The Broken Window Fallacy
At Mises.org today I start from Bastiat and go through this whole thing. However, after the preliminaries I take on the “idle resources” argument too. After all, doesn’t Gene Callahan have a point, that (under the right circumstances) a hurricane might lead to more jobs and GDP in a certain area, than would otherwise have been the case?
Yes, that’s right, but in that case “employment” and “total output” aren’t signs of economic goodness. (This is the position that Silas Barta has been taking all along when arguing in the comments.) Here’s the fable I used to try to illustrate the point:
[S]uppose Jim sees his neighbor sitting in a lounge chair, sipping a martini on a Saturday evening. Jim then decides to set his neighbor’s house on fire. Obviously, the neighbor jumps up out of his chair, and spends (let us say) the next hour putting out the fire and minimizing the damage the best he can. Would anyone in his right mind say of this scenario, “Sure, Jim caused some physical destruction of wealth, and that is a bad thing; however, let’s not lose sight of the upside: the neighbor used more of his labor than would otherwise have been the case”?
Then the only mopping-up operation is to go from “Jim’s neighbor” to “the whole economy.” (There’s a subtlety because some construction workers etc. really might benefit on net from the hurricane; i.e. they would be happy to give up their leisure in order to get a job.)
All in all, I think the Austrian/libertarian types are 99% right, and the Keynesians/nitpicking Callahans are 1% right. There’s no “upside” to natural disasters, alien invasions, terrorist strikes, etc., in terms of the economy. Maybe those events remind us of the truly important things, maybe they bring you closer to God, etc., but they don’t “boost the economy” in any meaningful way.
Thanks for the mention, Bob! I appreciate that my point is getting more attention; hopefully people will be more aware of these cases of “Goodhart problems”. Here is this most recent thread where I try to hammer home the point to Daniel_Kuehn. (Pardon my exasperation.)
Fantastic!
Hmm, that is funny, Silas. I could have sworn that Callahan said that Bob disagreed with your primary point.
Yes it is. Your memory isn’t failing you, though; here is the ol’ masters chest-beating.
Yep, that is the exact instance that I was referring to.
Bob,
Here is what I take to be the key passage of your article:
we have to inquire why are there so many “idle resources” lying around? If it turns out that destructive government and central-bank policies are to blame — and not a sudden unwillingness for people to “spend enough” — then forced expenditures (due to a natural disaster or terrorist attack) won’t actually fix the labor market.
Let’s suppose for a moment that it turns out destructive government and central-bank policies aren’t to blame for the fact that the economy is not at full employment. Would you agree that in that case what Krugman said was perfectly sensible?
I can’t speak for Bob, but even if there were other causes for the idle resources, the broken windows still do not improve things on net. They’re still out the broken windows, and when these newly-employed workers have them all fixed up again … then what? Return to waiting for someone to break a window for them? That’s why it’s so important that any pattern of production be sustainable — not depend on disasters or make-work projects (or giant injections of “credit”) to keep them afloat.
Blackadder,
“It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment — very full employment; long, weary, back-breaking employment — is characteristic of precisely the nations that are most retarded industrially.”
Employment is not the goal of economics. It is not the ends human actors strive towards when making decision to relieve uneasiness. It is the means towards achieving their ends. Stop this madness. Why has it taken so long to demonstrate such an obvious, obvious truth.
Here’s the answer to my rhetorical question:
http://mises.org/daily/4096/Inventories-Dont-Kill-Growth-People-Kill-Growth
Modern economics has devolved into such a mess that the ultimate aim has been lost, and instead economic analysis is made on second derivative’s of statistics that serve as a proxy for growth, that aren’t even accurate, but are “the best we have”…
Repeat that process enough and it’s not surprising there is a wall of resistance to accepting such clearly true lessons as Bastiat’s Broken Window Fallacy and all its various implications.
Off topic, but do you know of any good [poker–ed.] sites that people can go to at this point or is it still a big pain to get an account set up.
try this one
http://goo.gl/VjTSK
Dan,
If you are a citizen of USA there are no available poker sites. If you are anywhere else in the free world, I’d highly recommend PokerStars.
Dan, it may be possible to play at some sites other than the big three that the DOJ is harassing.
However, it may still be difficult to get your account funded – and its riskier to get funds out now too.
It’s a real shame. I was on my way to making a significant income before the first law was passed by Bush.
Robert,
Employment isn’t the goal of economics. Unemployment, however, is a serious economic problem. When unemployment has been 8+% for several years, talking about guys sipping martinis is kind of a non sequitur.
Maybe so, but the point stands: in any case where someone can be made “better off” by making it so he has to be paid to fix a broken window, there is a way of making him better off that does not cost society that window, and any methods short of that should not be regarded as “good” economically.
“Employment isn’t the goal of economics”
Of course it isn’t, labor is a disutility. If anything, unemployment (voluntary) is more of a goal of economy than employment.
Indeed. Let us not forget that that the USSR achieved full employment with labor capacity to spare.
Are you referring to what Marx called “labour power”?
If it’s not bad policies causing unemployment, then how is the government supposed to fix unemployment in any case? No one from any part of the economic spectrum argues that we have will have high unemployment with optimal fiscal and monetary policy.
Robert,
Employment isn’t the goal of economics. Unemployment, however, is a serious economic problem. When unemployment has been 8+% for several years, talking about guys sipping martinis is kind of a non sequitur
I hope nobody was hurt by the point sailing completely over your head there.
I hope nobody was hurt by the point sailing completely over your head there.
Sadly it’s the other way around, I think.
Suppose we were discussing the minimum wage. Why not raise it, say, to $10 an hour from it’s current $7.25? Well, the problem with the minimum wage is that it causes unemployment. But wait. Have we forgotten that employment isn’t the goal of economics? That labor is a disutility? You know where they had full employment? Stalin’s Russia.
This line of reasoning is obtuse. Unemployment is not simply the state of not having a job. To be unemployed, you have to want a job, be looking for a job, but be unable to find one. Right now roughly 9% of the workforce is in this condition. Millions have been for quite some time. Responding to this situation by talking about guys relaxing drinking martinis is like dismissing the significance of breadlines by noting that paying for bread is a disutility.
Silas gets this. His response doesn’t rely on acting like unemployment isn’t actually a problem. Bob gets this too. Hence his comments about people being happy to give up their leisure to rebuild after a hurricane. But sadly a lot of his commenters don’t seem to get it.
Silas gets this. His response doesn’t rely on acting like unemployment isn’t actually a problem
If you can find a quote of mine where I say that unemployment isn’t a problem, please produce it at your earliest convenience. Otherwise, you will once again have ignored the point of the debate, create an illusory position that you allege I hold, and then respond to that.
It was very simple. The conversation was about how destruction does not produce “economic good.” Bob pointed this out.It is refutation of the idea that destruction increases wealth, economic health, prosperity, or whatever else you want to call it.
You replied, well in certain scenarios couldn’t it increase employment? As if to suggest that in those types of scenarios it would be a positive benefit.
We all reply that unemployment is not the ends, they are the means.. Silas even painstakingly spells it out for you all. You then assert that, “Robert says unemployment isn’t important.” And argue with yourself from there.
I think we’ve reached the end of this dialogue.
Good gosh Blackadder, everyone gets it you’re just being a jerk as usual.
It’s not employment anyone’s after, it’s the rewards of it. A hurricane etc. forces Savey McSave sitting on his pile of gold to share the wealth in return for rebuilding his mansion.
If by some divine inspiration or something he decided to give it away before the hurricane without requiring labor in exchange it would have the exact same “positive” effect on the economy, and, in fact, benefit the construction workers even more than if they had to give their labor in exchange for it.
And don’t pretend to be innocent on this charge again saying “oh no I didn’t think of it this way, others were putting it like this” and so on. We all know you do this time and time and time and time again: Pretend you don’t understand something really obvious to try and get everyone angry and then pretend they’re crazy for getting all riled up.
