Is the Broken Window Fallacy Misused?

[Time Commander Bob]

The broken window fallacy claims that you cannot create wealth through destruction alone, since the money used to repair the destruction would have been used elsewhere. This seems perfectly reasonable.

However, I think that the simplicity of this fallacy is often misused to be applied to government fiscal policies.
Suppose that person A earns £10000:
If they are taxed nothing, they are free to spend all of this on whatever goods or services they choose.
Let's suppose they buy solely and entirely product Q, where Q cost £100, so with their income A can buy 100Q.
If something of A's is destroyed that costs £5000 that A must replace, then they can only buy 50Q. There is clearly a net loss here of 50Q for A.

Now imagine that A has to pay £5000 in tax, this means that they can only buy 50Q.
The government then uses this £5000 to buy a service P which it provides to A.
So the net result is that A has 50Q and service P. This clearly is not the same situation as before, the government has decided how to spend a fraction of A's wealth rather than destroy it.

Whether you think that governments are efficient at providing goods and services is another matter, perhaps better service of P or greater availability of P would be provided by the free market. The point is that surely taxation is the government deciding to use wealth to spend for itself rather than simplying destroying it. It would seem a tradeoff of goods and services rather than destruction and thus not an example of the broken window fallacy.

[Enemy of the State]

The problem here is that you forget the subjective nature of value. A might not value the product the government provides to him. He would have spent that money on something else instead. Meaning A is still at a loss because his property was forcefully taken from him.

You cannot objectively define "efficient" anyway. People have different ends and different ways in which to pursue them. What is efficient to one might not be efficient to another.

[florin87]

you are wrong on two things.
firstly take a look at the services the government provides as a result of taxation. most of them are highly valued by almost 100% of individuals (honestly I've yet to meet a person that does not want roads, education, healthcare, etc.) and yet very few can afford them individually. it would be simplistic to claim service P is completely useless to A.
why? because while the government will provide certain services that might no benefit A directly, and that is inevitable because like you said everyone has their own odds and ends, those services may be of use/necessary to other individuals (ex: B, C, D) who in turn pay taxes for services that may be useless to them, but are useful to A; or, better yet, enable them to provide a third useful service directly to A (like the manufacture of product Q for instance). so either way A would benefit from service P.


secondly as long as A lives in society he is obliged by collective responsibility to contribute to the general well being of that society, and that includes enabling the government to provide services that are useful for the majority. so the money A pays in taxes is not taken from him by force. it is the cost of A conscious choice of living in a society that benefits him. should A discover a society that has no need for service P, or decide to withdraw from society there would be no one or anything would be able to force him to pay taxes. but such as it is A must respect the fact that in a society everyone has both rights and obligations.


concerning efficiency i agree with you. you cannot define it objectively. but there is one thing that is universally true no matter where you are from: the government is both the definition of inefficiency and the template of efficiency.

[Enemy of the State]

firstly take a look at the services the government provides as a result of taxation. most of them are highly valued by almost 100% of individuals (honestly I've yet to meet a person that does not want roads, education, healthcare, etc.) and yet very few can afford them individually. it would be simplistic to claim service P is completely useless to A.
why? because while the government will provide certain services that might no benefit A directly, and that is inevitable because like you said everyone has their own odds and ends, those services may be of use/necessary to other individuals (ex: B, C, D) who in turn pay taxes for services that may be useless to them, but are useful to A; or, better yet, enable them to provide a third useful service directly to A (like the manufacture of product Q for instance). so either way A would benefit from service P.

A might very well acquire utility through services government provides, but you cannot make value judgements for others. Lets say I have some apples, and you have oranges. I happen prefer oranges over apples, as do you. I want to trade with you, but you refuse, since you value the oranges you have over the apples I have. Unhappy with this, I forcefully make you surrender your oranges and give you apples instead. While you can eat the oranges, and even enjoy them, you see yourself as being at a loss here and while I am at a gain. Thus we cannot talk of an exchange having occured, where both sides benefit, but instead of blatant robbery.

secondly as long as A lives in society he is obliged by collective responsibility to contribute to the general well being of that society, and that includes enabling the government to provide services that are useful for the majority. so the money A pays in taxes is not taken from him by force. it is the cost of A conscious choice of living in a society that benefits him. should A discover a society that has no need for service P, or decide to withdraw from society there would be no one or anything would be able to force him to pay taxes. but such as it is A must respect the fact that in a society everyone has both rights and obligations.

