Can you help me clarify this broken window theory debate?

[SHU16]

Two of my friends have been debating the merits of the broken window theory, and I'm wondering what you guys would provide as a response to the Keynesian's last response. Please see their message exchange below. Thanks for your help!

• Austrian Nicely written article. But is economics really a lesson? If it was, then why have we made the same mistakes that past decades, past centuries, and even past civilizations made? Krugman's philosophy is wrong because it tries to patch a scab with a razor. You can't stop a fire by pouring more kerosene, just as you can't stop a depression by further increasing the money supply
  
  
• 
  Austrian Actually even simpler - Krugman's philosophy is wrong because it just doesn't make sense. How can someone say that breaking windows leads to economic growth? Sure, it might put an extra $100 into a glass repair man's pocket, but it also takes $100 out of a homeowner's. He/she would then have less money to buy clothes or movie tickets, so other retailers would be out of a sale. Broken windows is like a ponzi scheme...it helps some at the expense of others
  
  
• 
  Keynesian That's basic economic theory. That hundred goes into the pockets of many others and will help the economy with each transaction even with its diminishing amount with each transfer.
• Keynesian 100 turns to 90 in the pocket of another, which then may turn to 70 in the pocket of another, which then in turn may turn to 30 in the pocket of another. Savings then add to AD.
  
  
• Austrian It's definitely mainstream economic theory today, but it wasn't 150 years ago. I don't like the money multiplier, because I don't think it takes into account what would have happened if the incident didn't occur. If that guy's window didn't break, he'd have $100 to spend on something else (say a hat). And that money would then circulate to Hat Salesman Bob, who would then have money to pay Movie Ticket Man, who would then have money to pay Lipstick Sam. The money continues to circulate just as it would have if the window broke, but to different people. You can't just assume that $100 would stay in a bank account unspent. But even if it did, it'd help to lower interest rates (at least that's how it would be in a free-market economy), which would then encourage it to be spent instead of saved.
  
  
• 
  Keynesian You're not taking into account the possiblity that the money will have conditions on it. If he has that extra 100 he could save it and it would be a long run effect instead of a mandatory spending on fixing the window which would produce a short run effect.
  
  
• 
  Keynesian If he has to spend the money, it will be a positive effect to the economy in the short run, nearly guarenteed. Otherwise that money could be a long run efect on the economy through saving
  
  

 

[Barrex]

No problemo. First I need you and your friends to smash your windows with a rock or some other object...later I will explain it to you how you and entire civilization is in better situation because of it...Actually you guys should burn your houses down to the ground. That way I will have better practical example. Why keep it just in theory. If your Keynesian friend is not willing to burn his house down you do it for him... after all you are being a positive force in economy and just implementing his theory in practice.

Whenever wherever Keynesian is coming at you with broken window fallacy you first need to burn his house down before continuing further debate. Make it practical and not just theoretical. That way there is no misunderstandings.

We will continue after you did this.

 

[Guitarzan]

He states in his last statement that it will be a positive effect on the economy in the short run, which isn't true...as what it not seen is that the money could have went to the shoemaker instead of the window maker.

So we either have a broken window (destruction) and a window maker with the money. OR we have a perfectly fine window (no destruction) and a shoemaker with the money.



And if we extrapolate this theory, we get to see how absurd these Keynesian ideas are, as Barrex pointed out.

 

[acptulsa]

You know, the hundred dollars is there. It will be spent or saved. I guess Keynesians think money has to keep moving or their big house of cards falls. So, they seem to figure that it's better that you buy new shoes and replace your broken window, because if you don't you might save some money. Never mind that it shows Keynes' complete lack of long term thinking (see my sig). Never mind that just because they can print whatever they need doesn't mean that someone whose window gets broken might have to do without something else to get it fixed because their money supply is finite. The fact is, because these fiat savings-robbing inflation apologists refuse to admit solid currency has merits, no one saves, they invest, and investment capital actually creates businesses rather than just supporting existing ones. Of course, savings did too by giving banks something to loan.

Broken window theory is like riding a stationary exercise bike. Without broken windows, you get to ride a real bike. That way, you might actually get somewhere.

