they note the existence of slack capacity whereas Bastiat assumed no slack capacity).

Daniel,

Krugman and Summers do not stand as exemplars of the wisdom that says "brevity is the soul of wit." Unfortunately, Krugman and Summers have spewed vulgar Keynesianisms voluminously.

Look, fiscal stimulus in the face of a contracting economy is what these guys (much of the mainstream) preach. This philosophy is why Japan already has debt levels approaching 200% of GDP.

It is no secret that they argue for increasing GDP through fiscal means, even if the spending is wasteful. This primes the pump. It is essentially the same argument that is used for war. Surely by now the majority of mainstreamers accept that WW 2 lifted the world from depression?

I find very little difference in the arguments which encourage increased aggregate spending through fiscal stimulus and those in the Summers statements. If the difference is real, please point it out to me.

Certainly there is a normative argument for helping those devastated by the tragedy. However, the question really boils down to the best way of accomplishing this. If the increased fiscal stimulus done in the name of humanitarianism creates a default on Japanese debt (with resulting austerity) or necessitates very high inflation, I'm not sure how it could be argued that such a move was correct under any normative pretense for action.

Now we will have to listen to endless stories of how the earthquake and tsunami saved Japan from its two decade stagnation, just as WWII saved the US from the Great D.

Discussing the effects of WWII, I tell my class that there is no need to kill people in order to boost gdp. Killing doesn't contribute at all. If WWII saved the US, then all we have to do today is build massive ships, haul them out to sea and torpedo them. Then build thousands of airplanes and shoot them down. Build millions of tanks and blow them up in the desert.

Those will stimulate gdp, but even my class of computer repairmen and nurses can understand that is stupid.

Austrian Window Breaker - What are the opportunity costs of the billions spent on rebuilding? What do you do about the lose of property that is irreplaceable? (lost heirlooms, memorabilia, lives, pets, and coastline to name a few).

After WW2 our nation took off because of pent up demand. There was enormous demand for consumer items that could not be realized during the war because of rationing. Also, we were one of the few intact industrial economies so we gained a large share of foreign trade as well.

http://krugman.blogs.nytimes.com/2011/03/15/meltdown-macroeconomics/

Yes indeed, there we have it from the horses' mouth.

Bob,

"Taking Summers, Krugman and fellow Keynesians argument to the idiotic extreme, evacuate our major cities and call out the Air Force for some domestic urban renewal and wait for wealth to occur. How could anybody take these morons seriously?"

Funny you would mention that, in _Recettes protectionnistes_ Bastiat suggested a similar plan to mock protectionists; by a windy day set the four corners of Paris on fire to stimulate economic growth. This paper was his follow-up to the one where he suggested forbidding the use of right-hands...

Anyone who says that there is a silver lining to the earthquake and tsunami and that that silver lining is an increase in GDP is in fact stupidly arguing that GDP = increase in wealth. But acceptance of Keynesianism, whether it's of his belief in the broken windows fallacy, or many of Keynes' other fallacies, does tend to make smart people sound incredibly stupid at times.

I'm reading Keynes' GT and commenting on it as I read it on my blog, and I cannot believe some of the incredibly stupid things he says in that book. There are also good things, which I note as well, but the errors far outweigh the insights.

Larry Summers falls for any economic fallacy that passes across his eyes. That comes from being a blood relative of two progressive Nobel Prizewinners in Economic Sciences.

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