I have not made any such choice. Show me the contract I signed.

[removeduser_4536284751384]

I have not made any such choice. Show me the contract I signed.

On the other side of the coin, what if people don't accept the concept of natural rights? Your concept of anarchy is a social contract no different from that of a state. Why is your concept of anarchy superior to the state? Because no system will have the full consent of its subscribers. And even in the lack of any social contract, in a state of nature people will want change and a safer environment; the state of nature was not established with their consent.

[justicar5]

I have not made any such choice. Show me the contract I signed.

http://en.wikipedia.org/wiki/Social_contract

The same contract you 'sign' by sitting down at a cafe that charges for sitting down. (For instance) Not all contracts are signed.

They have less to work with, why? What does a consumer's demand consist of? Their own production (or someone else's).

Someone not wanting to buy your product does not reduce your own productive ability. Make sense?

It does, that's the entire point of the market is it not? If people don't want your skill set, get an unskilled job, if the don't want that, die as you are useless to capitalism.

[Justice and Mercy]

It does, that's the entire point of the market is it not?

What I was saying here is that YOUR purchasing power (a prequisite of demand) consists primarily not of money, but of productive ability.

It is with that productive ability that money attains it's value.

But you're correct, taken that way, you're only productive as long as you make products are useful, and alot of the "use" products are is that they can be traded for other goods.

[Justice and Mercy]

You're right and wrong, in that you're creating a strawman here. EDIT: In fairness, it's actually not YOUR strawman. Yes, many free market advocates invoke the Broken Window Parable without clearly thinking about what they're saying.

The Broken Window Fallacy does NOT state that taxation is the destruction of wealth (it is, but that's a largely semantic argument that's totally beside the point.)

The Broken Window Fallacy attacks something much deeper than simply that. It attacks the idea that spending, by anyone for anything, is necessarily good for economic growth. It's the fallacy of looking at the economy as a circular flow, where money is the creator of wealth by being passed around.

Indeed, it's a reaffirmation of Say's Law. Keynes had to create a strawman of Say's Law in order to perpetrate the exact fallacy that Bastiat meant to refute with the Broken Window Parable: He claimed that the movement of money is what creates wealth.

In answer to your question, it's misused and misunderstood, both by you and the people who employ it improperly.

My thought process here isn't very clear, anything you want me to clear up?

[Time Commander Bob]

You're right and wrong, in that you're creating a strawman here. EDIT: In fairness, it's actually not YOUR strawman. Yes, many free market advocates invoke the Broken Window Parable without clearly thinking about what they're saying.

The Broken Window Fallacy does NOT state that taxation is the destruction of wealth (it is, but that's a largely semantic argument that's totally beside the point.)

The Broken Window Fallacy attacks something much deeper than simply that. It attacks the idea that spending, by anyone for anything, is necessarily good for economic growth. It's the fallacy of looking at the economy as a circular flow, where money is the creator of wealth by being passed around.

Indeed, it's a reaffirmation of Say's Law. Keynes had to create a strawman of Say's Law in order to perpetrate the exact fallacy that Bastiat meant to refute with the Broken Window Parable: He claimed that the movement of money is what creates wealth.

In answer to your question, it's misused and misunderstood, both by you and the people who employ it improperly.

My thought process here isn't very clear, anything you want me to clear up?

This makes sense, thanks, though could you elaborate on the connection between the Broken Window Fallacy and Say's Law?

[Justice and Mercy]

This makes sense, thanks, though could you elaborate on the connection between the Broken Window Fallacy and Say's Law?

Gladly.