 

[SHU16]

Thanks so much guys! I have an update, though, that I was hoping you could help me with:

• Austrian You're absolutely right, it very well could be saved. The lower interest rates would highly discourage it, but it still could be done.
  
  Why don't we burn every house in Gloucester County down? It won't be great for us, but it will help the masons, plumbers, and motor home park owners. I definitely would have spent my money on better things (groceries, movies, electric bills), but I'm now stuck spending on the bare bones plan. I'm using (and spending my money) on other services at the expense of others. Sure, I probably would have saved more of my money if my house didn't burn down, but I still would've spent a good portion of it. And now I don't have a house...but that's okay, it's good that I bit the bullet and let it burn down for the good of the economy, because god forbid I would've saved a few bucks. Every movie theater in Beckett, Bridgeport, and Center Square might be going out of business, but that's okay because McEntee Construction's doors are swiveling open like never before.
• Everything we do should be done for the good of the economy as a whole, and not for the benefit of our immediate needs. Let some prosper at the expense of others just to make those short-run GDP numbers go up a little bit. Makes sense
• 
  Keynesian You're using a hyperbole. Natural disasters are, in fact, on record to boost the economy. Now if every single house burned down, it would cause a different type of problem. But if there happened to be a 4 alarm fire and a limited amount of people lost their homes, that would provide some money for the economy. In fact, the money doesn't even have to come from the homeowner, as insurance could cover most of the costs. But because money is being spent, it provides incentive for the homeowner to add a bit more out of their own pocket in order to make their new home a bit more comforting.
• You have a rather skewed view. Not everyone can benefit at the same time. Remember that the money moves cyclically and will eventually get back to households

 

[Acala]

What he says about saving is typical Keynesian ignorance of how the market actually works. If I save my money instead of spending it on a new gizmo, that money doesn't go into a mattress somewhere. That money is loaned out and spent just as fast as if I spent it myself. In a free market it will be spent on second-order goods - tools, factories, etc. - but people have to make and sell those second-order goods just as certainly as the latest consumer gizmo. The difference is that although the money is spent immediately in both cases, in the case of savings the money is spent on goods that increase overall productivity. So not only is the saved money spent on goods in the present, it lays the foundation for more productivity in the future.

 

[acptulsa]

Keynesian You're using a hyperbole. Natural disasters are, in fact, on record to boost the economy. Now if every single house burned down, it would cause a different type of problem. But if there happened to be a 4 alarm fire and a limited amount of people lost their homes, that would provide some money for the economy. In fact, the money doesn't even have to come from the homeowner, as insurance could cover most of the costs. But because money is being spent, it provides incentive for the homeowner to add a bit more out of their own pocket in order to make their new home a bit more comforting.
[*]You have a rather skewed view. Not everyone can benefit at the same time. Remember that the money moves cyclically and will eventually get back to households
[/LIST]

When this person accuses someone of using hyperbole, it reminds me of the cop who just did 110 to catch up to you and give you a ticket for doing seventy looking at you and saying, 'You were speeding.'

So, if you're spending the money, the insurance company isn't Once again, he's acting like there isn't a fixed amount of money. The insurance company prints the stuff, but they only print it when they have to pay it, right? So, insurance claims create money that wasn't there before?

Now, major natural disasters can cause money to be printed, or at least borrowed from China (or both). But to say that's good for the economy is to say that inflation and the national debt are good for the economy...

'The budget is a mythical beanbag. Congress votes mythical beans into it, and then tries to reach in and pull real beans out.'--Will Rogers

...and you should ask him if he really wants to debate three highly controversial items of Keynesian b.s. at once.

Speaking of b.s. how does he figure that the 'cyclical nature of money' guarantees that all of the money cycles back to the household, or even the community, or even the nation?

'The money was all appropriated for the top in the hopes it would trickle down to the needy. Mr. Hoover didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night anyhow. But it will at least have passed through the poor fellow's hands.'--Will Rogers

If you want to preach the virtues of spending like there's no tomorrow, don't pester the poor; they have no choice. Don't even pester the middle class--it's getting too difficult, first you have to find what's left of it. Pester the rich. Not that the 'one percent' could possibly spend it as fast as they're stealing it.

