23 Aug 2011

Correcting the Keynesians on the Broken Window Fallacy

Economics 128 Comments

Lately our good friend Daniel Kuehn has been beside himself over the anti-Keynesians’ allegedly improper use of Bastiat’s broken window parable. The classic statement comes from this post, where Daniel declared, “Nothing convinces me you don’t understand what Bastiat wrote more thoroughly than accusing Paul Krugman of having committed a Broken Window Fallacy.”

Anyway, I bring it up now because this seems to be something that not only Daniel, but also Matt Yglesias, are hitting repeatedly. Perhaps sensing the rhetorical power in accusing Keynesians of falling prey to a fallacy exploded in the 1800s–after all, that’s why it stings so bad when Krugman accuses his opponents of ushering in a “Dark Age of Macro”–Daniel and Yglesias try to spin the whole thing as yet another example of sloppy thinking by the free-market guys. In the latest episode, Daniel praises Matt Yglesias for saying that shoplifting will create jobs. (See, we don’t need to fake alien invasions after all.)

I’ll let you go read the logic behind that one, but what interests me in the present post is how Yglesias introduces his post: “Conservatives persist on not understanding the point about broken windows…” In his earlier post on the same theme, Yglesias opened up by saying:

Few myths are as persistent as the idea that Keynesian and monetarist thinkers fail to appreciate Frédéric Bastiat point about broken windows. As even a cursory examination of efforts to apply Bastiat’s ideas to the conditions of a depressed economy will show, the so-called “broken windows fallacy” is not a fallacy at all, just a special case.

Where Daniel and Yglesias are coming from, is to make a distinction between wealth and employment. “Sure,” they concede, “everybody admits that breaking stuff makes us poorer. But it’s not a ‘broken window fallacy’ to say that breaking windows can boost employment.”

Well, regardless of your opinion on that claim, I want to point out that Bastiat didn’t agree. Here is his original (translated) discussion:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation – “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.[Bold added.]

There is no ambiguity in the passages I’ve put in bold. Bastiat is clearly saying that not only would it make the community poorer, but that it would not stimulate industry or boost overall employment, if somebody smashed a window. (Presumably repelling an alien invasion or replacing shoplifted goods wouldn’t give a different answer.)

So if Yglesias and Daniel Kuehn want to say, “Modern conservatives/libertarians should stop citing Bastiat’s broken window ‘fallacy’ because he was wrong; he assumes full employment which is the mistake all the classicals make when it comes to macro,” then OK fine. We can have that argument.

But they should stop accusing modern free-market folks of misapplying the lesson. To say that shoplifting or alien invasions can help employment is exactly the “broken window fallacy” as spelled out by Bastiat.

128 Responses to “Correcting the Keynesians on the Broken Window Fallacy”

  1. Daniel Kuehn says:

    Yglesias and I are not independent occurences of course – I’ve just been reposting his stuff :)

    • Major_Freedom says:

      http://reason.com/blog/2011/08/23/krugman-people-on-twitter-migh

      Few myths are as persistent as the idea that Keynesian and monetarist thinkers appreciate Frédéric Bastiat’s point about broken windows.

      • Major_Freedom says:

        Update: Krugman has stated it is a fake…

        http://krugman.blogs.nytimes.com/2011/08/24/identity-theft/

        • Robert Fellner says:

          Ya I saw that, not sure it changes anything. Clearly several Keynesians rushed to defend it, and it is totally inline with Krugman’s worldview and previous comments on acts of destruction anyways.

          • Gene Callahan says:

            “not sure it changes anything”

            I see — whether Krugman really said it or it was a total fabrication changes nothing!

            • Robert Fellner says:

              Hi Gene,

              I meant that what the statement symbolizes, “acts of destruction cause economic growth” is a belief Krugman has espoused several times. So while this statement was false, the message is true.

              So since the focus of debate is over that concept, not the specific incident of this earthquake Krugman’s reveal that he never said that specific quote doesn’t really change anything as it pertains to the conversation said quote prompted.

              Also, now that I have your attention, how come you never allowed my comment on your blog where I asked if you could elucidate on how the US is “way more free market today than it was in the 50s” to post?

              • Gene Callahan says:

                Robert, comments get lost for many reasons other than my “not allowing” them. I actually got e-mail on that one, thought I posted it, and looked through the comments in confusion because I intended to reply. What happened to it I’m not sure.

              • Robert Fellner says:

                Gotcha. Thanks for clarifying.

  2. Daniel Kuehn says:

    So on that content itself, the paragraph starting with “But if, on the other hand…” is one Keynesians should have no problem with that I can think of. The next one, starting with “It is seen that…” we would just say “right in most circumstances, but not in others – Bastiat can’t just assume that. And I think we’re pretty up front about our differences on crowding out.

    So sure – we can say Bastiat is wrong about assuming crowding out too easily. But usually what we’re accused of is ignoring the principle itself, which clearly we’re not guilty of.

    • bobmurphy says:

      Well, okay, but when you say stuff like, “Nothing convinces me you don’t understand what Bastiat wrote more thoroughly than accusing Paul Krugman of having committed a Broken Window Fallacy,” then 999 out of 1000 people will think that you think:

      (a) Krugman is saying nothing wrong,
      (b) Bastiat is saying nothing wrong,
      and
      (c) People using Bastiat to knock down Krugman have misunderstood what Bastiat was saying.

      Yet now you agree with me that you just mean (a)?

      • Daniel Kuehn says:

        (a.) locally, not globally. And (c.) more often than not.

      • Daniel Kuehn says:

        And also for the most part I’m saying (b.) too although obviously I don’t agree with him on everyhing.

  3. Daniel Kuehn says:

    Not to mention the people that plain and simple mix up stocks and flows.

    • bobmurphy says:

      DK wrote:

      Not to mention the people that plain and simple mix up stocks and flows.

      Including Bastiat himself, in the original exposition of the broken window “fallacy.” Right? He’s making the same “dumb” observation there, that say Dan Mitchell made about Krugman, earning Yglesias’ ire.

      • Daniel Kuehn says:

        I don’t think Bastiat mixed up stocks and flows.

        If you assume perfect crowding out then broken windows impoverish you and don’t help employment. That’s what Bastiat said. He’s wrong on the crowding out, but he keeps his stocks and his flows straight.

        • bobmurphy says:

          DK wrote:

          I don’t think Bastiat mixed up stocks and flows.

          If you assume perfect crowding out then broken windows impoverish you and don’t help employment. That’s what Bastiat said. He’s wrong on the crowding out, but he keeps his stocks and his flows straight.

          OK, so I submit that any PhD-toting economist today, who brings up “the broken window fallacy” when talking about Krugman and aliens or about earthquakes, is just as right (or just as wrong) as Bastiat on this topic. Do you concur?

          • Daniel Kuehn says:

            No, absolutely not. Robert Barro is just as right or just as wrong as Bastiat I would say because he knows Krugman understands the unseen cost element but just disagrees with him on the extent of crowding out.

            But do you see what kind of stuff gets written up on Cafe Hayek about Bastiat and Krugman, for example? Half the time there’s no recognition of the difference between stocks and flows and most of the time they assume Krugman’s a complete idiot and doesn’t understand “the unseen”.