The Broken Window Fallacy implies that economic growth is simply a matter of getting money flowing. You break a window, the owner repairs it, that money goes to the repairman, and maybe his car breaks down, so it now goes to the mechanic, on and on. To most economists this is a wonderful state of affairs. As long as money keeps moving everyone is employed and stuff is being made.

But the Austrian economist sees that this is superficial. Value has simply been lost, resources have gone into getting back to a former state of affairs (with a window and a running car). While other economists see money flowing and creating wealth where it goes, the Austrian understands that money does NOT create wealth, simply directs it via the price mechanism. It is purely a means of exchange. As Say's Law states, products are traded for products.

To simplify: Most economists see progress as a matter of getting money changing hands. To the Austrian, progress is a matter of making the right products, of efficiently allocating resources into the right fields of production.

These two views lend themselves to two very different avenues of monetary, fiscal, and regulatory policy.

[removeduser_4536284751384]

To simplify: Most economists see progress as a matter of getting money changing hands. To the Austrian, progress is a matter of making the right products, of efficiently allocating resources into the right fields of production.

But this is false. Non-Austrian economists aren't idiots.

[Justice and Mercy]

But this is false. Non-Austrian economists aren't idiots.

Here is a Harvard Professor and a Nobel Laureate in an interview, considered some of the finest minds in economics. Be sure to watch the whole interview, Krugman really goes off his rocker near the end.

http://www.youtube.com/watch?v=nhMAV9VLvHA

[Time Commander Bob]

Gladly.

The Broken Window Fallacy implies that economic growth is simply a matter of getting money flowing. You break a window, the owner repairs it, that money goes to the repairman, and maybe his car breaks down, so it now goes to the mechanic, on and on. To most economists this is a wonderful state of affairs. As long as money keeps moving everyone is employed and stuff is being made.

But the Austrian economist sees that this is superficial. Value has simply been lost, resources have gone into getting back to a former state of affairs (with a window and a running car). While other economists see money flowing and creating wealth where it goes, the Austrian understands that money does NOT create wealth, simply directs it via the price mechanism. It is purely a means of exchange. As Say's Law states, products are traded for products.

To simplify: Most economists see progress as a matter of getting money changing hands. To the Austrian, progress is a matter of making the right products, of efficiently allocating resources into the right fields of production.

These two views lend themselves to two very different avenues of monetary, fiscal, and regulatory policy.

Okay, this makes sense, I see the connection more clearly now. Although, by itself it does not seem to narrow down fiscal policy too much; it just seems to reject certain types of fiscal stimulus.
For example, one government could decide for example that it knows what the right products are and thus decides to nationalise industries so it produces them. Another government could decide that the right products are produced by market forces alone so decides not to interefere. Both would accept that it is products that matter not flow of money.

Er ... could this debate be aborted already ?

OP Seems not to be informed that the major objection to fiscal stimulus is the value of the Multiplier of government spending, and that the Broken Window analogy is used for public works program for either destroying existing infrastructure or duplicate them.

It is funny how a OP based on a strawman could make to more than 5 replies.

I think you've missed the point. I pointed out what I thought was misuse of the broken window fallacy, that alone is not a strawman. It would be a strawman if I had stated that was a reason people oppose taxation. I am aware that the multiplier effect is criticised in fiscal stimulus, but that wasn't what I was asking about, so I didn't mention it.

[Justice and Mercy]

This sums up a lot of why you are spouting from your mouth (fingers?). Are you assuming that economics stopped at Bastiat?

Of course not. Economics stopped at Mises.

What I "mean" is that too much investment (actually mean savings here) leads to low circulation in the market place and a sad economy.

What do you think I've been talking about this whole time?

I challenge the idea that economic growth is about moving money (or "circulation".)

Your little example at the end there is kinda ridiculous. If circulation of money is low, then there is only so much consumers can buy. It isn't so much that producers are just suddenly making goods consumers don't want, consumers have less to work with.

They have less to work with, why? What does a consumer's demand consist of? Their own production (or someone else's).

Someone not wanting to buy your product does not reduce your own productive ability. Make sense?