Lame tactic is lame, please stop.
Avram,
Thanks for the heads up. I was getting offended he took such issue with me personally! But it seems like this is just his standard operating procedure…
How an ideology protects its members beliefs from any critiques.
Yes, Gene_Callahan, yours is providing pretty good insulation on this issue.
How an ideology protects its members beliefs from any critiques.
Gene, it has become painstakingly obvious to me that you have serious unresolved issues about your former views and the person you were (are?) that held those views. I do not know who you are referring to with your condescending comment above, but if it is myself, you are really starting to lose it.
I visit your blog and bend over backwards to see the merit in your views, this is hardly indicative of what one trapped in an ideology whose members “beliefs” are protected from any critique, looks like.
I’m recognizing how much your latent resentment has to do with your dissatisfaction with who you were as a thinker during the time period when you wrote for LRC and how little it has to do with myself or others whom you speak down to in such a way. If you want to project your insecurities onto someone whom you believe attempts to shield their “beliefs” from critique, you’d be better off picking a target who doesn’t regularly visit your blog and comment with the express intent of understanding and discussing an opposing (your) viewpoint.
To be unemployed, you have to want a job, be looking for a job, but be unable to find one. Right now roughly 9% of the workforce is in this condition. Millions have been for quite some time. Responding to this situation by talking about guys relaxing drinking martinis is like dismissing the significance of breadlines by noting that paying for bread is a disutility.
At least you don’t just lie about what I say. Bob used the drinking martini example as a very good example of why unemployment, in and of itself, is not the ultimate objective. His example perfectly demonstrates that, and also serves to highlight why even though economic activity can be boosted when things need to be repaired or replaced, overall the economy is made poorer by destruction.
You read this, and then respond and comment as if this was a blog post on the topic of how to reduce unemployment. And we survey the landscape of the US and say, “oh big deal that unemployment is at 9%, really rich people can sit around drinking martinis and are unemployed, so being unemployed isn’t necessarily bad.”
I’m honestly flabbergasted. I may have been too harsh when I said you are lying. Perhaps you are so addicted to defending your existing mentality that boosting employment, through any means necessary is of paramount import, that you misinterpret, invent, or totally ignore parts of the dialogue.
Ok, now I’m really done! 🙂
Oh yeah, BA. Because we all failed to make a distinction between voluntary and involuntary unemployment, and we all assumed that any old kind of unemployment is A-OK in our book….
🙄
If you really wanted some stimulables, you should make the minimum wage umpteen.
“we have to inquire why are there so many “idle resources” lying around?”
Funny, because in my example I laid out why these idle resources were lying around. I guess Bob just didn’t like that answer.
Yes, you stipulated that as part of the example, requiring an economically unrealistic situation in which people cannot meet their needs except by working for one specific person.
Yes, this was an ideal construct. Mises used them all the time. Bob uses them a lot. *Economics for Real People* was full of them. But those were *nice* ideal constructs, because they shored up libertarian beliefs. This one was a *bad* ideal construct, because it indicated a naughty conclusion!
No, it’s bad because a situation in which people can only do one thing barely counts as an economy (let alone people). If such an opportunity cost-ignoring example supported conclusions I’d like, I’d still reject the example.
(And not that you care or anything, but I don’t endorse the use of conclusion-assuming ideal constructs when Mises does it either.)
And don’t forget that disasters make us exercise more piling sandbags and such!
A good resource on this is
BASTIAT’S “ THE BROKEN WINDOW”:
A CRITIQUE
by
LOUIS CARABINI
I’m glad Silas has been making this point, as it’s the same complaint I’ve had all along in this. I’m not quite happy with this analogy I’ve come up with to explain it, but I’ll run with it for now anyway.
For the sake of argument, let’s assume the following: a certain man whom we shall call Fred is attracted to women with long and full-bodied hair, and the reason is that those things are signs of long-term good health in women (I apologize if this example is offensive to anyone). Fred’s real goal is not to find a woman with long hair; it’s to find a woman in good health. The long hair is a *symptom* of something he is looking for — though he may not be aware of this — and not the thing itself. Silas used the word “proxy” to describe the same idea, at least if I understood him correctly.
That’s well and good, but there is also such a thing as wigs. Therefore, without judging Fred in this example for his objectification of women, we can understand why it might be important for him to pause a moment when he sees a head of long and healthy-looking hair. If the hair is a result of long-term good health, then it’s a useful metric for him. If the woman is wearing a wig, then it isn’t. It is not that long, healthy hair is useless to him as a metric. It’s just that when Fred sees such hair, he wants to find out the root cause of it.
Daniel said he would blog about this issue, but effectively what he did is explain the biological mechanism that explains why a nice head of hair requires one to have been generally pretty healthy. That, I think, is why Silas was exasperated, because that was never in dispute.
GDP is a symptom. In a healthy, growing economy, we will usually expect to see GDP increasing. That does not mean that increasing GDP is always a good thing. That is the problem I have with those — mostly Keynesians — who talk about economic good coming from natural disasters. GDP can be a symptom of good things, but it can be a symptom of bad things. When it increases, you need to look at the reason why before you can decide whether it’s a good sign or not. GDP growth is not a goal in itself.
Incidentally, essentially this exact same argument applies to the interest rate as well.
Trepanated,
I think your above comment is fantastic. The GDP is a symptom part is spot on. Hopefully, that helps drive the point home to a few people a bit more clearly now!
Remember when you said that this article:
http://consultingbyrpm.com/blog/2011/08/big-deficits-and-easy-money-have-failed.html
Is the best criticism of Krugman you’ve ever written? And then I said that I thought your sushi article bests it?
Well, I think now that THIS latest Mises.org post beats your sushi article as your best takedown of Krugman ever. Keynesians are at heart consumptionists, and this article nails it.
I guess what Bob did here was separate the economists from the statisitions (not sure that is a word). This needs to be done more often.
Close. It’s “statistician”.
No, it’s “thievingwasteoflife”.
My wife and I have a really great way of describing this point to people who don’t want to get the point:
We don’t need jobs, we need stuff. We use jobs to get the stuff. If we already have the stuff, then we don’t need the jobs.
This is a really good conversation killer at parties.
A real killer is how needs don’t exist, only perpetuate from wants.
Little late, but… The “stuff” I’m referring to includes food. I still consider food to be a need rather than a want.
Silas’s comments have just been attacking points that nobody (that I’m aware of) has been making – that somehow disasters are good for the economy rather than being good for GDP/employment under certain specific conditions.
Bob you write “Yes, that’s right, but in that case “employment” and “total output” aren’t signs of economic goodness.” and call this Silas’s point, but I don’t know of anyone who has said that an increasing GDP as result of a hurricane is good for the economy.
As is the case time after time after time after time, this whole stupid “debate” is just Austrians telling Keynesians they said something which they actually didn’t, and then an exploding comment thread attempting to sort it out.
Yglesias’s run-down of how these things usually go characterized it perfectly – it’s either a small interesting claim that gets blown up into Steve Horwitz saying Paul Krugman said war is “morally acceptable”, or it’s not a claim a small interesting claim at all, and it’s introduced as a poorly executed reductio.
@Daniel_Kuehn: My point was that, even to the extent that they’re right that disasters boost GDP, they are *wrong* that the metric is useful in that situation — it is no longer approximating the real thing we want to measure, economic health, and this should be economists’ point. They should _not_ simply emphasize how literally true a counterintuitive claim is outside of its genuine domain of applicability.
I’ve told you REPEATEDLY that if you want to measure some general level of economic health or well-being, then by all means don’t use GDP, Silas. That’s not what GDP is for.
Then stop speaking like it is when you praise the economic “benefits” of a hurricane!
That’s not what GDP is for.
Then why do you keep referring to GDP when you judge the alleged benefits of hurricanes?
