Monday, August 29, 2011

Bob Murphy on the Keynesians and Bastiat's "Broken Window Fallacy"

Bob Murphy has written an article dealing with how Keynesians are pushing back against the accusations that they are engaging in economic fallacies, or, to be specific, engaging Bastiat's famous fallacy. As usual, it is worth reading.

Now, Bob is fair to Krugman in that he does not say that Krugman wants war, alien invasions, or even the entire East Coast to be devastated by earthquakes and storms. Nonetheless, Murphy writes:
As I said earlier, the Keynesians lately have been launching a counterattack on the charge that they are committing the broken-window fallacy. One of their responses is to claim that the conservative/libertarian critics are ignoring the distinction between wealth and employment, and that they are unwittingly assuming that there is full employment (i.e., that there are no "idle resources").

Sympathetic onlookers have jumped into the debate, claiming that Bastiat could have been wrong. After all, suppose a hurricane came along and struck a community that initially had a large number of unemployed construction workers. Who would deny that the hurricane might (under the right circumstances) actually lead to more employment and a higher "gross domestic product" as it is currently measured?
Bob's answer is instructive, and I also believe that Keynesians cannot refute it, at least honestly.


On another note, Krugman's Princeton colleague Alan B. Krueger has been named the chairman of President Obama's economic advisers. I have commentary here.


Major_Freedom said...

Keynesians want to believe that their moral position regarding employment and resources, which just so happens to benefit the state's power, constitutes a sound economics argument.

They must be believing to themselves "We just want there to be more employment for people who want to work! What can be so bad about that?! Obviously anyone who criticizes us MUST be some partisan dogmatic jerk, which means we must be right." or "We're just trying to show that disasters are not all bad, and that there is a silver lining to it, a reason for us to hold our chins up and march on!"

The Keynesians believe that employment qua employment and use of resource qua use of resource are valid end goals. But as Murphy in this article, and Austrians in general, have painstakingly and brilliantly explained time and time again, the only proper end goal is individual utility, which can only be discovered in the market process of exchange, not by bureaucrats in Washington whose only talent is to print money and then spend it on themselves and/or give it to their friends that return the favor in votes, which passes off the expense to others, and then when the losses are incurred by others, they say "The recession was worse than we thought!"

Mike Cheel said...


One thing you are forgetting though is that those "bureaucrats in Washington whose only talent is to print money" where little American flags on their lapels.

That makes a difference you know. They are more special than you and I.

Dennis said...

Keynesians are like an investor who looks only at the revenue side of a company's balance sheet and declares, "Why this company has millions in revenue! They must be rich!" while forgetting that there is an expense side to be aware of as well. When you take that into account, the company could easily be running up huge losses. I wouldn't want any of these dopes as a business partner.

Anonymous said...

Could someone please explain why it is the seen/unseen argument can't be applied to employment? It seems clear to me there is an "unseen" cost where labor is idled or employed below its potential in a way not unlike capital in the broken window context. Mainly I'm saying this fallacy isn't terribly useful in refuting Keynesian stimulus on its own. It seems to me governments poor choices in investments to productively employ labor is sufficient without invoking broken windows.

nimrod said...

With anything Keynesian there’s always a very high risk of “broken window”, or a host of other inefficiecies or unintended consequences. Nukes and the Interstate Highway System are excellent examples.

But didn’t Jean-Baptiste Say himself, advocate public works to remedy unemployment, and criticize Ricardo for neglecting the possibility of hoarding if there was a lack of investment opportunities?

Anonymous said...

Has any member of the Krugman Keynesian Klan volunteered to burn down his house so he can stimulate the economy by rebuilding it?

nimrod said...

If an Austrian schooler burned down Krugmans house to teach him about the broken window fallacy, would he learn anything if he didn't rebuild it?

nimrod said...

Actually, they probably want to save the country. That it would be burnt down in the process is what's in question.

Kevin said...

Are you guys just pretending to not understand the Keynesian side of this?

Sure, you could stimulate the economy by fixing windows you just broke. But doing so does not increase wealth. You could also stimulate the economy by building extra windows for houses in the future. The whole point of the thought exercise is that money is being spent and you are avoiding a liquidity trap. The difference between the two cases is that one is mandatory and one is optional. Keynes tried to argue that the government has the option to build the windows without waiting for them to break and should do so to avoid a liquidity trap. What is so hard to understand about that?

nimrod said...

If there was some mechanism which caused The Job Creators to do those things which prevented liquidity traps, I might buy into it.

Perhaps spending on complex assemblies (cars, R&D, vacation homes...) or employing anybody who wanted to work but couldn't find it?

Holding a gun to The Job Creators heads ain't very nice, but there's only so much tax lowering and restriction easing and free trade pampering we all can do.

Where is everybody? Nobody wants a good tussle anymore?

Bob Roddis said...

I deny the concept of "liquidity trap" except as that special time when people finally realize that it's real dangerous to borrow funny money. When borrowing funny money is "stimulating" the economy, it is in a distorted and unsustainable manner. We should all celebrate that special time when no one wants to borrow any.

jason h said...

Keynes tried to argue that the government has the option to build the windows without waiting for them to break and should do so to avoid a liquidity trap.

It's not a liquidity trap - people just don't want any freakin' windows right now.

William L. Anderson said...