You've given me one example. That doesn't prove a negative. You can't prove that every single non-Austrian economist in the world believes in the broken window fallacy.

You'll note the word "most" used twice in the post to which you originally replied, preceding the word "economists" each time.

The fact that it is recognised widely as a fallacy despite the Austrian school being in the minority of proof of is prima facie evidence of non-Austrians rejecting it as fallacy.

Still missing the point? Though nearly all economists will recognize the fallacy in such a limited way, my purpose in this thread is to show that they accept it on a much grander scale.

Hoarding isn't even a problem.

Sure it is... for the hoarder.

Okay, this makes sense, I see the connection more clearly now. Although, by itself it does not seem to narrow down fiscal policy too much; it just seems to reject certain types of fiscal stimulus.

It rejects an entire view of the economy.

For example, one government could decide for example that it knows what the right products are and thus decides to nationalise industries so it produces them.

Sure, that's possible.

I'm not sure why you think the Broken Window Fallacy is pointed squarely at the government?

[Astaroth]

All he says is that if there was a common goal to work towards for the economies of the whole world that would benefit the world's economy as a whole...

[Justice and Mercy]

All he says is that if there was a common goal to work towards for the economies of the whole world that would benefit the world's economy as a whole...

Missed the point, huh?

Ireland doesn't believe that non-Austrians generally believe that progress is merely the movement of money through the economy, often called "stimulus".

This is a clear cut example of that. Krugman believes that preparing for an alien invasion would help the economy. How would that work? Because of stimulus, the movement of money.

And I'm curious as to how you think wasting resources on preparing an alien invasion would "benefit" the economy.

[removeduser_4536284751384]

Missed the point, huh?

Ireland doesn't believe that non-Austrians generally believe that progress is merely the movement of money through the economy, often called "stimulus".

This is a clear cut example of that. Krugman believes that preparing for an alien invasion would help the economy. How would that work? Because of stimulus, the movement of money.

And I'm curious as to how you think wasting resources on preparing an alien invasion would "benefit" the economy.

You've given me one example. That doesn't prove a negative. You can't prove that every single non-Austrian economist in the world believes in the broken window fallacy.

The fact that it is recognised widely as a fallacy despite the Austrian school being in the minority of proof of is prima facie evidence of non-Austrians rejecting it as fallacy.

You kind of just pointed it out there: "Money invested IS money spent". It isn't, at least by modern economic standards.

Yes it is. A business taking out a loan is spending money; an investment bank buying equity is spending money. Nobody will hoard money as cash when constant inflation will destroy it.

What I "mean" is that too much investment (actually mean savings here) leads to low circulation in the market place and a sad economy. Your little example at the end there is kinda ridiculous. If circulation of money is low, then there is only so much consumers can buy. It isn't so much that producers are just suddenly making goods consumers don't want, consumers have less to work with.

Ok let's look at the fallacy again, but instead of saving the money the baker was going to save it. Because his window was broken, he couldn't put it in a bank where interest would guarantee its continued value. The bank couldn't invest in a new start up company because of insufficient liquidity. The startup, had it survived, would have developed a new way of producing useful hydrocarbons for very cheap. Instead, he spends it in cash on repairing the window, and the glazier spends it on something else. As it goes inflation subtracts from its value.

Governments encourage constant inflation for a reason. To counter precisely what you're arguing. There is no danger of it in the real world.

[Enemy of the State]

Hoarding isn't even a problem. While it is true that money is only useful for exchange, it is not only useful at the moment of exchange. Money supplies the owner with the possibility of making exchanges at any time they desire. There are people with low time preference who simply value keeping money. This choice doesn't hurt society. What happens is that the purchasing power of a single unit of currency increases.

[The spartan]

The real problem I see with the broken window fallacy is that it treats expenditure as a constant and non-diminishing while it does, in fact, diminish.

[Justice and Mercy]

The real problem I see with the broken window fallacy is that it treats expenditure as a constant and non-diminishing while it does, in fact, diminish.

What?

Have you read Bastiat's essay? Because I have no idea what you're talking about.