The Burnt Window Fallacy

It is said that forest fires are nature's way of making new growth possible. They clear old growth, causing organic matter to decay and decompose into mineral components. These compounds serve as the building blocks for the fuel that replenishes essential nutrients for future flora. And some trees cannot survive without period blazes, the exposure to which is required for the opening of cones and germination of seeds. In this manner, fiery destruction kindles rebirth as the germ of new life.

Unfortunately, forest fires do not have the same effect on economies, no matter what modern day journalists try to tell us.

The worst wildfires that California has seen in a decade warded off shoppers and stung national retailers last week, but, in the long run, economists reckon the aftermath could end up lifting demand.

This is simply another example of the Broken Window Fallacy that Frederic Bastiat wrote about over a hundred years ago. What is missing from the analysis is What is Not Seen. The resources spent on rebuilding would have been used for more highly valued uses if the fires had not caused the destruction in the first place. Pre-existing plans must be put on hold, and means are diverted to less strongly desired ends. The economy cannot benefit from physical destruction.

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Unsurprisingly, the Mises

Unsurprisingly, the Mises Blog concurs.

the broken window fallacy,

the broken window fallacy, it seems to me, just assumes an efficient economy with no gluts (something very often proven in the abstract, ala Ricardo, but with dodgy empirical justification.) In the example for instance, suppose that the person who broke the window was Richy Rich, who spends all his money on gumballs. Would not the economy improve if Richy's money were directed away from the limited-utility producing gumball industry and toward hi-tech or something? Taking Richy's money is another thing altogether (clearly unjust)- but you libertarians like to couple your "justice" arguments with "economic efficiency" arguments that don't always work so well.

Or if the baker was hording his money under his mattress, it might actually be a good idea to stimulate investment or what have you. I just bought a book on Keynes (and checked out keynes "general principles" book- though that might even be worse than trying to read ricardo) so I'll probably have more to say about this later.

Yeah, Keynes in the original

Yeah, Keynes in the original is tough. I seem to be caught between the generally accepted arguments in mainstream economics that taxing-and-spending can sometimes be a boon to the economy when people are not consuming in the "right" way, and the Austrian argument that wealth is not created through its own destruction. Intuitively, the broken window fallacy makes me very skeptical of any Keynesian arguments to the contrary, especially when you throw in some of the pragmatic rational choice critiques.

You'd beggar and unemploy

You'd beggar and unemploy gumball workers in favor of rich high-tech workers/CEOs/entrepreneurs out of a sense of general economic "efficiency?"

It is inappropriate to declare one industry "low utility" over another, since such claims (and estimates of utility) are impossible. If the gumball industry employs more people AND makes a profit (without subsidy or compelled labor), then it is economically efficient for them to proceed.

Also, with the broken window, it will take time for it to be repaired. In the Richie Rich scenario, not only is he not buying gumballs NOW, but he has to adjust in other ways to the lack of a window- which may cause other spending priorities to change, etc. So gumball producers are out of money, RR has no gumball AND no window benefits until a new one is created. Boom in windows, bust in gumballs, and overall loss of utility.

If it is a case of trying to "liberate" or "mobilize" unproductive resources, one must consider the original state- if the economy has X resources and baker has taken Y out of circulation, then the total valye of the remaining resources is not X-Y, but X/(X-Y).

Compelling the baker to put amount Y back into the total X, reverses the sign of the denominator: X/(X+Y).

Thus, by incurring a loss on the baker and making him release his resources into the economy to make himself whole again, A) you've made the baker objectively poorer, period, (and that's not even taking into account how much the baker valued keeping those resources out of circulation!) and B) you've made everyone else in the economy poorer due to extra funds floating about chasing a slightly smaller basket of goods and services.

And all of this is just hand waving since, a priori, it can be known that you cannot increase wealth by destroying wealth.

Jesus, what dopes.

Jesus, what dopes.

"In the example for

"In the example for instance, suppose that the person who broke the window was Richy Rich, who spends all his money on gumballs. Would not the economy improve if Richy's money were directed away from the limited-utility producing gumball industry and toward hi-tech or something?"

No.

John and Brian, it's a shame

John and Brian,
it's a shame that free-marketeers like yourselves would fall prey to such a "zero-sum game" argument as the one you're making above.

Anyway, I gotta make this short and sweet: If the gumball industry is propped up by Richy Rich's niave fiat, allocating the resources to more sound investments could simply make the pie bigger. Think about the arguments that you guys always make for "gov't spending"- it's inefficient and whatnot. What's different about Richy and Gov't?

As far as the Baker hoarding his money brian, it's pretty simple:
aggregate income= aggregate output which means
spending and saving= private investment and consumer goods produced

if saving outpaces private investment, as in the baker example, then consumer goods produced will outpace spending. That means you will get a glut.

Nonsense. It is impossible

Nonsense. It is impossible for there to be a general glut or overproduction, for there are always needs that are unsatisfied. If there is too much in one area, there cannot be enough in another. It is Says Law, and Lord Keynes can no more repeal that than he can Gravitation or Thermodynamics.

The gumball industry, in our ongoing example, isn't "propped up" by RR's spending so much as responding to RR's demand for gumballs. Should RR permanently eliminate his desire to consume gumballs, then by all means the resources locked up in the gumball industry should be released to other purposes.