            Previously I had thought that Bastiat recognized some increased flow but didn’t think it was worth it – I had thought Bastiat was Krugman lite.

            You have managed to convince me that rather than Krugman lite, Bastiat is actually more like Robert Barro. You’ve definitely changed my view, but I wouldn’t say that most people that mention Bastiat understand him or understand Krugman – they’re deeply confused about at least one of them.

            • Subhi Andrews says:

              But do you see what kind of stuff gets written up on Conscience of a Liberal about Bastiat, for example? There’s no recognition ever of the difference between seen and unseen and most of the time they assume Austerians a re complete idiost and don’t understand “the flow”.

        • bobmurphy says:

          DK wrote:

          If you assume perfect crowding out then broken windows impoverish you and don’t help employment. That’s what Bastiat said. He’s wrong on the crowding out…

          Daniel, don’t you see that this means you dispute the whole point of Bastiat’s fable? If you take away the “fact” that the employment of the glazier reduces the employment of somebody else, then “that which is unseen” no longer exists.

          So to sum up my original point: You can’t say, “Modern free-market people haven’t a clue about what Bastiat was saying,” and then, “Bastiat was wrong about crowding out.” If the modern guys are wrong when they rip Krugman, for example, then it is for the same reason that Bastiat was wrong when he ripped “fallacious” analyses back in his day.

          • Daniel Kuehn says:

            Now hold on – I’m not saying he doesn’t take away the employment of somebody else. I’m saying under some circumstances he doesn’t completely displace the employment of someone else.

            But that’s the whole problem – people act as if me or Krugman don’t understand the concept of opportunity cost, just like you’ve done here. When really all we’re saying is “the degree of crowding out is a variable, not a paramter”.

            By “free market people” I’m assuming you’re meaning libertarians here??? I don’t know how many times I have to repeat this Bob. You’ve convinced me I think Bastiat is wrong in the sense that I think Robert Barro is wrong. I still think Bastiat and Krugman agree on points where guys like Russ Roberts think Bastiat and Krugman disagree, and that’s ultimately because people misunderstand Bastiat or misunderstand Krugman, or both.

  4. Scott says:

    I’ve kind of thought about this a bit lately, especially in the wake of the Japan earthquake and tsunami.

    It would not surprise me if actual economic statistics really did show an improving economy in the wake of a disaster, but I still think that the broken window fallacy is really a fallacy. I am thinking of all the families that otherwise would have spent their time together in leisure, enjoying the company of one another, in effect, ‘consuming’ one another (as ‘consumer goods’ or entertainment, or whatever.) I certainly enjoy my time with my family in my home. It does have value to me.

    But such consumption does not show up in GDP. If, instead, those people’s lives and homes are wrecked, they will expend enormous sums of money etc. in money transactions to restore their lives, rather than non-money transactions enjoying themselves. So, aside from money actually spent in other investment, lost capital, etc., there is lost consumption that is ‘invisible.’

    I think that in general there is an enormous world of economics that is completely overlooked by this kind of statistics obsession. My wife cuts my hair, I mow my own lawn and sometimes work on my car, but none of this shows up in economic statistics. If they really show that disasters are good for the economy, I’m wondering how useful they can really be.

    • Edward King says:

      Bravo. Bravo. Very well said. The problem with Keynesians is that they focus so narrowly on useless statistics, that they fail to see anything remotely meaningful. You pointed out numerous activities that satisfy your desires and needs that will never show up on the Keynesian radar.

      Keynesians focus on one aspect of economic life and chose to elevate it above all other considerations. Promoters of human liberty and thus the free-market, chose to focus on what best satisfies consumer wants and needs. To those who promote the free-market this is the only thing that matters. Free-marketers do not try to micro-manage the economy in a vain attempt to improve some useless statistic. They understand that what is best for the economy is displayed through the demonstrated preferences of the many individual actors in society.

      I can’t believe how hard it is for Keynesians to understand this. According to standard Keynesian theory, if all vestiges of civilization were destroyed, this would be a good thing because all able bodied men and women would have to expend labor to help rebuild. There would be 100% employment.

      Now having said that, the typical Keynesian response will be we don’t advocate the complete destruction of the vestiges of civilization, only the arbitrary small scale destruction of civilization. Sure we acknowledge that if all buildings and tools and etc. were razed to the ground, we would have full employment, but this is not what we mean. We mean that arbitrary localized destruction can boost employment and that this is a good thing.

      Many people might be poorer or whatever, but this is simply not our concern. We are only concerned with certain arbitrary statistics of our own choosing. GDP, unemployment, CPI, consumer spending, and other aggregates are our main focus. We don’t give a damn about those pesky demonstrated preferences or the psychic profits that people derive from wealth and prosperity. Free time, hobbies, vacations with family are hard to measure and aren’t headline statistics that those of us in government and ivory towers take seriously. So we choose not to focus too much on them, for if we did, we might find that an increase in the various statistics don’t lead to an increase in what the individuals in society value most.

        • Blackadder says:

          The Krugman quote is a fake.

      • Daniel Kuehn says:

        re: “According to standard Keynesian theory, if all vestiges of civilization were destroyed, this would be a good thing because all able bodied men and women would have to expend labor to help rebuild.” (emphasis mine)

        You are completely clueless, Edward.

        Bob Murphy – if you see this comment – this is precisely what I’m talking about.

        • Edward King says:

          You are the one who is clueless. Did you not see the link to what Krugman said. I didn’t make that up. Krugman is a Keynesian. He said greater destruction in the earthquake what have some positive benefit on economic affairs. How can you even deny this?

          You want to tell me I am clueless for pointing out how this man and others like yourself don’t even give a thought to how your ideas impoverish individuals and society as a whole, and you have the gall to call me clueless. Bob Murphy-if you see the above comment-this is precisely what you and I are up against.

          • Daniel Kuehn says:

            re: “and others like yourself don’t even give a thought to how your ideas impoverish individuals and society as a whole”

            Excuse me? Don’t ever talk to me like that Edward.

            • Edward King says:

              Why? You started with the name calling. You called me clueless and didn’t even acknowledge any of my other comments. Now you want to act like your offended when I point to how your ideas have negative consequences.

              You have yet to respond to the links about Krugman above which proves my point exactly. I posted those to show that I was not putting up a straw man in my first comment. I posted those links as proof that Keynesians advocate death and destruction.

              I have yet to see you condemn Paul Krugman for what he said. You only sought to defame me. Until such a time as you show your own contempt for the words of Paul Krugman and his cries for greater destruction of civilization, I can only think that you support his ideas.

          • Daniel Kuehn says:

            You didn’t say initially that Krugman said there could be a positive benefit to destruction. What you said was that he thought or the theory said “this would be a good thing” (YOUR words) and that people being poorer is “simply not our concern”

            Don’t weasel your way out of it by subsequently pointing out what Krugman actually said – that there are some benefits – as if that was what you said in the first place. Don’t weasel out of your initial claims and in the process accuse me of not caring about impoverished individuals. For Christ’s sake even when I raise concerns about the other side I don’t make idiot attacks like that. I’ve never once accused Bob Murphy or you or Russ Roberts of not caring about the people who I think their ideas may inadvertantly hurt.

