The Broken Window Fallacy

[editec]

Toro got it.

Some of you people think economics is like a hard science and therefore the same rules to getting things done can apply in every case

It's not. Economics is not remotely like a hard science


Hard sciences have rules that apply each and every time the conditions of that rule are met.

No economy is every the same from moment to moment.

Most economic theories are flawed at their very inception.

The flaw from which all other flawed economic thinking follows is the mistaken notion of the economically rational man.

I wish that theory were true, but it clearly isn't.

 

[The Rabbi]

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.

Velocity has nothing to do with it. Demand has nothing to do with it.
Government has no money of its own. Whatever it has it gets from someplace. That 'someplace" must supply more when gov't spends more. Thus the gov't is simply shifting demand from one place to another. That does not create anything.
How many times does this bogus theory need to be debunked? FDR tried it and we had the longest depression on record. Obama has tried it and we have the second longest recession on record. Carter tried it with "rebate" checks. Bush did the same. Every example was a failure.

 

[asterism]

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.

So in your opinion are those who say the policies starting in August 2008 have failed simply being idealogues?

 

[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.

To take my point further. People claim that WWII brought the US out of the Depression. (talk about a bunch of broken stuff) Well Bush started 2 wars after 9/11 & the recovery effects on the economy are not there. The US recovery from the Great Depression started with us supplying the allies with military hardware, supplies & weapons. This stimulus would have ended with the war & then the economy would have crashed again.

It was the VICTORIOUS SPIRIT citizens felt that lifted fallen nations & the millions of women telling the returning hero's HONEY I'M PREGNANT millions of times over that kept the economy rolling!!! Nothing creates 60 years continuous joyous demand like babies. They needed new clothes, beds, bigger houses, bigger cars, more toys, food, etc. Animal Spirits drives the economy. The current Mid-East wars may have depressed those spirits. We have not had the victorious attitude from these wars or a baby boom.

Japan's massive earth quake/tsunami/nuclear disaster will cause a lot of "Broken Window" spending on rebuilding. The Japanese people have been saving like crazy for the past 20 years because of a debt crisis similar to our current one. So will a defeatist attitude depress their economy or will this spending on rebuilding crack open their wallets permanently & propel that countries economy to new heights? Stay Tuned!!!

 

[Norman]

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

Banker.. glassman... what's the difference

Anyway I think this fallacy is still not understood by the public, which is one reason why everyone is voting for their benefits and trying to rationalize them in an election.

 

[Big Fitz]

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.

AHHHH HAHAHAAAAA... You're kidding right? That's like saying that the real purpose of a sandwich is a mayonnaise delivery system.

 

[Big Fitz]

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

Banker.. glassman... what's the difference

Anyway I think this fallacy is still not understood by the public, which is one reason why everyone is voting for their benefits and trying to rationalize them in an election.

And there's a vested interest by the anti-capitalists to make sure this basic economic lesson remains lost on the public.

Secondly, the anti-capitalists love those who are hurt most by "breaking windows". The victim is well camouflaged and the loss is spread over a large area (insurance companies and the investors they hate so much) so it's a gentle pressure down on the whole evil economy.

 

[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.

So in your opinion are those who say the policies starting in August 2008 have failed simply being idealogues?

That is not remotely what I said.

 

[Norman]

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.

Not quite. While austrians too believe some recessions are caused by fall in demand they believe there is a REASON for that fall.

Cash does not create supply, it's just medium of exchange. Human demand is endless, we always demand the best that there is to offer. So there is always demand of something. If a lot of people are harding cash it can be loaned out and stimulate investments for new projects. On the other hand if money is hoarded to socks, it will just transfer the purchasing power to the money that is not hoarded. The deflation will eventually get people spending again.

Well that is as far as I understand it.

 

[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.

To take my point further. People claim that WWII brought the US out of the Depression. (talk about a bunch of broken stuff) Well Bush started 2 wars after 9/11 & the recovery effects on the economy are not there. The US recovery from the Great Depression started with us supplying the allies with military hardware, supplies & weapons. This stimulus would have ended with the war & then the economy would have crashed again.

It was the VICTORIOUS SPIRIT citizens felt that lifted fallen nations & the millions of women telling the returning hero's HONEY I'M PREGNANT millions of times over that kept the economy rolling!!! Nothing creates 60 years continuous joyous demand like babies. They needed new clothes, beds, bigger houses, bigger cars, more toys, food, etc. Animal Spirits drives the economy. The current Mid-East wars may have depressed those spirits. We have not had the victorious attitude from these wars or a baby boom.

Japan's massive earth quake/tsunami/nuclear disaster will cause a lot of "Broken Window" spending on rebuilding. The Japanese people have been saving like crazy for the past 20 years because of a debt crisis similar to our current one. So will a defeatist attitude depress their economy or will this spending on rebuilding crack open their wallets permanently & propel that countries economy to new heights? Stay Tuned!!!

In your examples, you assume that monetary velocity is a constant. It is not always. It was not in the 30s. If monetary velocity collapses, then government spending can have a real, stimulative affect.

War can be very stimulative, especially when it is conducted elsewhere. In the first half of the 20th century, the year with the highest absolute level of US profits adjusted for inflation was 1916 as US companies fed the war in Europe. Profit levels didn't reach those levels again until the 1950s. The analogies of the Gulf wars are misguided because the scope and scale of both pale in comparisons to the WWs. Also, the economy in the 1930s was plagued by massive excess capacity, far greater than in the 2000s, and which was virtually non-existent in the early 1990s. Finally, you are correct that the end of the war fed a multi-decade boom as pent-up consumer demand from the Depression and the war led a spending spree by consumers, but the war years saw massive expansion in the economy driven by war spending. That 18% increase in GDP did not come from people anticipating the end of the war several years later. It came from government spending. Consumer spending was down in 1942. The end of the war brought about a recession as the government withdrew from the economy. But driven primarily by government spending, the economy was much bigger at the end of 1945 than it was at the beginning of the war.

 

[KissMy]

Yes government printing & spending moved the GDP because it caused inflation.

But the private sectors "Broken Windows" are not repaired by government printing presses. Real private sector spending & investing grows the economy by building things to make lives better & more productive like an Apple I-Phone. Sending a virus to all Apple I-Phones making them crash forcing their owners to get them repaired will not grow the economy. It will make people unproductive until their phone is repaired. That only a helps the Apple Store Technicians for a shot period of time. The rest of the economy will suffer. People likely lost phone numbers, documents & data they were using to build say a new state of the art off-shore drilling platform.

 

[Toro]

Yes government printing & spending moved the GDP because it caused inflation.

Those numbers are adjusted for inflation. Inflation doesn't move real GDP.

 

[Quantum Windbag]

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.

Was it?

 

[KissMy]

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.

The loose nut behind the steering wheel is a much larger determinate of how much mileage a vehicle gets than that EPA window sticker.

 

[KissMy]

Yes government printing & spending moved the GDP because it caused inflation.

Those numbers are adjusted for inflation. Inflation doesn't move real GDP.

Looking back at the 94% top tax rate back then, I guess government spending was the economy back then. Still it looks like personal spending was almost an inverse to government spending chart. Those boomer's have created a lot of demand & innovation over the years & have unknowingly paid high taxes through the SS, FICA & Medicare deducted from their checks & spent by government. Now there is no secret revenue boost to the government's economy & the boomer's are here to collect what does not exist. This will be a huge inflationary drag on the economy for many years.