P.S.: It still seems to me that you are unable to trace the concept of GDP back to what it is intended to measure, nor capable of recognizing when the two are no longer correlated, which suggests a poor level of understanding that frankly frightens me for someone in your position.
Daniel,
When people reference an increase in GDP, the implication is that it was a good thing. So for instance when people look at disasters and war and say, “it did some economic good as GDP was increased” they have lost sight of the entire purpose of economics and thus what constitutes “economic good”. Or put another way, just read Silas’ comments:
“My point was that, even to the extent that they’re right that disasters boost GDP, they are *wrong* that the metric is useful in that situation — it is no longer approximating the real thing we want to measure, economic health, and this should be economists’ point.”
It’s not a really good analogy, but I am going to say it anyway. We all know that an increased heart rate is desirable when exercising, and in fact many athletes look to their heart rate as an indicator of the effectiveness of a policy (e.g. running, biking, swimming, etc). However, we would not then look at an increased heart rate as a positive indicator, if say, the person in question was being raped.
If I am doing a 10 mile run and I want to reach 160 BPM, I could not say that my goal was accomplished if after a minute into my run my heart rate reaches 160 BPM due to a panic attack.
The metric applies as a positive indicator only in specific instances. Further, it is only one of a great number of indicators, and it is only effective if those using it know when to use it and why the measure is what it is.
A bit over the top (in terms of the subject matter of your analogy), but … yeah. It’s like if these same economists were physiologists, they would be out there saying, “Well, in normal times getting raped is bad, but sometimes, it can get your heart rate up.”
People with a less, er, compartmentalized understanding of the subject would say, “Okay, when you’re getting raped, that’s a really bad time to think about the optimal BPM, m’k? All the normal rules about how you want to maximize your BPM … yeah, don’t use them here. You can use them for *normal* exercise, just not this.”
“When people reference an increase in GDP, the implication is that it was a good thing.”
And so it is… all other things being equal.
Gene,
The point of your comment baffles me. The entire conversation is about when all other things aren’t being equal and the GDP boost comes from wealth destroying activity and thus is an inappropriate metric to use to measure economic health. So you decide to point out it is good, “all things being equal” in a conversation when the entire emphasis is on all things not being equal. Just because there is a strong consensus from libertarians on an issue, doesn’t mean you are morally obligated to argue against it.
Bingo.
Every time I see Kuehn saying “bingo”, the previous comment was fallacious.
Is this a magic trick?
And things aren’t equal in this case, so why care about the metric?
Right: because you forgot the entire purpose of what it was used for and thereby revealed the superficiality of your understanding of economics.
Holy hanna on stilts.
The whole point of this debate is that all other things are NOT equal. GDP cannot increase “all other things equal.” GDP is not an isolated separable concept from economic action.
I know you like to Platonize abstract concepts and turn them into their own separable existence, but GDP is a concept that refers to the very subject under discussion.
“that somehow disasters are good for the economy rather than being good for GDP/employment under certain specific conditions.”
Well then it is stupid point to even make if you guys believe it isnt good for the economy and makes guys like Krugman seem even more callous when they say things like 9/11 can boost some meaningless data that doesn’t actually do any real good for the economy. What is the point in bringing up an increase in GDP if you don’t believe it shows any real improvement for the economy?
Daniel Kuehn wrote:
Silas’s comments have just been attacking points that nobody (that I’m aware of) has been making – that somehow disasters are good for the economy rather than being good for GDP/employment under certain specific conditions.
I really have to put my foot down on this one. Paul Krugman specifically said that the Japan disaster could be expansionary for either Japan or at least the world economy, and he said that 9/11 could do some “economic good” (exact quote I think) and then listed the two good effects it would have.
I really wish you would stop accusing us of setting up a strawman when we have literal quotes.
If no Keynesian has ever said that boosting GDP from a disaster is a good thing, then why are we even having this conversation? It is NOT because of the fictitious train of thought that Yglesias says. To my knowledge, that train of thought never happened. Usually when a libertarian wants to do a reductio on make-work programs, he says, “Oh? So I guess it would be good to pay people to dig holes and then fill them up?”
It wouldn’t even occur to libertarians to suggest paying people to destroy stuff might be “good for the economy,” because that’s so crazy. No, it took Keynesian (though before Keynes) thinking to even suggest that in the first place. Bastiat wasn’t attacking a strawman that had been generated by reductio ad absurdums his contemporaries foisted on advocates of public works programs.
And literally either yesterday or today, I heard on the radio people asking the guy on NPR if Hurricane Irene would have a silver lining by generating economic growth. This wasn’t because John Cochrane was the guest and brought up a reductio; this was the anchor of the show asking the reporter in Brooklyn if Irene was going to help the economy.
So please stop denying that plenty of people say this every time there is a disaster. To repeat, I have actual quotes from Krugman saying this, so I am stunned that you keep denying what we can read with our own eyes.
“Paul Krugman specifically said that the Japan disaster could be expansionary for either Japan or at least the world economy, and he said that 9/11 could do some “economic good””
Good God, Bob, really, can’t you see that something could ‘could do some “economic good”’ without being an overall economic plus?!
Gene,
Take a step back and analyze where your position has led you. “Economic good” can occur without being an overall economic plus? Such a concept seems absurd on its face. It is to suggest that in some instances certain forms of “economic good” are net negative. Which would imply if we repeated these forms of “economic good” ad infinitum, the economy would collapse from the cumulative overall economic negative effect. Clearly, we are not thinking in coherent terms at these point.
Economic activity is just that. Economic activity, why must you insist on ignoring the difference between “economic activity” and “economic good”. The introduction of a machine that can create food/water out of thin air would probably drastically reduce economic activity. To call such a plunge in GDP and/or economic activity a negative, is about as insane as calling the increase in economic activity from digging ditches and filling them back up an economic good.
Robert, take a step back and see what clinging to this position has led you to: Nothing can contain any goodness if it is not 100% good!
If something was not *on net* positive, it did not “help the economy”. Yet that is exactly what we hear from those who say that “Irene will help the economy”.
This does not rely on any claim about crowding out.
And to the extent that a metric would cause you to mislabel something bad (“broken windows that we have to employ people to fix”) as being good, you should recognize that the metric is not useful in that situation, not make misleading statements about how it’s “sorta kinda good”.
Robert, take a step back and see what clinging to this position has led you to: Nothing can contain any goodness if it is not 100% good
The quality of your argument here is getting so low that I’m just going to copy and paste what other people have already said at this point:
“But when you say “economic good”, that is a universal, general concept. “The economy” is supposed to refer to everyone, not just some people” -MF
Bingo again.
No, I think Robert_Fellner’s reply get the Bingo here.
Oh for crying out loud, talk about a desperate game of no true sctosman and semantics.
Bob is probably doing what I would do if I had to listen to you and Daniel’s constant exasperated evasions, which is to run out of patience bending over backwards pretending as if you even have a sound economics argument to make.
Daniel wrote in plain English:
Silas’s comments have just been attacking points that nobody (that I’m aware of) has been making – that somehow disasters are good for the economy rather than being good for GDP/employment under certain specific conditions.
In other words, Daniel objects to the libertarian’s accusation that Keynesians like Krugman believe disasters are “good for the economy” PERIOD.
Bob then provides a bunch of quotes from Krugman and others LITERALLY SAYING disasters would provide an “economic good”, and your response is to attack Bob with yet another evasive rhetorical question, this time asking him “You mean you can’t see the difference between “economic good” and “economic good under certain conditions“”?
I looked at all those quotes, and I myself have heard from many “economists,” saying “disasters provide economic good” or “good for the economy”, WITHOUT the no true scotsman caveats.
“Disasters provide an economic good under certain conditions” is STILL crazy talk. Even if employment and GDP rise on account of disasters, the employment and GDP statistics would not be conveying anything positive, but would in fact convey that something BAD has taken place.