What Keynesians are claiming is that a "liquidity trap" pretty much nullifies the Law of Opportunity Cost. However, I agree with Bob in that I believe the "liquidity trap" is a bogus concept.

Mike Cheel said...

"Keynes tried to argue that the government has the option to build the windows without waiting for them to break and should do so to avoid a liquidity trap. What is so hard to understand about that?"

I say let them do it if they can do it without taxing the private sector and do it without borrowing to pay for it.

What is so hard to understand that the group of people(?) in Washington do not know how to spend my money better than me?

American Patriot said...


liquidity trap is a natural ocurrance that should not be tampered with. The question is why are investors not utilizing their capital. The obvious answer may have nothing to do with aggregate demand, but rather the business environment. If you have an anti-businesss administration who regulates the economy up the wazoo, no one in their right minds will expand or create new ventures. The free markets know that risks outweigh the potential upside. If and when the government gets involved, you are simply being engaged in an unwise and unproductive exercise with nothing but downside to it.
There is, at times like this, a damn good reason for resources to be idle. That is what Keynesians and Krugman fail to comprehend.


I am anxiously awaiting your take on Krugman's new NYT article:
"Republicans Against Science"

I get a chucle when the progressive libs call the other side anti-intellectual.
More I live and learn, more I realize that progressivism is a mental illness. I am serious.

Bob from Buffalo said...

So, if all if this catastrophic weather (broken window?) is good for the economy, you'd think progressives would be FOR globull warming, instead of against it.

American Patriot said...

Bob from Buffalo:

you'd think so, but what overwrites the broken window mentality of progressives is their desire for Marxism to triumph. Global warming is the mechanism of choice for accomplishing that.
(in other words, it is untouchable)

Bob Roddis said...

more I realize that progressivism is a mental illness

Something weird is going on there. Back when I first discovered Rothbard in 1973, I was an antiwar McGovernite. It was the complete failure of the "progressives" to respond intelligently to my newfound concerns that convinced me that free market ideas were worth looking into. The former occurred before I was spurred to seriously look into the latter.

Nothing has changed in 38 years. Apparently, there is a deep seated obsession lurking there that insists upon running the lives of average people. The free market precludes that while its advocates point out that it is elite meddling itself that is the cause of most societal problems. Hence the hysterical response.

This also explains why I constantly repeat the phrase: "You haven't the slightest familiarity with basic Austrian concepts". Not only was I convinced of the soundness of those concepts on their own merit way back when, but I was further convinced by the truly bizarre non-response to those concepts by the anti-Austrian opponents.

I still find the universal non-response truly incredible and unfathomable.

nimrod said...

There is no such thing as hoarding in the broken window parable. Unless that towns government is unfriendly to business. Then there’s lots of hoarding.

Is that why the DJIA skyrocketed after the stimulus?

William L. Anderson said...

I have a piece coming tomorrow on Krugman and science. The Usual Suspects will hate it.

Anonymous said...

Nothing is more natural than that a nation, after having assured itself that an enterprise will benefit the community, should have it executed by means of a general assessment. But I lose patience, I confess, when I hear this economic blunder advanced in support of such a project. "Besides, it will be a means of creating labour for the workmen." -- Bastiat

This is one of the best illustrations of a Keynesian failure IMHO. If work has no utility other than putting people to work it's basically the definition of malinvestment. Keynesians do a terrible job of explaining that away because they can't. That most Americans have generally concluded Congress is incapable of determining whether 'an enterprise will benefit the community' is why Austrians are enjoying a resurgence.

nimrod said...

So if welfare is out, and charity is out, and working people just to keep them busy is out, we should give the unemployed tickets to the next Austrian School convention?

Sam said...

Who said charity was out?

Bala said...

"Who said charity was out?"

nimrod, based on his preconceived notion that there is something right and something wrong on either side of this debate. That explains why he is desperately trying to identify the 'flaws' in the Austrian arguments/position.

nimrod said...

So point to flaws in my position.

Too hard?

jason h said...

Charity isn't out...unless of course the state steals 25-35% of the income from those who could otherwise afford to be charitable.

Imagine if instead of paying income tax all that money was voluntarily given to charity. Eliminate the middlemen and all the overhead of government bureaucracy and keep more resources in the community actually helping people.

nimrod said...

I imagined. Then preached. Then waited. Preached some more. Then presented pictures of Jesus weeping, while I myself, wept.

Sadly, few gave voluntarily. Most went to Vegas and played craps. The rest speculated on yet another commodity get rich bubble.

nimrod said...

To be honest Keynes is like heart surgery. Worst case scenario final option. Messy and expensive, but probably has to be done lest death happens. Mighta been easier to just live healthy. But how many of us do that? Of course, there is always the Church of Christ, Scientist. I myself would give it a go if credible numbers backed em up.

Credible numbers.

Projection, "But I took physics classes!", and "You suck, Ususal Suspect." don't work so well on me.

Anonymous said...

Moron, Americans are the most generous society. Do a search on Google and you will find the studies.
A lot more generous than progressive euros

nimrod said...

I know some unemployed people - professionals out of work through no fault of their own. Post your personal info here so I can send them your way.

jason h said...

Unfortunately those poor folks are out of work because the Keynesians stimulated unsustainable production/consumption, not because the Austrians are not generous enough.

nimrod said...

But God told me this is not so.

And last tag no tag backs.