            • Edward King says:

              I wrote the the following: ” Now having said that, the typical Keynesian response will be we don’t advocate the complete destruction of the vestiges of civilization, only the arbitrary small scale destruction of civilization. Sure we acknowledge that if all buildings and tools and etc. were razed to the ground, we would have full employment, but this is not what we mean. We mean that arbitrary localized destruction can boost employment and that this is a good thing.” What part of this isn’t explained in the Krugman quote? In the Krugman quote did he ever acknowledge that people might have died should greater destruction have actually happened. No. He said matter of factly that greater destruction would have been positive for the economy.

              Once again I didn’t make this up. I have seen this idea that destruction and war and useless money printing can result in good things for the economy on many occasions. I am not the only one. If you do not acknowledge that destruction, war, money printing impoverish people, what other conclusion can I draw.

              The difference between Austrians and Keynesians is that Austrians do not advocate destructive policies. As I stated before, we only want an environment in which individuals choose what is best for them. That is the difference. Austrians are not about trying to socially engineer outcomes.

          • Gene Callahan says:

            IT’S A FAKE QUOTE, EDWARD.

      • Scott says:

        Thanks Edward. It also makes me wonder — is our economy actually perhaps many times larger than we think it is? Maybe the invisible activities actually swamp out the visible ones?

        Who knows what kinds of stuff we’re missing?

      • Gene Callahan says:

        “To those who promote the free-market this is the only thing that matters.”

        A bold confession of monomania.

        • Joseph Fetz says:

          Gene, is there some other purpose to economy (other than the best satisfaction of the consumer) that we aren’t aware of?

          • Gene Callahan says:

            There is much more to life than the best satisfaction of consumers.

            • Joseph Fetz says:

              Can that be said without making a value judgement?

            • Silas Barta says:

              No, Gene_Callahan is right: sometimes, it’s more important for, say, nominal GDP to go up 5%, or for people to be employed digging and refilling holes, than for consumers to be more satisfied, which is exactly why the Keynesian remedies are so vital.

    • Tel says:

      If you get all the countries and rank them by GDP per person, you clearly see that having a higher GDP is broadly better than having a low GDP. However, you are right that a lot of economic activity is not captured, and that many types of leisure activity are also not captured. Also, GDP says nothing about distribution so high GDP can still leave the have-nots and politically marginalized groups badly off.

      I think the problem started when people started deciding that small improvements in GDP implied specifically better policy (looking at the narrow picture rather than the big picture). GDP is good as a generally indicative statistic, and nothing more than that.

      • Scott says:

        Yes. Maybe its better to just look at things qualitatively like that.

  5. Bob Roddis says:

    I’ve been waiting since May 2009 for a scintilla of evidence that Yglesias has any understanding of Austrian School thought. I must have posted 200 comments since then on his blog requesting such proof. It has not been forthcoming from either him or his vicious minions.

    Both Yglesias and DK should go to law school. They can split hairs into five strands that no one else can even find.

    I say let the Keynesians blab on. Average people need to understand what they are all about and that it is their “expert” advice that is driving our misery. Average people simply do not yet understand that inflation and unpayable debt are purposeful policy of the “experts” and not some mysterious force of nature.

  6. MamMoTh says:

    Bastiat is not assuming full employment, rather a lack of spare capacity of window makers.

    More importantly, and that is what makes it a fallacy or not depending on your behavioural assumptions, is that he is assuming the shopkeeper’s (net) savings desire will remain unchanged so spending on a new window means not spending on something else at the present.

    The pro-stimulus argument assumes this unfortunate event will make him spend more than otherwise, so he will buy the new window and new shoes, or book or whatever. And given the spending multiplier, which assumes the (net) saving desire of those whose windows were not broken remains unchanged, the shopkeeper’s extra spending will trigger additional spending, etc.

    • Zack A says:

      Why would you assume he has the funds for the new window, new shoes, book or “whatever else?” The idea is that he will have to make an economic choice about what he will purchase in light of the fact he has a broken window. He can’t simply just spend what he would have, then spend the extra for the new window, thus constituting the “stimulus.” No, the funding has to come from somewhere in the sense that his prior production can fund a limited number of activities and having a broken window that will need fixing will simply undermine his ability to purchase other goods and services.

      Basically, he merely diverts spending from one sector to another; there is no net “gain” to the economy. Further, the “employment” that would come about from the alleged broken window would also draw labor away from other sectors that are probably producing goods and services that are in tune with consumer demand. Drawing resources away from profitable activities to rebuild things that were destroyed undermines economic growth, “idle” resources or not.

      No matter how you look at it, breaking things and rebuilding them hurts the individual who has the broken item, and the economy as a whole regardless of whether it supports “employment.” For me, there is no net economic gain from destroying anything. Period, no matter how you feel about “crowding out” during a period of “idle resources.”

      Interesting to see an MMT’er trying to grapple with the broken window fallacy.

      • MamMoTh says:

        Why would you assume he hasn’t the funds, especially at a time when he, like pretty much everybody else, is spending much less than his income?

        All I am saying is that there are different assumptions about the spending behaviour of consumers behind the so called broken window fallacy. (and no Keynesian really advocates we should start smashing windows to restart the economy) .

        I am really surprised you Austrians can’t even see that.

        • Zack A says:

          If he has to blow his wad now, and spend his hard earned savings because one of his possessions is now broken, he has less funds to spend in the future to purchase other goods and services. He is that much poorer and the economy is no better position than it was before.

          Regardless of his spending behavior, no net economic gain is provided when things are broken or destroyed. It is not “simulative” to the economy nor does it support any sort of productive employment. If he spends more in the near term because he has been saving and now has a broken to fix, he has less to spend or invest in the future. Still, no free lunch. Sorry.

          • MamMoTh says:

            When the window is broken the shopkeeper goes to his piggy bank, takes the money out, and buys a new window without changing his spending otherwise.

            The window repairman fixes the new window and decides to buy with his extra income something from the shopkeeper that he wouldn’t have bought without this extra income.

            It is all about what kind of assumptions one makes about the net saving / spending behaviour of participants.

          • Eric Hosemann says:

            “Why would you assume he has the funds for the new window, new shoes, book or ‘whatever else?’”

            He bought the new window, didn’t he?

  7. MamMoTh says:

    And watch out for an alien invasion. A hot green girl I recently met told me they are about to invade us as part of their stimulus program.

    • Bob Roddis says:

      This isn’t that complicated. Average people can understand this.

      http://www.flickr.com/photos/bob_roddis/4163003939/in/set-72157600951970959

      • Gene Callahan says:

        Well, from the cartoon, it is clear that you don’t understand it, so where is the evidence that average people can?

      • Daniel Kuehn says:

        What one person spends is not income to that person.

        What an economy spends is income to that economy.

        Macro is different from micro, as much as people want to insist it’s not.

  8. Yancey Ward says:

    Well, you can always save the window, take the shopkeeper’s money, and pay someone to read Matthew Yglesias all day long. Was this useful economic activity? Was wealth increased, or was it just redistributed? Can any Keynesian tell me the difference betwee the window intact and the window broken?