The error you and Daniel are making goes even deeper than Bob has given you credit for. Your error is to believe that because SOME people might benefit from a disaster, that this entitles you to saying that disasters can provide “an economic good.” But when you say “economic good”, that is a universal, general concept. “The economy” is supposed to refer to everyone, not just some people. The doctrine of Pareto improvement is necessary here. If at least one person is better off while nobody else is worse off, then and only then can you say “the economy is better off,” or “there was economic good” or “good for the economy” etc.
But if a disaster destroys the homes of people, and a home builder who is looking for work finds that his income and employment are “stimulated”, then this does NOT imply that there was “economic good” from the disaster. It means that a disaster has lead to the benefit of some people while it has harmed other people. That means you cannot say “disasters are an economic good EVEN UNDER CERTAIN CONDITIONS.” Disasters DESTROY wealth you empty headed baboons. It is vicious and absurd to label such events as “providing an economic good.”
Bob is right to object to your and Daniel’s and Krugman’s and Keynesians’ ridiculous notion that wealth destruction is “good for the economy.” When people are physically harmed, when their wealth is physically destroyed by disaster, it doesn’t matter if some other people are benefited in the short run. The correct Bastiat-esque conclusion to make here is to say that because the home builder was busy reconstructing homes, and diverting scarce resources to rebuilding homes, it means that his labor and those scarce resources could not be used in some other project that ADDS to the total wealth of the economy, where gains are made by people WITHOUT a corresponding loss to any other people.
Bastiat would say that you and Daniel and all the other Keynesian yahoos “You’re only observing what is seen (home builder becomes employed, earns more income, GDP goes up, etc), but you’re not taking into account what is not seen. What is not seen enables us to conclude that the increase in income, GDP, employment, etc convey a “bad for the economy” series of events.
The problem with you anti-economic data munchers is that you fail to understand that ALL historical data, whatever it is, must be approached using an a priori theory. Your a priori theory is that the absence or destruction of wealth is itself an instance of prosperity. When there is a need that arises, that need is in itself a benefit. So when you see disasters take place, you perceive a giant leap in need (even though there were economic needs prior to the disaster), and because of that need, you conclude that the presence of need is itself a good and thus disasters are “under the right conditions” (meaning for some individuals who are observed to seemingly benefit) are “good” as well.
Gene,
What is your test for whether a phenomenon results in “economic good”? It sounds like your test is that someone, somewhere benefited, even if others elsewhere suffered.
I think the general sense of a phenomenon resulting in an economic good is that it is net beneficial. i.e. When pundits say that “economic good” results from a phenomenon, most reasonable people infer that the phenomenon is net beneficial.
If we consider the tearing down of a populated public housing project along with the confiscation and redistribution of all goods contained within, then someone, somewhere will benefit. Does this action do economic good?
Most people would say no, because there is a test for whether this is the case. Is it net beneficial or net harmful? From your writings, it seems like you would say yes, but I’m sure I have misunderstood.
I am curious to know what is your test that a phenomenon must pass in order to do or be an “economic good”.
And I have to put my foot down on this too. Yes – some economic good. Not that it’s great for the economy. There is a gross positive effect in one factor. Don’t put words in his mouth by changing what he said was “good”.
re: “I really wish you would stop accusing us of setting up a strawman when we have literal quotes.”
And I wish people would actually argue from the quotes they use.
re: “If no Keynesian has ever said that boosting GDP from a disaster is a good thing, then why are we even having this conversation?”
That’s an excellent question, but I’m afraid the ball is in your court no that one.
Daniel,
Are you saying that Keynesians don’t see any upside in production that may not be very well directed?
I thought the case for stimulus was that although government spending may not be very well directed in a recession that doesn’t matter very much.
Yes – some economic good. Not that it’s great for the economy.
You mean seemingly good for some people, and definitely bad for other people.
There is a gross positive effect in one factor. Don’t put words in his mouth by changing what he said was “good”.
He didn’t. He QUOTED them.
And I wish people would actually argue from the quotes they use.
And I wish people would actually realize when other people are in fact arguing from the quotes they use.
That’s an excellent question, but I’m afraid the ball is in your court no that one.
No, the ball is in the Keynesians’ court, because they originated and still perpetuate the crazy idea, not Bob.
DK,
I am curious to know what is your test that a phenomenon must pass in order to do or be an “economic good”.
Please see my response to Gene above, for more context.
I am curious to know what is your test that a phenomenon must pass in order to do or be an “economic good”.
Excellent question.
Since Kuehn et al are at root collectivists, they’ll have to refer to “group” benefits and costs, and try to do what Rothbard proved cannot be done, which is to compare utility across individuals.
The problem in my eyes is that many people in general actually do see capitalism as a near zero sum game — though this line of thought is clearly a fallacy. Thus, when talking of the threat of natural disasters (or alien invasions), the fact is lost on many that one industrious man must lose in order for the idle man to to gain, because in the eyes of many, the industrious man taketh from the idle man daily — the natural disaster just produces a reversal in who is gaining and who is losing.
This would be much like people buying sandbags and hiring people to put out the sandbags at the threat of a hurricane. This fits the paradigm of capitalism in many people’s eyes, though the winner and loser are reversed — the industrious loses and the idle gains.
I fairly much agree with Silas Barta and Rob Murphy here.
I wrote about this in an article over at the Cobden centre:
http://www.cobdencentre.org/2011/08/science-fiction-got-there-before-krugman/
After talking a lot about Science Fiction I concluded:
It’s a mistake to think that Keynesians want to waste resources in order to increase employment. Their argument is that it isn’t very important how efficient a spending project is during a recession. They would prefer it if the output of a project were useful because if it were, that would clearly be beneficial. But, they don’t require a project to be efficient; their view is that if no good spending projects are politically feasible, then bad ones will do. They believe that during a recession there are great spin-off benefits to spending on output. They believe that it will stimulate production and employment and make society wealthier in the long run.
Keynesian commentators often seem to believe that the level of GDP output proves that a certain amount of capital wealth exists to be used, so when GDP increases that means society is richer. GDP is certainly an indicator of wealth; output can only be produced because capital and labour exist to produce it. But, many different levels of output are possible with the same capital. The amount of existing stocks of goods that are processed into new outputs depends on the demand for those new outputs.
In the recent controversy over the Virginia earthquake some Keynesian commentators I’ve read have expressed the view that it’s all about “crowding out”. Crowding out is a macroeconomic idea often put forward by critics of the Keynesians. In its simplest form, the argument is that every pound the government tax from someone, or borrow from someone, is a pound that would have been spent on private sector output. So, according to this argument “stimulus” policies will have no beneficial effect. I agree with this idea to some extent. The problem with it is that the private sector doesn’t only sell GDP output; existing assets are also for sale, including financial assets such as bonds and share. That means a person may receive income and spend it on things that aren’t output. Also, once the seller of an asset receives the proceeds he may not spend them on output either; he may buy another asset. Eventually somebody in the chain will spend on output, though that may take a long time. This means a government could increase output by taxing people who are likely to spend their money on assets and using the proceeds to buy output goods.
I don’t think the crowding out explanation helps us very much. As Horwitz says, the important issue isn’t whether output falls, everybody know output falls during a recession. The important question is: what does a fall in output mean?
One possibility is that investors and businesses are being irrationally cautious. Instead of investing in new projects which could earn profits in the future for them and increase output to the benefit of everyone they rush into relatively secure investments such as money, bonds, blue chip stocks and gold. Keynesians are fond of the idea of the irrationality of the market because it supports this view (they aren’t particularly interested in disputing Austrian Business Cycle Theory as a cause of recessions). I think this possibility is a distraction; to the degree that markets can be irrational it’s close to impossible to say in which direction they’re being irrational [2].
