The Broken Window Fallacy

[Publius1787]

The Broken Window Fallacy

How Stimulous and "cash for clunker scams" destroyes the economy.



[ame]http://www.youtube.com/watch?v=Hrg1CArkuNc&feature=related[/ame]

 

[Sheldon]

This has been a mainstay battlecry of the Austrian School. I'd be surprised if any regular in the economics forum hasn't heard of this.

 

[Modbert]

This has been a mainstay battlecry of the Austrian School. I'd be surprised if any regular in the economics forum hasn't heard of this.

I highly doubt any regulars in the economics forum haven't heard of this. I know I have heard and read about this theory many times.

I'm pretty sure those same videos were posted with a very similar title within the thread many months ago. Publius however is a year behind the curve.

 

[JBeukema]

I'm sure the glassman would say it's no fallacy

 

[JBeukema]

So I hit 'play' and saw WTC. I thought this was supposed to be an economics thread?

 

[RadiomanATL]

So I hit 'play' and saw WTC. I thought this was supposed to be an economics thread?

It is. The video discusses something Krugman said about 9/11 stimulating the economy.

 

[Cuyo]

The Broken Window Fallacy

How Stimulous and "cash for clunker scams" destroyes the economy.

Applying the broken window parable to Cash for Clunkers assumes that the goal of CFC was simply to sell cars. It wasn't. It's goal was to increase average fuel economies, which it did, and was successful beyond anyones best hopes.

 

[Toro]

The Fallacy of the Broken Window is generally correct, but ...

It assumes monetary velocity is a constant. If velocity has collapsed, then breaking windows can create wealth because it circulates money throughout the economy. It can also be beneficial when there is excess capacity in the economy.

Also, it can be very good for your economy if you are breaking other people's windows. This is why war spending can be stimulative.

As well, the OP has made a mistake implying that the broken window theory and stimulus are the same thing. They are not.

 

[Paulie]

This has been a mainstay battlecry of the Austrian School. I'd be surprised if any regular in the economics forum hasn't heard of this.

First of all, I've never seen you stick your nose in Economy. Second of all, you are educated on the Austrian School???

I'd like to know more from you...

 

[Paulie]

The idea behind this is that a lot of people won't open their wallets for anything until they have absolutely no other choice.

I completely understand that line of thinking, and I will never condone precipitating it by knowingly causing damage somewhere to force spending.

 

[JBeukema]

So I hit 'play' and saw WTC. I thought this was supposed to be an economics thread?

It is. The video discusses something Krugman said about 9/11 stimulating the economy.

It did. Well, certain sectors. Mostly the people who get paid to clean up the mess.

 

[JBeukema]

The broken window:

-stimulates the glass and service industry

-prevents the funds spent on the new window from either (A) sitting around, doing nothing or (B) being elsewhere invested (such as paying a gardener or investing in materials that might increase the productivity of the man whose windows has been broken)

Hence it stimulates certain economic sectors, but to the possible detriment of others.

To use the Austrian example of building a house: you add a fireplace, which can be a great thing, especially during the winter but if you needed those bricks to finish a loadbearing wall, then then you're fucked

 

[william the wie]

The Fallacy of the Broken Window is generally correct, but ...

It assumes monetary velocity is a constant. If velocity has collapsed, then breaking windows can create wealth because it circulates money throughout the economy. It can also be beneficial when there is excess capacity in the economy.

Actually that assumption does not hold for Austrian Business Cycle Theory at least not in modern form. The supply and distribution chains have different transmission systems resulting in different velocities depending on where in the cycle you are.

Also, it can be very good for your economy if you are breaking other people's windows. This is why war spending can be stimulative.

As well, the OP has made a mistake implying that the broken window theory and stimulus are the same thing. They are not.

Last paragraph extremely true. Deliberate non-criminal mis and mal investment is the usual result of stimulus spending but that is not a law of nature. Truman aiding conversion back to civilian use and Eisenhower with the Defense Highway system with its spillover benefits were useful but as a general rule most stimulus is broken window makework of negative economic value.

 

[loosecannon]

The Fallacy of the Broken Window is generally correct, but ...

It assumes monetary velocity is a constant. If velocity has collapsed, then breaking windows can create wealth because it circulates money throughout the economy. It can also be beneficial when there is excess capacity in the economy.

Also, it can be very good for your economy if you are breaking other people's windows. This is why war spending can be stimulative.

As well, the OP has made a mistake implying that the broken window theory and stimulus are the same thing. They are not.

The broken window fallacy argument is always correct, but it is being misused by the OP who habitually relies on logical irregularity and sophism to advance partisan points.

The fallacy applies much more to war than to stimulus tho, two points that you correctly stated. War and defense spending as econ stimulus is like the broken window argument squared.

 

[loosecannon]

The Broken Window Fallacy

How Stimulous and "cash for clunker scams" destroyes the economy.

http://www.youtube.com/watch?v=gG3AKoL0vEs

http://www.youtube.com/watch?v=Hrg1CArkuNc&feature=related

Duffus award!

 

[KissMy]

The Fallacy of the Broken Window is generally correct, but ...

It assumes monetary velocity is a constant. If velocity has collapsed, then breaking windows can create wealth because it circulates money throughout the economy. It can also be beneficial when there is excess capacity in the economy.