    • MamMoTh says:

      No difference, the reader will end up breaking Yglesias’ window. What’s his address?

  9. David S. says:

    Before you talk about correcting anyone, especially Keynesians who’ve been far more correct in their predictions than you, you might want to actually demonstrate you have an economic model that works. At least you keep me laughing. lmao

  10. Ivan Georgiev says:

    Oh, please, there is NO WAY to logically escape the reasoning of Bastiat’s “broken window fallacy”. Everyone who says the opposite IS wrong. And everyone who continually says that death and destruction are good is an IDIOT. How pathetic do you have to be to defend a theory that is
    a) on its face “wrong”, that is, there is no way an intelligent guy could possibly think disasters are good; maybe an intelligent and sadistic guy could think disaster are good BEFORE deeply comprehending the theory
    b) 100% absolutely wrong, so an intelligent guy who fails to understand it is actually not that intelligent

    • Tel says:

      And everyone who continually says that death and destruction are good is an IDIOT.

      I know this blog has a deeply Christian base, but there’s a famous Zen Buddhist quote which I’m cutting and pasting out of this website…

      http://sped2work.tripod.com/AllThingsZen.html

      Thirty years ago, before I began the study of Zen, I said, ‘Mountains are mountains, waters are waters.’ After I got insight into the truth of Zen through the instructions of a good master, I said, ‘Mountains are not mountains, waters are not waters.’ But now, having attained the abode of final rest, (that is, Enlightenment) I say, ‘Mountains are really mountains, waters are really waters.’

      It’s funny how you can put a lot of study into something to finally come to the conclusion that obvious folk wisdom really does make sense.

    • MamMoTh says:

      There is a lot of old infrastructure that needs to be destroyed in order to be replaced.

  11. AP Lerner says:

    But Mr. Murphy, in this post, http://consultingbyrpm.com/blog/2011/03/two-questions-on-japan.html, when you say:

    “The only flaw in my brilliant plan was that (apparently) the nominal GDP of Haiti went way up after the earthquake, and even the Gross State Product of Louisiana went up after Katrina.”

    aren’t you acknowledging at least some belief in the broken glass fallacy? Is this a Murphy Kontradiction?

    • bobmurphy says:

      AP, well, at worst I am in that post saying, “What the heck is going on here? I thought the broken glass thing was a fallacy, but these data suggest otherwise at face value.”

      I’m not (in the present post) saying Bastiat is right or wrong. I’m saying modern anti-Keynesians have every right to cite him when attacking Krugman, because Krugman is saying the exact same thing as the hypothetical crowd looking at the broken window in Bastiat’s fable. If the modern anti-Keynesians like Russ Roberts or Steve Horwitz are wrong in attacking Krugman, then so was Bastiat for criticizing the crowd. The people in the crowd were right and Bastiat was wrong (at least if there were a liquidity trap when the kid broke the window).

      So, Daniel and Yglesias should stop lecturing people about what Bastiat really meant. He meant exactly what Roberts and Horwitz are claiming he meant. Maybe he was wrong, but they’re accurately reproducing his argument.

      (As far as Haiti and LA: That might be due to outsiders coming in. I’m not sure that US GDP was higher because of Katrina, or that world GDP was higher because of Haiti’s earthquake.)

      • Robert Fellner says:

        Bob,

        Why are you using GDP to measure wealth? I mean I’m very surprised to see that you are questioning the validity of Bastiat’s broken window fallacy, because of data points like GDP. It seems like everyone agrees that at best, GDP, is a very rough measure of a nation’s economy that is riddled with intrinsic flaws (doesn’t it count government spending as being equal to private) but then after pointing out how terrible of an indicator GDP is, everyone goes right back to using it in their analysis. What am I missing here?

  12. Daniel Kuehn says:

    It comes down to this.

    Bastiat makes one distinction and two points.

    - The distinction is between stocks and flows. A lot of the general public don’t understand the implications of this distinction and a lot of economists get sloppy about it, but all economists basically understand if they think through it carefully. A lot of the criticism of Keynesians using Bastiat is simply being sloppy about this distinction, which Bastiat and Keynesians make.

    - The first point Bastiat makes is that resource use has an opportunity cost. Every economist I’ve ever met agrees about this, but opportunity costs are very hard for non-economists to grasp the significance of. One of the greatest tasks of an intro economics professor, I think, is imparting the idea of opportunity costs to the two thirds of the students who will never take economics again. A lot of the criticism of Keynesians using Bastiat is assuming Keynesians are somehow unaware of the concept of opportunity cost.

    - The second point Bastiat makes is that there is crowding out. I hadn’t realized he made this point so strongly until you pointed it out, even though I’ve read the piece several times before. I appreciate you pointing this out. There’s a lot of disagreement over this question. Rarely do you hear criicisms of Keynesianism work out why they think Keynesians are wrong on the crowding out point. You often just hear unjustified assertions like “every dollar the government spends is a dollar the private sector can’t spend” with no understanding that there is no necessary reason why this is true all the time.

    • Daniel Kuehn says:

      Anyway, the point is if you think people flinging Bastiat at Krugman are typically making careful arguments about the extent of crowding out, I think you’re wrong. More often than not they’re either thinking (1.) he’s saying destroying things is good and is a benefit on net – missing Bastiat’s distinction and putting words in our mouth, or (2.) saying Krugman doesn’t understand opportunity cost.

      Trust me, if everyone were just arguing over the theoretical and empirical merits of their preferred multiplier – if this were akin to an extended argument between Christina Romer and Robert Barro – I would be thrilled.

      • Yancey Ward says:

        I ask again:

        Well, you can always save the window, take the shopkeeper’s money, and pay someone to read Matthew Yglesias all day long (or just sit on the deck and watch the grass grow). Was this useful economic activity? Was wealth increased, or was it just redistributed? Can any Keynesian tell me the difference between the cases of the window intact and the window broken?

        • Daniel Kuehn says:

          Oh was that to me? Obviously that’s redistribution… I guess no wealth was technically destroyed there. Reading Yglesias isn’t the least useful thing I could think of, but clearly it’s less useful than whatever the shopkeeper was going to do with the money. What’s the point of this? What is this meant to illustrate?

          • Yancey Ward says:

            but clearly it’s less useful than whatever the shopkeeper was going to do with the money.

            Why is it “less useful”? What does “less useful” mean to you?

            I am assuming, of course, that you mean it was less useful in both cases I described.

          • Yancey Ward says:

            And, I will note that you really didn’t answer my main question which was:

            What is the difference between the scenario with the window intact, and the scenario with it broken?

    • Silas Barta says:

      Along with what Yancey_Ward said, the problem with your argument is that any use of money (or resources, it doesn’t matter here) could have been applied to making something new rather than bringing yourself back to square one. So you’re still better off not breaking windows and employing X units of glazier labor than reducing society’s welath by one window and employing X units of glazier labor.

      Now, if your point is that there are situations where the alternative to

      “paying a glazier to fix a broken window”

      is not

      “paying a glazier to make a window on a new building”

      but instead

      “glazier (and everyone else) does nothing”

      then you might have a point. But you need to explain why the choice set really is constrained this way, not just quietly assume it.