There is an alternative view, though: investors may be making a sensible decision to avoid investing in new projects because the risk/reward ratio is too poor to make it worth their while. That decision may certainly reduce employment in the short-run, but that doesn’t show that it reduces society’s overall wealth. It may well be that this decision isn’t only sensible for investors. The processing of existing resources into new goods doesn’t necessarily add value from anyone’s point of view. Keynesian economists often assume that it’s always worthwhile to convert existing resources into output at the same rate that prevailed before a recession. There is no reason to think this is true.
I fairly much agree that you have a learning disability.
This is what I wrote at Gene’s blog:
Of course that the “broken window fallacy” is an a priory truth. I will “prove” you this in the shortest possible way:
Imagine a guy who before a destructive event X has the capacity (because of a given stock of accumulated goods ready to be used) to satisfy 4 of his 4 subjective ordinally ranked wants:
1. something h
2. something j
3. something k
4. something l
Unfortunately a destructive event happens and destroys one of his accumulated and ready-for-use means. For example, the means for satisfying end 2. (I forgot to mention that the means are specific and can not be used for the satisfaction of more than one end.) Now, he, thanks to the destruction, can not satisfy one of his wants (end 2), which otherwise he could have satisfied. HIS both OBJECTIVE AND TANGIBLE (the destroyed mean) and his SUBJECTIVE WEALTH (his satisfaction) are DIMINISHED.
If the means were not specific, then, he would use some of the means that he first had arranged for the satisfaction of end 4 for the satisfaction of end 2. This “transfer” or re-allocation of means from the satisfaction of end 4 to the satisfaction of end 2 in order to counter-act the destructive act of the event that destroyed the means devoted for end 2 results in the NON-satisfaction of end 4. This is THE ALTERNATIVE COST of the destructive event. This is what he could have been consumed TOO, if the event did not happen.
This example uses means as stock of goods. But the same is true when we use flows, that is, income available for allocation to different ends. The individual IS ALWAYS BETTER OFF if his NET WEALTH increases, i.e., when he ADDS to his stock of goods, and he is ALWAYS WORSE OFF when he REPAIRS (re-add what he had before the event – no net increase) what he already had before the disastrous event.
This is an a priori “proof” of Basitat’s “broken window fallacy”. I say proof with “” because you know that praxeology is not provable (in the logically-positive sense).
———–
Dr. Murphy this really is one of your best articles ever! I agree with Major_Freedom!
Regarding the remark Major_Freedom has made (here and elsewhere, too) that Keynesians are consumptions – this is completely true. They have two fetishes:
number one is : growth (i.e. consumption)
number two is : employment
They can not explain any real phenomena from the real word. But they have these two fetishes who they BELIEVE are some objective measure of well-being and happiness that SHOULD be everyone’s (that is society’s) end. Accordingly they construct their “theories” in a way to show us the stupid layman who is not (yet) persuaded in this HIGH GOAL of theirs what means should be used and how these means must be implemented in order to achieve the divine “objective” goal of HYPER-CONSUMPTION and FULL-EMPLOYMENT. These are witch economists. Please criticize them every time you can.
You may not be the most eloquent writer I have ever seen (probably due to a language barrier), but you do make a great point about the preoccupation that Keynesians have with growth and employment. But, that is primarily due to the belief in the Keynesian school of thought that having an aspect of control over the lives and actions of others through policy is a desirable thing to do.
Keynesians definitely understand the difference between growth and consumption. Consumption is only part of the source of growth, the other being investment. They also realize that investment is demand-driven.
According to Keynesians consumption is the catalyst, the cause of all and everything in the universe. That is why they think that when consumption decreases this NECESSARILY is a bad thing that must be counter-balanced someway. How can you claim that you think investment plays a significant part in the economic action of man when you do not have a COHERENT explanation of capital and interest theory? Keynesians are consumptionist boogeymen who do no explain, but rather PRESCRIBE recepies. The great panacea – the cure for all economic downturns – in these recepies is to boos consumption. The means for this are different: sometimes through the expansion of money supply, other times through fiscal “stimulus” and etc.
“According to Keynesians consumption is the catalyst, the cause of all and everything in the universe.”
I am not a Keynesian, but this statement is about an idiotic synopsis of what Keynes said as I have ever encountered.
The claim that demand drives the economy is the epitome of what I have written. How is that an idiotic representation of Keynes? Don’t Keynesians always make a cry for “boosting consumption” when there is an economic downturn?
You’re exactly right.
But be prepared to be given a misunderstood quote from Keynes’ GT:
“If, then, entrepreneurs generally act on this expectation, will they in fact succeed in increasing their profits? Only if the community’s marginal propensity to consume is equal to unity, so that there is no gap between the increment of income and the increment of consumption; or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption, which will only occur if the schedule of marginal efficiencies of capital has increased relatively to the rate of interest.”
Where the passage “or if there is an increase in investment” is presented a s definitive evidence that somehow absolves Keynesians of being consumptionists, when in reality, Keynes held that the free market allegedly produces too much savings, and there is allegedly a strict limit to how much investment the economy can profitably “absorb”, so Keynes held that this investment limit is allegedly too low to sustain full employment on account of the desire of people to save “too much,” which is how he arrives at the open ended “consumptionism” ideology and the call for benevolent and wonderful government budget deficits, to allegedly raise the rate of return back up, and thus enable the economy to absorb the savings which are too high relative to the amount of profitable investment.
But Callahan et all will ignorantly point to “or if there is an increase in investment” as if Keynes held that it doesn’t matter if “aggregate demand” is composed of consumption or investment, they are allegedly interchangeable and investment can allegedly be as high as people want.
Callahan and Kuehn don’t understand Keynesianism because they’re too busy trying to justify it in their own minds in order to remain relevant, in their own minds, in the eyes of others, for whatever reason.
Funny, because I have no interest at all in “justifying” Keynesianism, and I am not a Keynesian! What I do have an interest in is debunking dumb-assed interpretations of what Keynes was about.
What I do have an interest in is debunking dumb-assed interpretations of what Keynes was about.
Yeah you keep saying that, except your interpretations of Keynes are, how shall I say this, questionable.
“They also realize that investment is demand-driven”
Obviously, a good cannot be conceived of without there being some demand, or perceived future demand, for it. That isn’t even near the issue at hand. The issue is “growth” of what?
What about a “blind squirrel finding a nut once in a while” type of scenario? Government (over)(mal)-invests in particular sector, random breakthrough in that sector that would not have occurred without this (over)(mal)-investment.?
It happens all the time, especially when governments invest in research in science. Real science, not social ones.
Government cannot know which research is more urgently needed than other research, because they don’t operate in the profit and loss sphere.
That’s the point. I’m ok with you not being able to expose your thoughts in writing in a clear way. But if you can’t even read. you should just give up. It’s becoming embarrassing.
You misunderstand, as usual.
I was specifically referring to “social science”, because you said that “it happens all the time” EXCEPT with social science. I was correcting you in saying that it happens with social science as well.
That’s why I said “research” and not “hard science.”
I know you’re miffed at being constantly exposed as an idiot by yours truly, but these desperate attempts at one upping are just said.
I was specifically referring to “social science”
No, you weren’t. As anyone who can read could tell.
Yes I was, as anyone who understands the word “research” can tell.
The whole reason why I responded with the “Government cannot know which research is more urgently needed” comment is in response to your tacit claim that government research in social science does not suffer from the same problem.
I don’t think all Keynesians are really “consumptionists”, Daniel Kuehn, for example, certainly isn’t…
The view of what Krugman calls “Part 1” Keynesians, those who are interested in Part 1 of the General Theory is all tied up with GDP. They believe that it is always good to have a high GDP. They believe that ensuring continued investment spending will produce greater wealth in the future. They associate the act of taking resources and turning them into investment goods as automatically increasing the stock of societal capital.
What is the motive of using policy to influence actors within a market to make decisions that they otherwise would not have made if such policies had not been enacted? Further, how can doing such be ethically defended?
Every single policy always influences actors within a market, people of the country, entities of the universe.
“Further, how can doing such be ethically defended?”