But in our example, the destruction of RR's window results in a temporary disordering of RR's natural preferences- he has to divert resources he would prefer be spent on gumballs (and will spend in the future) in order to make himself whole after the loss of the window. In the meantime, RR loses utility of the window and gumballs while waiting for the window shop to finish crafting the replacement.

So all the breaking of the window has done is divert money from one endeavor to another, with a net loss of utility (RR's).

One of Lord Keynes' myriad mistakes was to equate "savings" with removal of goods/commodities from the economy- as though spending were the be all and end all of economic activity. In the real world, savings are deployed as investment (corporate or personal), which means that in general all money is working and resources are allocated intertemporally according to interest rates and so forth.

But even if there were hoarding, I repeat, the removal of a portion of the supply of a commodity from the market will tend to increase the price of that commodity (value). If Bill Gates were to remove a $billion from the economy and sit on it, interest rates would probably rise, but if the Fed did nothing, general prices would fall because the price of money would also rise- money is a commodity like anything else. If the purchasing power of money rises, it doesn't matter how much is "hoarded". But that's another post.

In any case, the biggest difference between the government and RR is (wait for it) that RR didn't take anyone's money by fiat (taxes). If he wants more cash to blow on gumballs, he has to go out and serve someone via exchange of goods or services. If he keeps making bad decisions (i.e. decisions that pay out less resources than he put in), he'll run out of money, and eventually his (bad) influence on the economy will stop.

Governments have no such built in limits...

It is impossible for there

It is impossible for there to be a general glut or overproduction, for there are always needs that are unsatisfied. If there is too much in one area, there cannot be enough in another. It is Says Law, and Lord Keynes can no more repeal that than he can Gravitation or Thermodynamics.
boy, oh boy, brian- we've got a lot to straighten out
a. I'm almost sure you're thinking of Walras's law, a common mistake- that's the one that says "total excess demand must always equal total excess supply"- that means general equilibrium. Not specific equilibrium, ala say's law.
b. regardless of whether you've gotten the law right, I think it's pretty safe to say that you're being just a touch dramatic. The idea that Say's law (which, let's remember is not accepted by every economist- mainly just the austrian and chicago ones, and has been heavily critiqued by Malthus Bentham and Keynes) is on par with the law of thermodynamics is basically crazy.
c. "disproving" gluts while hanging on to the marginalproductivity theory of distribution (a cornerstone of the Austrian and Chicago theories, I believe) is risky business indeed.

The gumball industry, in our ongoing example, isn't "propped up" by RR's spending so much as responding to RR's demand for gumballs.
just like new deal era construction companies were responding to the govt's demand for roads. The argument against that- forgive me if I assume too much about your position- goes like this "governments allocate resources less efficiently than markets, and thereby prop up inefficient industry." Correct? What about little Richy Rich doing the same thing; naively propping up the gumball industry even though it overcharges.

In the meantime, RR loses utility of the window and gumballs while waiting for the window shop to finish crafting the replacement.
sure, it doesn't take a genius to figure this out. But what if the proverbial pie is made bigger because the window making shop is able to spend their profit on developing new, cheaper window material? And a new upstart gumball company which is much better is able to gain market share, making many others happy? I hope you are able to look past the Pareto criterion in order to see gains from this.

So all the breaking of the window has done is divert money from one endeavor to another, with a net loss of utility (RR's).
not neccesarily at all. see above.

One of Lord Keynes' myriad mistakes was to equate "savings" with removal of goods/commodities from the economy- as though spending were the be all and end all of economic activity. In the real world, savings are deployed as investment (corporate or personal), which means that in general all money is working and resources are allocated intertemporally according to interest rates and so forth.
I nicely sidestepped this delimma (small though it may be- there are good reasons for distinguishing saving from investment) by having the baker put his money under the mattress.

If Bill Gates were to remove a $billion from the economy and sit on it, interest rates would probably rise, but if the Fed did nothing, general prices would fall because the price of money would also rise- money is a commodity like anything else. If the purchasing power of money rises, it doesn't matter how much is "hoarded".
but what else is going on in the economy? Supply is outpacing demand, so businesses reduce production (obviously- they didn't sell all they produced before) which means reducing employment. Declining income means even less will be spent though, and you get a downward spiral with production decreasing and employment decreasing along with it. Oh yeah, though, governments create all the depressions.

In any case, the biggest difference between the government and RR is (wait for it) that RR didn't take anyone's money by fiat (taxes).
I admire your consistancy by taking this position, but it's a very very dangerous one. Try looking at the history of private property, wealth, and capital and concluding that force, fiat, or coercion wasn't involved. It's pretty damaging.

If he keeps making bad decisions (i.e. decisions that pay out less resources than he put in), he'll run out of money, and eventually his (bad) influence on the economy will stop.

Governments have no such built in limits...
ahhh, but they do. The state of New Hampshire, soon enough, will outpace every other state, economically speaking (though I'm sure everyone will be more happy as well.) The consequnces of government fiat will be realized as businesses flock to New Hampshire and everyone else winds up poor... The example is lightearted, but the point should be clear enough.

The problem with Keynes was

The problem with Keynes was his fixation on stimulating aggregate demand. He didn't care if it was paying people to dig ditches and fill them back up. The concept of value escaped him.

Capital accumulation, as well, it would seem.