      But even if we granted you that, it still wouldn’t prove that breaking the window is better than, say, paying the glazier a welfare check out of the taxpayers’ funds.

      Generally speaking, employment to produce useful things is better than employment to produce non-useful things — and they sure as heck should not be counted as equally good for purposes of judging policy.

      • Daniel Kuehn says:

        re: “So you’re still better off not breaking windows and employing X units of glazier labor than reducing society’s welath by one window and employing X units of glazier labor.”

        Right – I’ve never argued otherwise Silas.

        re: “But you need to explain why the choice set really is constrained this way, not just quietly assume it.”

        Who’s quietly assuming anything? This has been hotly debated for three years now. I’ve been saying that the the point of crowding out is the essential question!

        re: “Generally speaking, employment to produce useful things is better than employment to produce non-useful things — and they sure as heck should not be counted as equally good for purposes of judging policy.”

        I 100% argee. Why did you lead this comment with the line “the problem with your argument”???

        • Silas Barta says:

          re: “So you’re still better off not breaking windows and employing X units of glazier labor than reducing society’s welath by one window and employing X units of glazier labor.”

          Right – I’ve never argued otherwise Silas.

          If you agree, then you haven’t incorporated this agreement into your definition of economic growth. The breaking of the window is an economic contraction, and the employment of the glazier simply undoes it. Therefore, as judged from the standpoint of before the breakage — and per any useful definition of economic growth — breaking the window did not cause economic growth.

          Who’s quietly assuming anything? This has been hotly debated for three years now. I’ve been saying that the the point of crowding out is the essential question!

          So where have you shown that we don’t have the option to just make a transfer payment without debasing our stock of wealth (such as we have in unbroken windows)?

          re: “Generally speaking, employment to produce useful things is better than employment to produce non-useful things — and they sure as heck should not be counted as equally good for purposes of judging policy.”

          I 100% argee.

          No, you don’t, because you assign a positive value to the goodness of employing the glazier to fix a broken window. In reality, avoidable labor should be counted as worthless for purposes of judging policy — else you could show, as Yglesias does, that breaking windows or shoplifing can improve our economic condition in any meaningful, non-trivial sense.

        • Silas Barta says:

          Oops, some goofs on the html, it should be clear though what I’m quoting and what I replied with.

          • bobmurphy says:

            Fixed it, Silas. Also, let me show Daniel that I am trying to see his side on this: In reference to your above comment, Silas, Daniel will get exasperated and think you are not understanding what he means about the difference between wealth and employment. Silas, you said that breaking a window and then having the glazier repair it wouldn’t constitute economic growth.

            However, when Daniel talks about economic growth, he means GDP. So if “the economy” produces one more window pane this year because of the mischievous boy, than would otherwise be the case (i.e. GDP is higher), then Daniel would say the boy actually did boost the flow of output.

            However, that is not the same thing as saying the boy made us richer.

            (It’s perhaps an unfortunate terminology, because “growth” suggests that there is a positive delta in wealth, with GDP being the flow. In that commonsense usage, then you’re right Silas, we haven’t “grown” at all by treading water and keeping our wealth the same–plus missing out on the glazier’s leisure. But I’m just clarifying what Daniel’s position is.)

            • Daniel Kuehn says:

              This is exactly what I’m saying, thanks Bob.

              And – to restate what Yglesias and Krugman have both said – this is why we can make observations about the consequences of WWII during the Depression or of 9-11 during a tech bust without arguing that it’s a “good thing” for the economy, and without arguing that it’s a “good thing” for society.

              This is my point, Bob. I know you get it. I know the point of THIS post was to show that actually Bastiat got specific on crowding out too.

              But you have a better grasp of the positions being held and a fairer grasp of the positions being held, and a less outrageous understanding of other peoples’ intentions than 99% of the people on “your side”.

              • Robert Fellner says:

                DK,

                This is exactly what I’m saying, thanks Bob.

                I agree with your compliments of Dr, Murphy completely. In fact his endorsement of you, is why I try and read your blog and understand where you are coming from. If you could reply to my comment below where I essentially ask, “if it is understand that ‘economic growth’ is defined such that it does not mean an increase in wealth or improved well-being for the people comprising said economy, why do we care about it at all?” I’d appreciate it!

              • Silas Barta says:

                Alright, then we are in much greater agreement than I thought, but this still leaves the significant issue of how to define “growth”.

                If you’re equating growth with GDP, and saying thus there’s growth because GDP goes up when the glazier does his work, then you’ve lost sight of the reason for the metric, and should immediately stop and recognize is inapplicability. Because in cases like this, GDP is no longer reflecting something we want more of — because we _don’t_ want more of “breaking stuff to make work”.

                So even if you take the “reasonable” position that, “hey, I’m not saying it’s _good_, I’m just saying it would mean _growth_ and _employment_”, you’re still suffering from a confusion in failing to recognize where metrics deviate from their intended purpose.

                And this confusion is very clearly present in debates when Keynesians, when they reveal that the kind of “growth” and “employment” they are happy with is isomorphic to this kind of fake “broken window” growth, and this thread is the first time I’ve seen them reveal understanding of the distinction.

                (For example, they advocate policies that would make people — who were perfectly content to just hold on to their cash — go out and spend it on stuff that, the absence of this jawboning, wouldn’t want to purchase. This is just like breaking windows to give people something to do, and Keynesians *do* regard this as good, as do Sumner types.)

                So pardon me if I can’t sympathize with Daniel_Kuehn’s exasperation, when it still forces me to hold his hand back to the grounding issues of why we use certain metrics. Because I can guarantee that induces a lot more exasperation for me.

              • dogmai says:

                This conversation neatly demonstrates what economists of the Austrian perspective have known for DECADES.

                That the entire Keynesian economic apparatus is a castle built upon a cloud, floating in the sky and totally irrelevant to the purpose of economics as a study of identifying what people do when they decide to economize their time in regards to the actions of production and trade.

                Alien invasions! Indeed!

              • Eric Hosemann says:

                Clothing manufacturers in the Soviet Union produced hundreds of thousands of pairs of jogging shorts and ill-fitting denim slacks that no-one wanted. Was this growth?

            • Robert Fellner says:

              However, when Daniel talks about economic growth, he means GDP. So if “the economy” produces one more window pane this year because of the mischievous boy, than would otherwise be the case (i.e. GDP is higher), then Daniel would say the boy actually did boost the flow of output.

              However, that is not the same thing as saying the boy made us richer.

              So why are we so obsessed with GDP?! And I think the above definition of “economic growth” is more than just unfortunate, its entirely inaccurate.

              I really don’t get this. I thought economics was about the study of people making decisions and dealing with scarcity via division of labor etc. Instead it seems like well sure that world is made poorer, but in our fictionalized “economy” increasing spending is a sign of growth. We even have a statistic called GDP that goes up when spending does, so all we need to focus on is increasing GDP because that represents “economic growth”. But that doesn’t mean anyone is actually better off! So why is this our goal?!

              • Silas Barta says:

                Thanks, Robert_Fellner, in this and your nearby comment you’re expressing exactly what I’m worried about in clumsy uses of the concept of “economic growth”.

