Krugman: Break Windows, Help the Economy

OK, so Paul Krugman has decided to be a political shill for Barack Obama, but in today's blog post, he decides to abandon economics all together. Just as Larry Kudlow, Timothy Noah and others jettisoned economic logic for a bizarre "Broken Windows Theory" when they claimed that the 9/11 attacks would be good for the economy,  Krugman (fittingly on September 11) makes a similar claim about the iPhone 5.

Krugman writes:

There’s been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy. I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture.

The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.

In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions

Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.

First, it is obvious that Krugman has not a clue about the creation of wealth and he certainly knows nothing about capital. Keynesians believe that the real benefit of capital spending is, well, spending, and Krugman does nothing to dispel that false notion in this post.

Second, the idea that the money spent on buying new iPhones would provide a "significant boost" to the economy is to forget what Keynesians and Krugman always forget: opportunity cost. If someone purchases an iPhone, then that means the person cannot purchase something else. The presence of new iPhones does not mean that suddenly everyone has new reserves with which to spend new money.

Now, Krugman seems at best to give a backhanded endorsement of the "broken windows theory," but nonetheless this "theory" is pure Keynesianism. As every Austrian knows, it is not even the "broken windows theory," but rather the "broken windows fallacy." The concept comes from Frederic Bastiat in his famous "That Which is Seen, and That Which is Not Seen," the first chapter entitled, "The Broken Window."

Defenders of Krugman will point to the last paragraph in the quote in which he essentially calls for more public works spending, but one needs to remember that Krugman sees public works projects as important not because of the roads and bridges that will make transportation more reliable, but because these projects are transmitters of spending via individual incomes.

He has it backward. What we produce is what permits us to consume. Krugman believes that all it takes is for someone to have cash in his hand, and the goods magically appear on the shelves. It might work that way in Wonderland, but not in a real economy.

(Thanks to Scott Ellis for showing me Krugman's post)