Tuesday, August 23, 2011

Yglesias on Broken Windows: couldn't have said it better myself

He writes:

"The fact that breaking windows would make a society poorer (fewer windows) is precisely why nobody ever proposes stimulating the economy by deliberately smashing windows. But the way the dialogue works is that first a Keynesian observes that fiscal stimulus can increase growth in a depressed economy. Second, as an attempted reductio, a conservative says “if that was true, then you could increase growth by breaking a bunch of windows.” Third, the Keynesian accurately points out that you could, in fact, increase growth by breaking windows. Fourth, the conservative accuses Keynesians of wanting to break windows or believing that window-breaking increases wealth. But nobody ever said that! The point is that we have very good reasons to think smashing windows would be a bad idea—there’s more to life than full employment—and that’s why Keynesians generally want to boost employment by having people do something useful like renovate schools or repair bridges."

...or colonize and terraform Mars.

Anyway - getting back to the point. The argument can sometimes get a little more complicated than this, because some people say that the act of government spending itself is the window-breaking. Then you have to ask why? The weak arguers will talk about taxing and spending at which point the discussion just needs to end. The somewhat smarter arguers will talk about crowding out in the bond market. At that point you say that yes, crowding out may very well be a problem at some point, but it's not now, so this window you think is being broken actually isn't being broken at all.

Yglesias also makes a reference to reductio ad absurdums. I personally think that reductios are often very bad economic logic. Economists think on the margin and they usually think there are lots of diminishing marginal returns to different things. Reductios are usually started in a way that completely ignores this. In truth that means they're not even actual reductios, because the reductio is supposed to carry an argument to its logical extreme, and if you ignore things like diminishing marginal returns or if you ignore the fact that we're making an argument on a particular margin you're abandoning the underlying logic of the claim, and therefore you're not really offering a refutation of the claim.

UPDATE: Bob Murphy points out that while Keynesians and Bastiat agree on the stock vs. flow question that anti-Keynesians regularly bungle in making accusations (well - he doesn't use those words exactly), Bastiat was pretty clear about assuming complete crowding out in his essay. In that sense, we can just say "Bastiat made the right point, but he messed up on the crowding out part... or at least was declarative enough that his parable can't be applied under all circumstances". A better rendition is given by Wilhelm Ropke, who doesn't make Bastiat's broader crowding out claims when talking about the impact of disasters. Brad DeLong has made the argument in the past that Bastiat understood there could be crowding in by public expenditures during depressions. I'm not entirely sure I agree with Brad on that, but at the very least he demonstrates that Bastiat supported a sort of "demand smoothing" by the state, which is still better than a Ricardian equivalence-esque non-effect.

UPDATE 2: The point is this - nobody flings Bastiat because they are having a disagreement about crowding out, which may be a point that Krugman and Bastiat disagree on. They fling Bastiat because they think that Krugman and others are somehow ignorant of the unseen costs of these things or ignorant of the concept of opportunity cost. If that's what you think, don't expect people to be impressed.

8 comments:

  1. Something "useful" is always in the eye of the beholder actually. Anyway, we spend gobs of money renovating schools already (see "The Cartel"). As for repairing bridges, the taxes on gas would be more readily available for that if they weren't be bled off to pay for public transit projects (of course, the roads would still be heavily subsidized even at that point - meaning privatization of some type is in order).

    As for terraforming Mars, since that is basically a kin to agriculture, it is up to the private sector to do. That's why it will never happen until someone can turn a profit doing it (or you have forced labor camps like those found in the Soviet Union when Siberia was "developed").

    "At that point you say that yes, crowding out may very well be a problem at some point, but it's not now, so this window you think is being broken actually isn't being broken at all."

    It is now; the government is doing lots of crowding out right now. All fiscal policy does is to keep the benefits of self-correction from occurring.

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  2. This is what Bob Murphy writes:

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

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

    _________________

    I am not seeing here what you are seeing in his statement; nothing about anyone regularly bungling, etc.

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  3. "Third, the Keynesian accurately points out that you could, in fact, increase growth by breaking windows."

    Could you point out the growth to us?
    -Ed

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  4. In light of this discussion I thought I would pass this along: http://twitter.com/#!/krugmanaliens

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  5. "The point is this - nobody flings Bastiat because they are having a disagreement about crowding out, which may be a point that Krugman and Bastiat disagree on. They fling Bastiat because they think that Krugman and others are somehow ignorant of the unseen costs of these things or ignorant of the concept of opportunity cost."

    Um, isn't crowding out pretty damn near the definition of opportunity costs? Second best and all that. The second best crowds out the best v. the cost of the second best not pursued. I mean, the concern with the crowding out crowd (pardon) is that what is crowded out is the best, in favor of the second best.

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  6. This keeps getting funnier and funnier:

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

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  7. re: "nothing about anyone regularly bungling, etc."

    Right Gary - it's called being facetious. Bob quotes Bastiat making the stock vs. flow distinction just fine, but then disagreeing with Keynesians on strict crowding out. I can't simply concede the point to Bob that he's demonstrated Bastiat entirely disagrees with what Keynesians say about him, and so I jokingly highlight that I can't concede that.

    Nonymous -
    re: "Um, isn't crowding out pretty damn near the definition of opportunity costs? Second best and all that"

    Right, but think about what the opportunity cost of an idle resource is. Crowding out is definitely related to opportunity cost. You can disagree on crowding out without disagreeing on opportunity cost.

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  8. "... at the very least he demonstrates that Bastiat supported a sort of "demand smoothing" by the state,..."

    Hahahahaha! Yeah, the classical liberal who wrote that the state is the great fiction by which we all attempt to live at the expense of everyone else, also supported technocratic AD optimization by the state!

    Anyway, could you please explain where confusion between stocks and flows affects the use of this argument? You keep referring to it but I haven't yet seen you articulate where anyone makes an error grounded in equivocation therebetween.

    Also, I don't think the "crowding out" issue is as relevant as you claim. You needn't endorse or reject any such position in order to realize that it would be better for society to employ resources to produce improvements than to deliberately sabatoge its wealth in order to artificially create the necessity of fixing the sabatoge. It is this inference that leads people to conclude (correctly) that the logcial conclusion of advocacy of such "demand stimulation" is that we should destroy everything in order to give everyone a metric _f-ton_ to do.

    (A similar point applies to the morons who support currency debasement to boost export industries -- why not debase the currency to nothing and be slaves?)

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