              • Zack A says:

                Right, that’s what I don’t get here. How can a Keynesian say, “hey! I’m not saying breaking things is a good thing per se, but rebuilding broken windows can pump up GDP and employment statistics! “Don’t we care primarily about real economic growth and productive employment, not just GDP and employment statistics? How can pointing to statistics somehow salvage your argument?

                GDP can be very high and unemployment can be very low in an economy with slow and anemic growth where conditions are generally depressed. WWII is an example for the former and the Soviet Union can be an example of the latter. Sometimes it seems like Keynesians only care about if resources are employment and not take into consideration how and where they are employed.

                Anyway you look at it; there is no net economic gain in breaking windows or destroying thing regardless of what the GDP or unemployment numbers are. Breaking windows is equally destructive during a recession or a period of idle resources. I don’t see how anyone can, with a straight face, try to argue positive net economic gains can be made from destroying things. Again, the statistics here shouldn’t’ be the primary concern and surely can’t salvage any argument trying to downplay the significance of Bastiat.

              • Daniel Kuehn says:

                I’ve been spending too much time on this today (even though it’s my second to last day of work – so it’s not like things are that busy). But this is a good point, and I’m going to try to blog on it tomorrow morning.

              • Silas Barta says:

                I’m glad you’re going to address it after I scream it at you seven times and four other commenters make the same point! It shows you can actually engage the other side.

              • Daniel Kuehn says:

                Silas I’ve been answering your questions repeatedly. This seems somewhat different.

              • Silas Barta says:

                No, my point and Robert_Fellner’s point are both, “hey, your measures of growth don’t reflect the growth we want, so why should we care about them?”

                That’s what I objected to about the broken windows stuff: yes, GDP goes up — but no person with an IQ above yours wants that kind of “growth”!

              • MamMoTh says:

                no person with an IQ above yours wants that kind of “growth”!

                how would you know?

              • Robert Fellner says:

                I don’t know why I can’t reply to the comment I want to but this is in reply to Daniel writing:

                “I’ve been spending too much time on this today (even though it’s my second to last day of work – so it’s not like things are that busy). But this is a good point, and I’m going to try to blog on it tomorrow morning.”

                To me its more than a good point, its the entire point of economics. I see so much dialogue back on forth on these blogs that amount to quibbling over people using savings vs investment in different ways or other technical arguments. While those things definitely have their place, it seems ludicrous to devote so much focus and energy to that, if we have lost sight of the fundamental reason we study economics, namely to improve the lot of ourselves and those around us.

                So this is a very serious point to address. Not that it justifies it, but this is also explains why some free-market guys are so hostile towards Keynesianism. We genuinely believe you guys have become so lost in the mist of your animal spirits and paradoxes of thrift, you forgot what the whole point of this thing is, and inadvertently are advocating destructive policies as long as it increases the almighty GDP.

                Ironically I wrote an entire blog post, in which I thought I made an original insight showing why GDP is an inherently flawed metric to measure a nation’s prosperity. I showed it around to people, even those who are diametrically opposed to the free-market view, and the overwhelming response I got was, “ya everyone knows that.”

                Having said that, I’m looking forward to your blog post tomorrow addressing the issue Silas and I have been trying to get answered here.

              • Daniel Kuehn says:

                Right, GDP is absolutely not a measure of prosperity. It’s a measure of expenditure and a measure of income.

                Now – is real GDP per capita better than nothing as a comment on prosperity? It’s probably better than nothing. But it’s hard to do any meaningful theorizing about that.

                You can do meaningful theorizing about income and expenditures.

              • MamMoTh says:

                It’s a measure of expenditure and a measure of income.

                For newly produced goods and services.

                That is why real GDP growth is a good proxy for real economic growth.

              • Silas Barta says:

                For the third+ time, Daniel_Kuehn, yes, GDP is a good *general* measure, but people with a genuine understanding of economics (please work toward that) are capable of recognizing when a metric doesn’t work for it’s intended purpose, and then they — guess what? — don’t apply it in that case!!! Capital idea, don’t you think?

                If you know nothing else about an economic situation but GDP, yes, it’s informative. But when you find out that a sudden spike in GDP simply reflected people going to work to fix earthquake damage, then you should say what I said in your comments section:

                “Yes, in the wake of an earthquake, you will see GDP numbers go up, but relative to the pre-quate situation this does not actually represent growth in the sense most of us care about — it’s just going to replace lost wealth. Certainly it’s better to rebuild, *given* the earthquake, but the fact that we have to marshal resources this way is not some kind of blessing, nor would it have been an improvement for the earthquake to have been worse.”

                If you are a lazy economist with only superficial understanding of what goes on in an economy and what we want more of, you’ll say something more asinine like, “Yep, GDP’s up, so the earthquake caused some needed economic growth, given the recession and all. Case closed.” And then collect a Nobel.

              • Robert Fellner says:

                I echo Silas’ frustration. I’m pretty underwhelmed by your response DK.

              • MikeM says:

                It seems to me that the Keynesians just promote growth for the sake of growth itself. Whether or not the growth is beneficial is a different story. If they admit that “ok, its not necessarily a good thing… but it does increase GDP” why is growth something that we should strive for and implement policies to attain if its not necessarily a “good” thing? after all, cancer is growth, but we’ed all be better off without it.

              • Silas Barta says:

                But didn’t you hear, Robert_Fellner? Daniel_Kuehn said that your and my criticisms are ~totally~ different!

    • Eric Hosemann says:

      Keynesians understand opportunity cost as well as anyone else–they just think other people’s opportunity costs are a waste of time & money.

  13. Paul says:

    Bob,

    I’m curious to get your take on this. It seems to me that there is a fundamental difference between Austrians and Keynesians (I know I know obvious statement made). However, it almost seems like there are two completely different goals which is why there is never any agreement. It seems to me that Keynesians focus on increasing wealth/improving the economy as always being preferable to the alternative whereas Austrians seem to take the view that any increase in wealth has to be compared to what the wealth was yesterday. To me this can sound very similar, but it can illustrate why destruction can be spun as a good thing.

    I think that it is an undisputable fact that after the earthquake hit Japan the economy will improve and wealth will increase and it is a good thing that this happens, for if economies never improved post destruction disputes the fact that economies can improve alltogether. Austrians may try to dispute this, but it is really not necessary to do so. The question is are the Japanese better off or worse off because of the earthquake. Of course you can spur economic activity with destruction, but the instantanious act of destruction doesn’t improve the economy, but rather sets it back, and an Austrian will say that any undesired setback is a bad thing.

    I guess the point I’m getting at is that Keynesians like to use numbers and stats and as long as those numbers are increasing where they want to them to increase then they have succeeded, but Austrians will refer to standard of living which cannot be measued. We cannot and should not deny an improving economy, but should ask are we better off. To use a horrible analogy, if there is a ladder a Keynesian will say that as long as we’re climbing it is a good thing, and an Austrian will say that the higher we are on the ladder the better, so if a Keynesian stops climbing we can kick him off the ladder and it is a good thing because he can simply get back on and climb again. It may be the fault of my analogy, but if a Keynesian says that we can improve via destruction then does that imply that there is a maximum amount of improvement that is even possible?