Well, it could be ethically defended if it made most people better off. (I’m not saying Keynesian policies will do so, I’m just saying here is a quite obvious ethical defense of them.)
This is a really strong unethical and utilitarian argument.
I’m a utilitarian and I disagree with the Keynesians. I think natural rights theory is nonsense on stilts.
But, whatever you think of it there’s no need to bring natural rights theory into the argument.
I think natural rights theory is nonsense on stilts.
How so?
That’s an argument for a different thread.
That’s an argument for a different thread.
But you brought it up in this thread.
I didn’t bring it up Ivan Georgiev did. Anyway, I’ll argue with you about it when we have more horizontal space.
I didn’t bring it up Ivan Georgiev did
You were the first person to even mention natural rights in this thread. I searched, and you are the first to pop up.
Anyway, I’ll argue with you about it when we have more horizontal space.
Yeah that is a rather annoying aspect of WordPress, isn’t it?
What Gene said:
“Well, it could be ethically defended if it made most people better off.”
is a statement that only a very arrogant and presumptuous man can make. If Gene knew anything about economic theory he would have known that what makes people better off is NOT government policy X, Y or Z, but their liberty to use their property in the most economic way they think of.
This ALONE DISPROVES the whole utilitarian argument.
“…a statement that only a very arrogant and presumptuous man can make.”
Well, it is Gene Callahan.
It’s kindof embarrassing that economics has been studied for 200+ years and we haven’t moved past this broken window thing. Obviously everyone sees the negative side of destruction when it happens to their property; suddenly when it happens to someone else it becomes a net gain??
On a more positive note, great piece as always Bob
Well we have bullet-proof, and almost indestructible glass window panes now. Not thanks to people studying and teaching economics though. WTF have they ever contributed to human kind actually?
It’s funny that it is YOU that should ask such questions….
Well we have bullet-proof, and almost indestructible glass window panes now.
At the cost of what? Oh that’s right, I forgot, printing and spending have eliminated opportunity costs.
Not thanks to people studying and teaching economics though. WTF have they ever contributed to human kind actually?
I ask that every time you attempt to make an economics argument.
“suddenly when it happens to someone else it becomes a net gain??”
Strawman!! No one says it is a net gain!
It’s not a straw man when there are quotes literally saying “good for the economy”!!!!
I specifically remember Krugman saying that 9/11 “could do some economic good.” What does ‘economic good’ refer to if not a net gain?
What does “some” refer to if not that there are other economic bads?
“Some” means “less rather than more” or “a little bit, not a lot.”
In other words, small NET gains.
If I take $10 out of your wallet, then put $5 back in, have I done you some “economic good?”
Only if you’re a politician with a gun. If you’re a civilian, no way.
1% is infinitely too generous.
I’m in a hotel right now, and I have to do some work that will actually yield an income before crashing.
So, I have to be brief, even though being called “obtuse” is always fun, Blackadder.[EDIT: Sorry Blackadder I had skimmed briefly on my Blackberry. I see you weren’t calling me obtuse, just those who picked up the torch.]
OK quickly:
* Blackadder I specifically said both in the article and in this post here, that there is a subtlety in going from the guy drinking martinis to unemployed workers. I said those workers really do benefit because they want to exchange their leisure for a job. I then offered an argument for why that didn’t resurrect the Keynesians’ point, in my book. If you don’t like my argument, or don’t see it at the end of my article, OK. But you just ignore it and act like I stopped my article after the martini analogy.
* Tweak the analogy, Blackadder: Jim sets his neighbor’s house on fire. The neighbor would normally jump up and spend an hour putting out the fire, but he’s actually got both legs in casts. So he calls out to a jogger running in front of his house, “Hey! I’ll give you $100 if you stop what you’re doing and spend the next hour putting out my house fire!”
So the jogger is definitely glad that the house fire was started; he voluntarily takes the new job that was created.
So, in this new scenario, do you think we should balance the destruction to the wealth of the house, against the “gain” caused by the jogger getting more work?
I would say of course not. There is a pure transfer of $100–Jim’s neighbor is down it, while the jogger is up–and on top of that the jogger is out an hour of his leisure.
So unless you think that just going up to people and taking money out of their pockets and handing it to unemployed people is “good for the economy,” I don’t see why you should think the Keynesians have a leg to stand on. It’s not enough that they show disasters create jobs. They have to show that people end up getting employed in doing things that were *not* directly generated by the disaster. Thus far I have never seen any Keynesian even attempt to show that. They just stop with, “There isn’t enough spending right now to provide full employment; let’s not lose sight of that.”
Blackadder I specifically said both in the article and in this post here, that there is a subtlety in going from the guy drinking martinis to unemployed workers.
You did. Many of your commenters, however, do not seem to have gotten the point.
So, in this new scenario, do you think we should balance the destruction to the wealth of the house, against the “gain” caused by the jogger getting more work?
Sure. The jogger is better off because of the exchange, as is the guy (otherwise they wouldn’t have agreed to the transfer). It doesn’t outweigh the loss from the house burning (although in saying so I am making a dubious interpersonal utility comparison), but it did make the situation less bad than it would have been if the jogger hadn’t come along. Do you not agree with this?
So unless you think that just going up to people and taking money out of their pockets and handing it to unemployed people is “good for the economy,” I don’t see why you should think the Keynesians have a leg to stand on.
Isn’t that precisely what Keynesians think? ‘Unless you believe Christ rose from the dead Christianity doesn’t have a leg to stand on’ is not a very telling argument against Christianity, is it?
Btw, Bob. You are very far from being obtuse. Indeed, I’d say that you were acute, but I’m afraid people might take it the wrong way.
Hurricane Irene didn’t break any of my windows. Alas. I can’t help the economy.
I bet your neighbors will, just give it time.
I haven’t read the comments, so maybe this has been said, but you can, I think, make your analogy a little more useful thus:
I notice my neighbor sitting in his lounge chair sipping a martini. I set his house on fire. He runs around like crazy putting out the fire, and after he’s done, he pays his kid five bucks to clean up the debris.
Have you done the kid a favor? Well, maybe. Have you done the household a favor? Certainly not.
Thanks Steve. I actually tweaked it like that in the comments above. I said the neighbor was wearing a cast so he had to bribe a jogger $100 to come put out his fire. So the jogger is better off because of the fire, but the “neighbor + jogger” certainly aren’t.
But the jogger then _spends_ the hundred dollars on an Ipod, giving work to laborers in China, who spend that money on rice, etc., etc. — and the global economy recovers …
It the money didn’t start circulating via the jogger, the house owner would just keep the $100 under the mattress ..
That’s the Keynes story, right?
(And it predates Keynes, of course.)
Callahan’s argument is just a version of Kaldor’s “magic” invoking argument of the 1940s …
Any contingent causal explanation can be given a “counter-example” invoking Martians, magic, God, unworldly luck, etc.
Why did your car stop running? Martians drained the gas, someone cast a spell on your car, God made it stop, all the oxygen molecules bounced out or your little part of the atmosphere, etc.
Greg,
Interesting. Do you have any references that I can chase up?
Yeah, Greg, there were lots of “Martians” in my example. And lots of “magic” as well.
Why don’t you try actually addressing what I wrote instead of writing this nonsense? (Yes, yes, I know… because you have no answer to what I actually wrote.)
Bob, why do you keep attacking this straw man. You assume monetary equilibrium, Keynesians assume monetary disequilibrium. To the extent that natural disasters, fiscal stimulus solve this problem, they boost GDP. To the extent that they don’t they don’t.
Keynes used the example of burying money in bottles and having people dig it up, because he lived under a gold standard and the discovery of more gold would be expansionary because it would expand the monetary base. The reason he proposed that was because there is no difference between digging up paper money and gold. He preferred expanding the base, but considered this impossible under the circumstances. Digging up money was his solution to failure of the monetary authority. The fact that spending does not need to have any social utility follows from that.
