Without further ado, we take a look at the attack on the Broken Window Fallacy posted recently at mises.org.
The gist of his argument is that if we accept the assumptions of Keynesians, that people are unemployed because those with money to spend are hoarding their cash instead of spending it, and also accept that lowering wages is hard to do, then breaking a few windows is a great way to end unemployment. Break those windows, and the hoarders will be forced to open their miserly wallets and hire the unemployed to fix those windows, and at the going wage, too.
Here’s what he says:
The Broken Window Fallacy, in its basic state necessitates that the money which would be spent on the broken window, would otherwise have been spent on something else, either invested on producer’s goods or spent on consumer’s goods.
What he means here is that the fallacy is usually presented like this: Mr A gets his window broken by a vandal. Cost of repair, a hundred bucks. Some say that this is a good thing for the economy, because it creates jobs. The glazier now has employment, repairing the window.
This is a fallacy, say Austrian Economists, because had the window not been broken, Mr A would have spent the hundred bucks on something else, say a new suit. So yes, the glazier gained a job, but the tailor lost a job.
However, if we grant the usual Keynesian assumption that money is merely hoarded during a recession and prices are sticky, then this is no longer the case. If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window.
The poster at mises.org thinks he has found a flaw in this reasoning. What if Mr A is a hoarder? Then those hundred bucks will never be spent at the tailor’s [Note for sticklers: The poster got his story confused, talking about spending money on windows that were not broken. He means spending it at the tailor’s]. So that the only way to get Mr A to spend the money and increase employment and end the recession is to break his stupid window, forcing him to spend those hundred bucks hiring the glazier:
If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money, thusly [sic] boosting the economy from what it would have been.
One broken window and a lot of money is spent. Consumption is increased. The economy is “boosted”.
In fact, the more windows you break, the better:
If we assume this on a mass scale, then unemployment will be reduced and output would increase from an increase in general demand, from many broken windows.
Bottom line, break tons of windows and you increase spending from those miserly hoarders, you increase consumption, you increase employment, you increase output, you increase general demand, you boost the economy. Gimme a high five, bro. We have done it all; we have saved the world.
The poster assures us there is no possible rebuttal to this argument:
So for once and for all, the broken window fallacy in and of itself cannot even touch Keynesianism by itself, and it does not apply during a recession.
Let’s introduce Devil’s Advocate [=DA] again, as he talks to Smiling Dave [=SD].
DA: He sure cooked your goose this time, Dave. Admit it, you never even thought about hoarders.
SD: You Devil, you forgot about Part One, where we discussed parasitic jobs.
DA: What do you mean? The glazier is being productive, fixing the window.
SD: Sure after it is broken, he is being productive. But we are talking about something different. The question is, is the economy better off before the window was broken, or after? So let’s look at this way. The window is there, the money is hoarded, the glazier is unemployed. The poster at mises.org claims we are better off breaking the window, so that the glazier can fix it.
DA: You’re darn tootin.
SD: I have a better idea. Why not cut out the middle man and have the glazier both break the window and fix it? Why wait for Hurricane Katrina or the gov’t to break those windows? That will give the glazier even more employment.
DA: Great idea, Dave. You might win a Nobel Prize for this.
SD: Well. I’m about to win two Nobel Prizes. Why not save everyone a lot of bother by this simple expedient. The gov’t will send letters to all the people saying “You have 5 windows in your house. The economy will be improved if they are all broken and then fixed. To save you the inconvenience of having your windows actually broken with the attendant health hazards, we hereby legally declare that your window has been broken by a hurricane, and that Sam Glazier has fixed them to exactly as they were before. You now owe Sam Glazier $100 per window. Thank you for improving the economy.”
DA: But, Dave that’s a parasitic job like no other!
SD: Exactly. And it is just as parasitic if the govt breaks the window. And the loss to the economy is the same if a hurricane breaks it and it is fixed by the glazier as when the glazier does nothing and gets his gov’t check.