    Is the standard of living improving after the earthquake? Yes it is. Is the standard of living the moment after the earthquake better than it was the moment before? No it isn’t. The second question is the Austrians and the first is the Keynesians. To have any meaningful debate shouldn’t we be at least debating the same question?

  14. Ivan Georgiev says:

    So, the crowding out effect not always manifests because there are cases in which the government can employ an idle resource, that is, if the government did not utilize it it would have been “left staying unproductive”? Please read Hutt’s Theory of idle resources.

    • Paul says:

      Is there any real difference between doing nothing productive and doing something unproductive? I’d say that the latter is worse.

  15. Martin says:

    Bob, I don’t understand are you arguing that every time private savings exceeds private investment (% of GDP), this is solely due to crowding out? http://research.stlouisfed.org/fredgraph.png?g=1M3

    That is are you arguing or agreeing with that every time savings > investment this is ’caused’ by government borrowing? And that never, government borrowing is caused by savings > investment?

  16. david nh says:

    Sigh.

    A window is part of the capital stock. Any part of the capital stock that is destroyed other than through the voluntary efforts of the owner of the capital reduces, by definition, the stock of economically viable capital. The production possibilities frontier shifts in from where it would otherwise would have been given planned savings behaviour. Seems like a bad thing regardless of whether you are operating on the frontier or not because of course it removes the possibility of operating at the frontier in the near term (i.e., if you were to correct policies that were causing the economy to operate well inside the frontier) and compromises its path over time.

    Discussions about whether there is “crowding out” are really about the discoordinating effects of monetary disequilibrium in the form of excess demand for money. If we are operating inside the frontier due to excess demand for money, can we rely on breaking windows to move us out to the frontier? If we simply reallocate our investment expenditures from previously planned investment to window replacement, then we stay where we are (and so does the new frontier). We can get the frontier back to where it would have been absent the window breakage only if we boost planned investment by the amount of the window. That can happen only if we increase savings at the expense of previously planned consumption (uh-oh, don’t like the sound of that) or reallocate savings from excess portfolio holdings of money, if any, into productive investment. But how likely is the latter if the policies which created the excess demand for money continue to exist, particularly where that excess demand for money is the flip side (as it often is) of reduced real investment?

    Furthermore, hands up everyone who believes that misfortune and turmoil, whether in the form of vandalism (e.g., UK) or natural disasters, tends to reduce demand for money? (Of course, in times of wars or alien attacks, the government can force reductions in money balances by simply taking people’s money but of course in those cases, the whole purpose of the enterprise is to move in the production possibilities frontier in not out whether through directing the expenditure to destructive capabilities rather than productive or through directing the expenditures according to policy makers’ preferences rather than consumers’.)

    • Martin says:

      Whether you spend and tax later or force someone to spend by destruction, that is essentially the same. The question though is, is government always the cause of private savings exceeding investment? This seems to be Bastiat’s argument.

      • david nh says:

        ” is government always the cause of private savings exceeding investment?”

        Well…

        1) To say that private savings exceeds investment is another way saying there is monetary disequilibrium. In the presence of central banking, the government is responsible for maintaining monetary equilibrium. The presence of monetary disequilibrium implies central banking error.

        2) Voluntary action is equilibrating or coordinating. Persistent discoordination implies the presence of barriers to voluntary behaviour (i.e., government).

        3) The only entity that, virtually overnight and in a discontinuous, unpredictable fashion, can alter property rights and therefore the risks and returns of investments in many sectors of the economy simultaneously is government. Behold regime uncertainty.

        • Martin says:

          1) And I don’t disagree. The central bank should fix the error, by making up for the shortage it has created. Counter-question: what if the central bank is unwilling or incapable? How is equilibrium restored then?

          2) Is voluntary action coordinating / equilibrating in the presence of a money disequilibrium? And if so, is the new equilibrium desirable, or is there a more desirable equilibrium possible?

          3) I am not too sure about that. Is this still true in case of an alien invasion ;) ?

          • david nh says:

            ” what if the central bank is unwilling or incapable? How is equilibrium restored then?”

            My view is that it’s always incapable, even when they are willing which I would imagine is most of the time. However, I don’t see why we would expect the fiscal authorities to be endowed with special knowledge and expertise that central bankers are lacking. My solution: free banking.

            ” Is voluntary action coordinating / equilibrating in the presence of a money disequilibrium? And if so, is the new equilibrium desirable, or is there a more desirable equilibrium possible?”

            Yes, voluntary action is coordinating / equilibrating in the presence of a money disequilibrium, it’s just that we have to redo some of the coordination because the nominal equilibrium has been moved by virtue of the monetary disequilibrium. I think the benefit of maintaining monetary equilibrium is that it economizes on the need for coordination. Requiring re-coordination also implies another round of trial and error and potential real effects so you may end up somewhere different than where you might have absent the monetary disequilibrium, particularly when you’ve got the central bank and fiscal authorities in there continuing to lurch about .

            • Martin says:

              And I don’t disagree about free banking, I am certainly sympathetic to the option. However at present this is not an option.

              Do I understand you correctly when I say that according to you fiscal stimulus could work to restore equilibrium were it not for the information constraint?

              What if however the stimulus was provided through tax cuts? What if those tax cuts would be aimed at those people that are most likely to spend the money? If you agree with the first and disagree with the second why?

              If you agree with both the first and the second, what is the difference between making people buy a pen and fill out an application to get the tax cut? What is the difference between that and making those people do more work before they receive any money?

              Note that all of the above are the result of deficit spending financed through the sale of bonds and the promise of future taxes.

              Note also that the result of deficit spending is that people get to hold dollar bills and those buying bonds, promises of dollar bills in the future.

              And since we both agree that the voluntary action is coordinating and efficient, those people valuing those dollar bills most will get those dollar bills in their hands in exchange for goods.

              Why doesn’t it solve the monetary disequilibrium again?

              • david nh says:

                My feeling at present is that the excess demand for money is being sustained by fiscal policy and regime uncertainty (as per Robert Higgs) which have, by polluting market signals, impeding market adjustments and raising government-related risk, undermined the business case for immediate productive investment and encouraged entrepreneurs to await the time when they can have more confidence in market data and their own expectations.

                According to this logic, fiscal policy may not just be ineffective, but actually a negative force which undermines, and potentially neutralizes, expansionary monetary policy, particularly where some restructuring in the economy is required, by raising the demand for money.

                If this is correct, there may well be a liquidity trap, but one induced by government intervention not by monetary error per se (even though the initial bust in the fall of 2008 or, for those of Austrian inclination, the boom as well as the bust, were most probably caused by monetary error). I am not sure whether it can be overcome by expansionary monetary policy.

              • Martin says:

                “My feeling at present is that the excess demand for money is being sustained by fiscal policy and regime uncertainty”

                I don’t see how fiscal policy in itself can have created an excess demand for money. All fiscal policy does now – assuming no crowding out – is swapping dollar savings for bonds and then spending those dollars. This instead of investment swapping dollars for corporate bonds and then spending this on investment purchases.

                Regime uncertainty, is a possibility, but what do you think makes an entrepreneur less likely to invest? Is it that people demand money instead of his products or is it that people demand his products, but he does not know how much providing his products in the future will cost?