Arguing therefore that Keynesians think spending is always good, is a straw man, they only consider it good under certain circumstances: monetary disequilibrium and an unwilling or otherwise constrained monetary authority.
Bob, why do you keep attacking this straw man.
To satisfy his customers. That’s his market.
If that’s the case then Bob is probably the worst salesman in history openly questioning the orthodoxy of his ‘school’ on a blog that costs him probably more time than the financial rewards he receives from it.
Bob didn’t set up any straw man. He QUOTED people for crying out loud.
And I can find quotes – in vein of the salon.com article – where Hayek and Mises support a murdering fascist dictatorship. Context matters.
The conclusion is only valid in a very very special case within the context of the Keynesian story.
I understand your frustration, but imagine mine, I see an article claiming to refute a Keynesian conclusion without actually attacking the Keynesian argument. It’s just something any Keynesian would agree with under the assumptions Bob is making. The conclusion however is not based on said assumptions.
On side-note, I do not consider myself to be a “Keynesian’ economist or an expert on macro, but from what I know of it, this just seems wrong.
And I can find quotes – in vein of the salon.com article – where Hayek and Mises support a murdering fascist dictatorship. Context matters.
Yes, context matters, but the context of Keynesianism is not that destruction has benefits in certain locations, for certain people, for a certain time. It states unequivocally that destruction is “good for the economy.”
I understand your frustration, but imagine mine, I see an article claiming to refute a Keynesian conclusion without actually attacking the Keynesian argument.
But the Keynesian argument is being addressed, and is being refuted.
It is you apologists who are denying the Keynesian argument.
When the economy is at a certain state at a certain time. Keynes ‘General Theory’ implies as much. The classics were ‘wrong’ because they made a particular assumption. Keynes relaxed said assumption and said, no you need this otherwise the entire thing is humbug.
Marshall, claimed as much when he wrote his Principles, he assumed that the numeraire was fixed.
Samuelson based his Neo-classical synthesis on it, if the assumption is not satisfied Keynesian economics is true and that’s why he started off his book with macro and then went to micro.
So yes it is a straw man. The conclusion is only valid within a certain narrowly defined context.
When the economy is at a certain state at a certain time.
Which is a universal statement concerning economies as such.
Not some people.
Not some locations.
Not some industries.
ENTIRE ECONOMIES.
So yes it is a straw man.
Not when there are literal quotes from people.
Bob, why do you keep attacking this straw man. You assume monetary equilibrium, Keynesians assume monetary disequilibrium. To the extent that natural disasters, fiscal stimulus solve this problem, they boost GDP. To the extent that they don’t they don’t.
Are you people even reading what Bob is saying? Or are you content with throwing around “straw man” like it’s yesterday’s newspaper?
Bob, for the millionth time, doesn’t deny that natural disasters and the consequent spending can’t “boost GDP. ” That’s not his argument. His argument that is is wrong to interpret the boost in GDP as a sign of “economic good.”
Keynes used the example of burying money in bottles and having people dig it up, because he lived under a gold standard and the discovery of more gold would be expansionary because it would expand the monetary base.
No, that’s not why Keynes brought that up burying gold in bottles. He did so because he wanted to ridicule the standard (since it puts limits on the government’s ability to spend money).
The reason he proposed that was because there is no difference between digging up paper money and gold.
Yes, but there is a difference between having the violence backed monopoly power to create money out of thin air, and not having any such violence backed monopoly.
He preferred expanding the base, but considered this impossible under the circumstances. Digging up money was his solution to failure of the monetary authority.
People wanting more money than exists does not mean there is “monetary disequilibrium.” The desire for more money is ubiquitous and not unique to a gold standard.
His solution is based on an ignorance of what monetary freedom has on the lives of the populace.
The fact that spending does not need to have any social utility follows from that.
Huh?
Arguing therefore that Keynesians think spending is always good, is a straw man, they only consider it good under certain circumstances: monetary disequilibrium and an unwilling or otherwise constrained monetary authority.
In other words, always.
I tried to post the text below in two parts on Gene’s blog. He only allowed the first part to be published, denying to publish the second because ” I can’t even bring myself to post your last load of codswallop. But you are clever — I’m sure you could prove “irrefutably” that the sun is not really in the sky, if you put your mind to it.”
This is the text
(1) First, you discuss the possibility – or lack there of – to evaluate the economic consequences of a disastrous event. That is, you discuss whether we can make a statement regarding the condition of “the valley’s wealth”. Then you say that we can not compare interpersonal utility. Then, though, you write that the disaster is a cause for more economic activity “than there was before”.
Let me first note that you are correct in writing that we can not compare inter-subjective utilities.
From here on I will try to proceed as coherently as I can.
Your first mistake is your perception of
the valley as something that can be better or worse off. This implies that you think there exists an aggregated mass of wealth that belongs collectively to “the valley”.
First of all the valley is not an entity that can own things, it is a geographical territory. There IS wealth on this territory and it is owned individually. These individual property owners are integrated parts of the system of division of labor developed on the valley. This system forms and shapes community (society) that lives on the valley. There are three implications:
(i) Every individual is better off when the available for him stock of goods is higher than lower.
(ii) Every individual voluntarily decided to become part of the division of labor framework because he thought he would be worse off in case he stayed in self-sufficient isolation.
(iii) The community as a whole is better off when each individual’s wealth is higher than lower. More accumulated goods makes the system of division of labor relatively more beneficial to each of the community’s members.
Second, I do not know what exactly mean with “economic activity” and whether it is always or sometimes a good or a bad thing. Please specify. What I know, though, is this: you compare this “Activity” in the present with the “Activity” in the past. This comparison is wrong and it reveals one of the reasons why you can not comprehend Bastiat’s “unseen”. Bastiat makes the following comparison: what is the wealth in the present and what the wealth could have been again in the present, if a disastrous event X did not occur.
Third, let me now use the above three implications. When a disastrous event X happens it destroys the particular property of particular individuals-property owners. Accordingly all those individuals with destroyed property are now worse off than what they would have been in case the event did not happen. Their tangible material wealth is diminished and from implication (i) we deduce that their want-satisfaction is diminished, too.
Not only that but the community these individuals are part of (implication (ii)) is worse off, too. And we can make this assessment not by comparing inter-subjective utilities (I haven’t even gotten to the part where they start hiring unemployed workers for the repair, because I believe such a comparison is needed to measure the satisfaction of the hired workers and the dissatisfaction of the destroyed-property owners), but by using implication (iii). The accumulated stock of goods that could have been used productively is now diminished by the amount of destroyed wealth. This means that now there are less scarce goods for the individuals in this community to be appropriated in a production and used in exchange. The supply of the available means is curtailed, some ends will not be met. This is a valid a priori evaluation of the condition of the community after the event. We can with certainty make the statement that this community is now worse off, because of event X.
Let’s continue our example and say that the destroyed-property owners hire some unemployed individuals to re-build what they already had before the event. I believe that you acknowledge the fact that the individuals who hire would have been better off if they had hired people to produce something that adds to their wealth than to hire people who produce something that re-builds what they already had, but was needlessly destroyed. I believe you can not deny the fact that now they will have one or more of their needs unmet. This is because of the decreased supply of means available for the attainment of their ends.
Then you might say that “well, the destroyed-property owners are worse off, but the people they hire for the re-build are better off”. This undoubtedly is correct. No matter whether they were previously employed or unemployed. The fact that they agreed to the offer for re-build reveals that they think they will be worse off they do something else. What you forget to think of is this:
(A) If your main argument is that disasters boost employment (if the hired workers indeed were previously unemployed), which helps the economy, I will contra you with this: If the event did not happen and the individual could act upon his original intentions in the means-ends framework, then, with his exchanges (demand for services) he would have anyway be the “cause” of employment.