Also, it can be very good for your economy if you are breaking other people's windows. This is why war spending can be stimulative.

As well, the OP has made a mistake implying that the broken window theory and stimulus are the same thing. They are not.

This may be what they teach in economics but it is dead wrong. It takes away more than it stimulates. If a 30 year window still had 15 years of good service life remaining & it was destroyed then we lost. That money spent to replace that window was pulled from the bakers investments that was leveraged 4 to 1 creating jobs. Now 4 new higher level jobs are not created & an established window installer makes a few bucks. A new 30 year window will be placed in the series of remaining windows that will all be replaced again in 15 years. Also broken windows lead to lost business. Customers, surrounding business & community feels less secure & relocate to safer communities. Broken windows lead to increased crime, fewer jobs & lost opportunities. Study - Police Broken windows theory

Also the shop owner & the surrounding community becomes somewhat depressed after an incident. Depressed people do not stimulate the economy. They stop spending & begin nesting. Just look at what happened to the economy after 9/11. The Fed had to over stimulate a housing bubble to get the economy to start moving again.

 

[william the wie]

The Fallacy of the Broken Window is generally correct, but ...

It assumes monetary velocity is a constant. If velocity has collapsed, then breaking windows can create wealth because it circulates money throughout the economy. It can also be beneficial when there is excess capacity in the economy.

Also, it can be very good for your economy if you are breaking other people's windows. This is why war spending can be stimulative.

As well, the OP has made a mistake implying that the broken window theory and stimulus are the same thing. They are not.

This may be what they teach in economics but it is dead wrong. It takes away more than it stimulates. If a 30 year window still had 15 years of good service life remaining & it was destroyed then we lost. That money spent to replace that window was pulled from the bakers investments that was leveraged 4 to 1 creating jobs. Now 4 new higher level jobs are not created & an established window installer makes a few bucks. A new 30 year window will be placed in the series of remaining windows that will all be replaced again in 15 years. Also broken windows lead to lost business. Customers, surrounding business & community feels less secure & relocate to safer communities. Broken windows lead to increased crime, fewer jobs & lost opportunities. Study - Police Broken windows theory

I forgot all about that Thanks for the reminder. (sorry, I can't rep you again yet.)

 

[JBeukema]

That money spent to replace that window was pulled from the bakers investments that was leveraged 4 to 1 creating jobs. Now 4 new higher level jobs are not created & an established window installer makes a few bucks.

Actually, it was sitting in my mattress as wasn't being invested anywhere at all. it was my Window Fund.

Depressed people do not stimulate the economy.

Tell that to Hoffman Le-Roch

 

[editec]

The fallacy of Austrian school economic is that it believes that the money would be put back into circulation anyway.

That, as we have been seeing now for some time, it not true.

Investment on the supply side doesn't happen until there is DEMAND.

In a deflationary period, it is DEMAND that is lacking, rather than there not being enough cash to create supply.

So whether or not keynesian solution are useful really depends on the state of the economy at the time.

I'll say it still one more time...cars have accelerators AND brakes for a reason.

Sometimes stepping on the gas is the right thing to do. Other times stepping on the brakes is the right thing to do.

And as some of you who race cars are probably aware, there are even times when one might be dragging the brakes and giving the auto gas at the same time.

So too with our economy.

We might reason that some aspect of our society needs stimulus, while another part of that economy needs braking.

I know this won't convince many of you who are wearing ideological blinders.

But you idealogues have proven to me that your POVs are faith-based rather than based on any reality I'm aware of.

 

[Toro]

The Fallacy of the Broken Window is generally correct, but ...

It assumes monetary velocity is a constant. If velocity has collapsed, then breaking windows can create wealth because it circulates money throughout the economy. It can also be beneficial when there is excess capacity in the economy.

Also, it can be very good for your economy if you are breaking other people's windows. This is why war spending can be stimulative.

As well, the OP has made a mistake implying that the broken window theory and stimulus are the same thing. They are not.

This may be what they teach in economics but it is dead wrong. It takes away more than it stimulates. If a 30 year window still had 15 years of good service life remaining & it was destroyed then we lost. That money spent to replace that window was pulled from the bakers investments that was leveraged 4 to 1 creating jobs. Now 4 new higher level jobs are not created & an established window installer makes a few bucks. A new 30 year window will be placed in the series of remaining windows that will all be replaced again in 15 years. Also broken windows lead to lost business. Customers, surrounding business & community feels less secure & relocate to safer communities. Broken windows lead to increased crime, fewer jobs & lost opportunities. Study - Police Broken windows theory

Also the shop owner & the surrounding community becomes somewhat depressed after an incident. Depressed people do not stimulate the economy. They stop spending & begin nesting. Just look at what happened to the economy after 9/11. The Fed had to over stimulate a housing bubble to get the economy to start moving again.

The broken window is merely an example. You could use other examples, such as rebuilding a park, which implies no crime and thus no reason to feel unsafe and depressed.

As per the baker example, again, you assume constant velocity. If velocity has collapsed, then no one is buying from the baker, so he's going belly up anyways. By inducing economic activity by rebuilding the park, people now can/want to buy goods from the baker, which they didn't before as collapsed velocity implies. You can pay for this by borrowing. Value is created if the project creates economic activity greater than the rate of interest on the project.

Like I said, the Broken Window Fallacy is usually correct. However, it is not always correct.