What he says about saving is typical Keynesian ignorance of how the market actually works. If I save my money instead of spending it on a new gizmo, that money doesn't go into a mattress somewhere. That money is loaned out and spent just as fast as if I spent it myself. In a free market it will be spent on second-order goods - tools, factories, etc. - but people have to make and sell those second-order goods just as certainly as the latest consumer gizmo. The difference is that although the money is spent immediately in both cases, in the case of savings the money is spent on goods that increase overall productivity. So not only is the saved money spent on goods in the present, it lays the foundation for more productivity in the future.

Thank you Acala. I thought I already said that, but you presented a nice clarification.

 

[Xerographica]

Yes, we could stimulate the economy by crucifying liberals. But perhaps we could put liberals to more valuable uses?




Why would Calvin's mom pay him $5 to pound nails into her coffee table when she could pay him $5 to shovel snow? Clearly shoveling snow would create far more value for Calvin's mother.

Liberals think it's simply about spending money. But the truth of the matter is that it's about maximizing the amount of value that's created. Given that values are super subjective, value maximization depends on earner valuation.

Part of the problem is semantic. We're missing words...

LinvoidX = Earner Valuation
LinvoidY = Representative Valuation

We're actually missing a lot of words. In order to effectively battle economic ignorance...we really need to improve our arsenal.

 

[Acala]

Thank you Acala. I thought I already said that, but you presented a nice clarification.

You did, but he apparently ignored you.

 

[CaptUSA]

That which is unseen.

Even if I stimulate the economy I can see by moving money now, I had to take it from someplace. Perhaps, it was out of my bank account. But that means there is less money that the bank can lend out to businesses that use the money to create more things. If I use insurance money, likewise, they had to get it from somewhere else.

It becomes easier to see to me when you view it as "capital" instead of "money". Money is just a poor measurement. If you use "capital" to repair something, it is usually assumed that the capital could have been used elsewhere. And if you are using capital to build something new, the economy grows because instead of just the old thing, you also have the new thing. In the Keynesian world, you have to take capital away from the new thing to repair the old thing. So, in the end, there is only one thing left.

 

[Barrex]

Keynesian You're using a hyperbole...

I told you. Didnt I told you? Burn his house down. Not just talk about it. Now you are in "retard theory land" debating people who cant do simple math problem:

Keynesian way:
economy - house + money earned spent on rebuilding house* = economy + 1 house*

Austrian way:

economy + house + money earned spent on second house = economy + 2 houses

Austrian economy is better off by 1 house

*Keynesian house would be a tent or small shack. Since it is good for economy to burn it people would burn them daily.


STOP TALKING AND BURN HIS HOUSE!!!!!!!

 

[SHU16]

Thank you so much for all of your help everyone. Your explanations helped my understanding on this tremendously. For your entertainment, I have included his final "defense" :

Keynesian You say that it as if the bank doesn't care about how well it does since the FDIC will bail it out, but you don't understand the idea that their incentive is to make a profit. They don't make money when the FDIC "cushions" them. They make money when they give out loans and develop the economy, which is great! While the Great depression had extreme circumstances, natural disasters do in fact help the economy. I wrote a paper of the effects of hurricane sandy on the north jersey area and found evidence, through multiple sources, that there was at least a momentary boost in the economy following the disaster. You're not understanding the fact that if money HAS to be spent, it is guaranteed to provide a short-term benefit whereas money that CAN be spent is variable. Just like the article stated, uncertainty is important when dealing with the economy, not just risk. When money has to be spent, one forgoes uncertainty of the market, as they need the money to provide their basic necessities. The point of saving is that in the long run, is for loans but say's law states that savings = Investments and that BOTH savings and investments affect interest rates. So money in the economy would allow for cyclical shifts of money, thereby both affecting it in the short run and the long run. Remember, based on Keynesian views, savings hurt a weak economy. You can't just say boosting the economy isn't about spending money without justification. History disagrees with that.