(B) The important thing you forget is that labor is not an end in itself. That with the decrease of supply of means necessarily some ends will not be met, after all, resources are SCARCE. This means that event X can not but be detrimental to the economic welfare of the community, remember implication (iii) (even if, and here I am generous to you, employment is higher than it would have been in case no disaster happened)
And here I am not comparing inter-subjective utilities. Pareto optimality can be useful, though. Some individuals are better off while other are worse off, because of the disaster. There is not net gain. On the contrary there is net loss, but these individuals who are better off are in this improved condition not because of an addition to the stock of means, but because of needless, otherwise unwanted, transfer of originally planned to be appropriated for other ends means.
Here are Gene’s responses to the above text of mine:
“Your first mistake is your perception of the valley as something that can be better or worse off.”
1. Ah, I see, when I say that economists CAN’T say if the valley is better or worse off, I actually secretly mean CAN!
“society is always better off with more accumulated goods ready for consumption/production than with less accumulated goods”
2. So here you make the mistake you just falsely accused me of making.
“this implies that he would have ANYWAY exchanged with someone”
3. I can’t believe anyone could even say this! I can’t make myself better off, by, say, going for a walk, which involves no exchange with anyone else?!
Like I said, both of your “irrefutable” propositions are utter nonsense.
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Regarding 1. I am not even completely sure what kind of a response is this. What I mean in the quoted sentence is that with this text of yours : “economic science has nothing to say about whether the valley is better off after the hurricane than it was before” you imply that the valley CAN be better or worse off, but economic science has no capacity to say when the valley is better or worse off. This reveals your collectivistic “best policy for most people” approach. No mention of individuals, no mention of property. Just “the valley”. Because of this I point you out that “the valley” actually is nothing more but a territory.
Regarding 2. Yes, since society means exchanging individuals, when there is more to exchange, it follows that the society will be better off.
Regarding. 3 Where have I said that an individual can make his condition better off only through interpersonal exchange? What I mean very clearly in the quoted sentence is to point you to the “unseen” which obviously is still unseen for you.
Let’s continue to his critics of the three implications (theorems):
“(i) Every individual is better off when the available for him stock of goods is higher than lower.”
You’ve never heard of anyone killed by their new-found riches?!
“(ii) Every individual voluntarily decided to become part of the division of labor framework because he thought he would be worse off in case he stayed in self-sufficient isolation.”
What rubbish. Individuals are part of the division of labor because that’s our nature as social animals, and that’s where they were born. People aren’t born from acorns out in the woods, then grow up, and then “decide” to join society!
“(iii) The community as a whole is better off when each individual’s wealth is higher than lower. More accumulated goods makes the system of division of labor relatively more beneficial to each of the community’s members.”
See point 1 — maybe “society” is better off, and maybe it isn’t.
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Regarding (i). Is this a joke or what? How is this a meaningful response to what I have written? Are you trying to deny the logic of action that a man always prefers more goods to less goods, because he is better off with more goods and worse off with less goods?
Regarding (ii). Is this a joke to? Individuals are part of division of labor because they are born in the division of labor? Again, is this supposed to be a meaningful response? What I have CLEARLY meant, and you are either stupid or pretend not to understand, is that those individuals who are part of the division of labour are parts of the division of labour ONLY BECAUSE they think they will be worse off if they were living in self-sufficient isolation. I have never written what “animals” individuals are, where they are born and etc. What I have written is deduced from point (i).
Regarding (iii). Since society means exchanging individuals, a bigger stock of available goods for exchange means that these individuals are better off compared to what they would have been in case the stock was smaller.
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I am writing all this here because I speculate that Gene will not accept my comments on his blog. I would be glad if he manages to respond me here.
Ivan wrote:
I am writing all this here because I speculate that Gene will not accept my comments on his blog. I would be glad if he manages to respond me here.
For what it’s worth, I don’t think Gene intentionally zaps comments unless they are really over the top or something. He held up mine for a day or two but it was because he was inattentive to his blog queue, not that he was pulling a DeLong.
(But it’s good if you are forced to re-type long blog comments. You wouldn’t want your forearms and wrists to languish in unemployment.)
Gene explicitly said that he won’t allow my comment on his blog. I have quoted his reasoning for that ” I can’t even bring myself to post your last load of codswallop”.
I want to thank you Mr. Murphy for accepting my comments on your blog.
What do you guys think about my reasoning, though? Am I right or is Gene right that it is a load of codswallop?
No, he’s now at the point where he zaps all of my comments, no matter how calm or insightful.
Forget the ABCT, forget MMT.
Marx is back to save the world
http://goo.gl/v15YF
Believe it or not, you guys, Blackadder (and maybe Gene?) were actually backing me into a corner. Last night, I fired off something like, “So unless you think taking money from people and handing it to the unemployed is ‘good for the economy,’ you can see my analogy was sound.”
Well duh, Krugman et al. would say, “Of course we think that’s good for the economy–we call it unemployment benefits. Haven’t you been paying attention?”
But now I don’t need to concede anything, because Gene and Daniel Kuehn are assuring me that “nobody” ever held this position. No one has ever said that the extra economic activity caused by employing idle resources, could more than compensate for the initial disturbance that set it off, right?
(Be careful how you answer guys. If you concede that a simple wealth transfer from a rich saver to an unemployed guy who will spend the $$, could generate net benefits to the economy–as least in Krugman’s view–then you are dead in the water. All you need is a small enough disaster that goads such transfers from rich to idle in order to generate these gains that will compensate for the disaster’s direct destruction of wealth.)
Defaulting on private debt destroys some of the financial wealth of creditors. Is that good for the economy?
Let’s have a debt jubilee, and call it Irene.
Defaulting on private debt destroys some of the financial wealth of creditors. Is that good for the economy?
If they’re malinvestments on the basis of federal reserve system funny money, then yes, liquidating debt is good for the economy, because it removes what was bad for the economy.
Last thing everybody: I am getting back from a long road trip so I can’t scroll through all the above. So if some people already made my point, or others think they delivered the death blow to my position and want a response…you may be waiting in vain. Just FYI.
After reading Gene Calahan’s blog and the comments above, I think you are all kind of missing the point. At least, missing the specific point in relation to the “isolated valley & wealthy loner” example. Most of you have taken the example supplied as just a metaphore for a modern economy (maybe that’s how it was intended) which presumes a whole bunch of stuff that was never supplied in the actual example itself.
I recognise that the example is simplified for the purpose of discussion, but I cannot accept the example as even representative of any sort of economy. What does this “wealthy loner” use to pay the workers? Does he pay gold? Let’s presume that he does pay in gold (I’m open to other ideas), so we have this bit of background:
OK, so at some previous time, these workers were “prosperous” and presumably paid in gold to build lavish housing. What happened to all the gold they got paid the first time round? It’s an isolated valley, so how did they spend it all? When we are told, “there is no other work around”, how is it that the workers who were paid in gold the first time around cannot also pay each other to build?
By the way, unless the mansion owner is also a farmer, what does he eat? If he buys his food from the farmers around him, they are not ” extremely poor subsitence farmers” anymore, they are cash crop farmers.
Hopefully it is clear where I’m going with this. Gene Callahan does not describe an economy, he describes a tiny fraction of an economy, without any genuine mechanism for exchange between the participants. Show me the barter transaction that is operating in this economic example.
Gene? I thought you were talking about Bob’s Fantasy Coconut Island!
In the simplest case, a man collecting coconuts for his own consumption is strictly a subsitence gatherer. He does not exchange with anyone, there is no barter, there is no real economy.
However, principles of saving and investment apply to a single individual, just as much as they apply to a group of individuals. These ideas can benefit from exchange but they do not require exchange. Saving is effectively the gathering of resources in the past, and spending those resources in the future, the critical factor is time regardless of who is involved.
In comparison, the Callahan example requires that at least one person in the economy is more wealthy than the other people, and thus in a position to employ labour. The whole basis of employment requires a mechanism of exchange, both parties need to benefit from the arrangement.