                This graph seems to favour the former (Household debt/GDP):
                http://research.stlouisfed.org/fredgraph.png?g=1LV

                Where is the spending going to come from, especially when people prefer to hold cash instead of employ other people?

  17. Tyler Watts says:

    Daniel,

    Are you familiar with the Austrian tactic of denying the very concept of “idle resources?” This is how I deal with the crowding out argument:

    http://www.thefreemanonline.org/headline/the-canard-of-underutilized-resources/

    • Martin says:

      Tyler,

      suppose the entire stock of money gets wiped out. Rational economic calculation is now impossible on the scale that it was previously practiced. Are you going to argue that this has no implications whatsoever for the utilization of resources? Or are you going to argue that given the circumstances the resources are utilized 100%, making any reference to utilization meaningless.

      Now imagine that the following day the stock of money is miraculously restored. Are you going to argue that the introduction of money is not an improvement over the previous situation?

  18. david nh says:

    Let’s see:

    a) First they ignore you,

    b) then they laugh at you,

    c) then they fight you,

    d) then you win.

    I think Austrians are transitioning somewhere between b) and c). When the left feels compelled to take on Bastiat in order to defend Krugman from a Twitter/web piling-on, you know you have them on the run.

    • Martin says:

      “The left”

      Because disagreement has to be ideological? I thought austrian economics was wertfrei.

      • david nh says:

        Doesn’t mean their philosophical adversaries are.

        • Martin says:

          It seems to me that causation – if ‘austrians’ are to be believed – always runs from ideology to economics for non-Austrians, and from economics to ideology for Austrians.

          Ergo disagreement is always ideological.

          • david nh says:

            It seems to me that I recall Keynesian types referring to themselves as being on the left or being liberals, progressives, etc. They and their ilk certainly have referred to free market economists as being on the right or being “extremist”. The implication of much such commentary is that the progressives occupy the only middle ground.

            • Martin says:

              Generally economists are right of center: views range from pro-market to (virtually) no government.

              You will find people with a (New-)Keynesian persuasion all over the spectrum. Keynes himself was not exactly left-wing. And he advocated deficit spending in crisis, but a balanced budget over the business cycle, that means surpluses in the good times.

              Under Clinton, Keynesians also advocated a reduction of the deficit as it was a drag on economic growth.

              • david nh says:

                ” Generally economists are right of center”.

                I used to think that as well when I was young and innocent. I have come to view economics as essentially an interventionist discipline. Perhaps the problem is with the terms right and left – there is such a thing as the “statist right.”

                In any case, many of those with whom Bob is arguing would not describe themselves as being on the “right”.

                Finally, here’s one of my favourite quotes on this topic. It’s what (respected monetarist and history of economic thought scholar) David Laidler had to say in a piece about free banking he did for the Bank of Canada (“Free Banking and the Bank of Canada”):

                “By the 1950s, developments in economics had created something close to an intellectual consensus, … according to which, rather than have a monetary system designed to limit the actions of government, its configuration should be such as to help the government pursue a wide range of undoubtedly worthy goals that electorates set for it. No policy apparatus that lacked a central bank, preferably working in close co-operation with other branches of government, seemed complete, and those who questioned this seemed to be either hopelessly unenlightened representatives of conservative political interests, or otherworldly
                intellectuals.”

                In other words, flushing free banking (and any discussion of it in the mainstream) down the memory hole was explicitly ideological – no economic “science” there. That certainly sounds to me like the presence of motives other than the pristine search for economic truth.

              • Martin says:

                If I am not mistaken, “statist” is a term used by Rothbardians to describe anyone who is not a Rothbardian. People such as Hayek, Friedman etc. have been called this.

                Regarding the Free Banking, I have no doubt that that is true, but that’s in the past.

                Keynesian analysis is used by economists such as Mankiw, Taylor etc, not exactly people who would support such policies now.

                Of course ideology will muddle such debates, but this does not mean that only one school (austrians) is immune to it.

              • david nh says:

                Oh, let’s play nice.

                Just as the term “libertarian” denotes someone who values no or limited government, the term “statist” usually denotes someone who values a large state. Such people do exist (and I am not talking about Hayek or Friedman).

                The word “statist”, like all sorts of words, is sometimes used unjustifiably. There’s also a continuum of statism, like almost everything else, and people on the continuum fight amongst themselves.

                Lots (and lots and lots) of people other than Rothbardians use the word “statist”. In fact, many people who I might consider to be statists call other pople statists.

                I am assuming that you are not denying there is such a thing a “big government” conservative?

    • MamMoTh says:

      MMTers are claiming exactly the same thing.

      Not that I want to spoil your self delusion.

      • david nh says:

        I don’t claim to be an Austrian just someone open to Austrian ideas.

        I haven’t been following the MMT thing, have Krugman and Yglesias been taking MMT on?

        • MamMoTh says:

          I don’t know about Yglesias, but Krugman has had a couple of blogs about MMT. And many MMTers have had exactly the same reaction as you…

          • david nh says:

            I always try to be optimistic.

  19. Martin says:

    @David nh

    “I am assuming that you are not denying there is such a thing a “big government” conservative?”

    Of course not, but I think terms such as big/small government and statists are silly and meaningless. Nobody wants government for government’s sake. No ones ethics, consequentialist or deontologists, have government as their end in mind.

    • Anonymous says:

      Are you kidding me? DKos had a post last week or so that was titled, “Government is the solution.” There is an entire main-stream political and sociological ideology (liberalism) that is rooted in the premise that Government is Good and society should rely on it to take care of all its ills.

      • Martin says:

        ‘Government is the solution’, is government as means, not as an end in itself. Liberalism (even its American variety), as I see it, is premised on the idea that knowledge should be used to improve the lot of mankind. Change the knowledge and you’ll change the solutions that those adhering to liberalism propose.

        The discussion is far too complex and far too interesting to dismiss people as ‘statists’.

  20. Bob Roddis says:

    If any non-Austrian has an interest in basic Austrian ideas, I would start with “The Essential Von Mises” here:

    http://mises.org/resources.aspx?Id=3081&html=1

    • MamMoTh says:

      There has to be something better than this piece of sycophantic crap?

      If you add the Mises worshipping to the gold fetishism, you don’t really expect to be taken seriously, do you?

  21. Boona says:

    >then OK fine. We can have that argument.

    And what would *that * argument be like?

  22. Tyler Watts says:

    Martin,

    Interesting thought experiment. Yes, having the money stock wiped out would hurt bad. But I think this misses my point on resource utilization. It’s not a matter of 100% vs. 80% utilization, but a relative matter of how well resource use is adapted to patterns and plans that will achieve maximum want-satisfaction. If there are 2 million unemployed construction workers, in a sense you could say this group of workers is being “utilized” as a reserve labor force. What I’m driving at is that when a housing bubble collapses, 2 million people who trained to be construction workers are now being poorly used in the economy relative to what could have been (i.e. had no boom occurred which drew in these now obviously “excess” workers).

    In my mind the Keynesians simply see unemployed workers and think, gee, if we could just pump up AD enough to get them back to work! But labor in a complex, developed economy is a specific good (like capital), and finding new uses is just not that simple.