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The Broken-Window Fallacy-Bastiat
#1
I have been looking for a Bastiat Thread, and know I have posted a good deal about his Broken Window Fallacy, but there does not appear to be one. Now I realize that I have posted them all over the forum, and would like to have them gathered together.

So, I'm going to start collecting all I can find, and post them here.
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I'll start out by linking to his famous essay, That Which is Seen, and That Which is Not Seen. This is perhaps the most important lesson for someone to learn in economics: not for the economic theory, but for the importance of being critical in All things economic, and looking for all things hidden. Because, in economics, what is not seen is most often more important than what is seen.

Every example in his famous essay highlights this point. But is it the first portion, The Broken Window, which is most famous. Here is the Broken Window.

Quote:I. THE BROKEN WINDOW

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation - "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade - that it encourages that trade to the amount of six francs - I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier's trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker's trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: "Society loses the value of things which are uselessly destroyed;" and we must assent to a maxim which will make the hair of protectionists stand on end - To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit."

What will you say, Monsieur Industriel -- what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen. The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying - What would become of the glaziers, if nobody ever broke windows?
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#2
Here is Dr. Ron Paul on the "the undeclared war in Iraq" ─ War at Any Cost? An excerpt:

Quote:Unfortunately, it appears too many policymakers in Washington still cling to the broken window fallacy, long since discredited by the 19th century French economist Frederic Bastiat, that destruction is a good thing because jobs are created to rebuild what is destroyed. This pernicious fallacy is unfortunately widespread in our society today because those in positions of power and influence only recognize what is seen, and ignore what is unseen.
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EXPLANATION: The concept

What is the broken window fallacy?


The broken window fallacy was first expressed by the great French economist, Frederic Bastiat. Bastiat used the parable of a broken window to point out why destruction doesn't benefit the economy.

In Bastiat's tale, a man's son breaks a pane of glass, meaning the man will have to pay to replace it. The onlookers consider the situation and decide that the boy has actually done the community a service because his father will have to pay the glazier (window repair man) to replace the broken pane. The glazier will then presumably spend the extra money on something else, jump-starting the local economy. (For related reading, see Economics Basics.)

The onlookers come to believe that breaking windows stimulates the economy, but Bastiat points out that further analysis exposes the fallacy. By breaking the window, the man's son has reduced his father's disposable income, meaning his father will not be able purchase new shoes or some other luxury good. Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount being spent on other goods. Moreover, replacing something that has already been purchased is a maintenance cost, rather than a purchase of truly new goods, and maintenance doesn't stimulate production. In short, Bastiat suggests that destruction - and its costs - don't pay in an economic sense.

The broken window fallacy is often used to discredit the idea that going to war stimulates a country's economy. As with the broken window, war causes resources and capital to be funneled out of industries that produce goods to industries that destroy things, leading to even more costs. According to this line of reasoning, the rebuilding that occurs after war is primarily maintenance costs, meaning that countries would be much better off not fighting at all.

The broken window fallacy also demonstrates the faulty conclusions of the onlookers; by only taking into consideration the man with the broken window and the glazier who must replace it, the crowd forgets about the missing third party (such as the shoe maker). In this sense, the fallacy comes from making a decision by looking only at the parties directly involved in the short term, rather than looking at all parties (directly and indirectly) involved in the short and long term.
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#3
And here is his follow-up article to the one above.

Quote:The Other Broken Window
Fallacy and hypothesis

Posted By Sandy Ikeda
My first article for TheFreemanOnline dealt with the “broken window fallacy.” But in the literature on social theory, there’s actually another important idea that also uses the metaphor of a “broken window.”

In his comment on The Freeman’s Facebook page, Flavio Ortigao raised this point when he wrote:

…I do not quite follow the putative analogy with broken windows theory. In many case[s] “broken windows” has been used as an analogy for the necessity of not allowing the degradation of public space/utilities. Inferring that there is a psychological effect that compounds the problem. I think [it] is very important that cities do not surrender to vandalism. This has little to do with the situation of Haiti, struck by a natural disaster.

Mr. Ortigao is right. The idea to which he refers does not directly relate to the Haitian earthquake or to other situations in which destruction is supposed to create wealth. That’s a different “broken window.”

The typical way to commit the broken-window fallacy is to argue that a natural disaster, war, or economic crisis is actually good for an economy. The idea is that if the event causes an increase in spending on infrastructure or war materiel or what-have-you, the “new” demand will stimulate the economy and create more wealth than there would have been otherwise. But that’s not what Mr. Ortigao is referring to.

One of the articles I assign to my students is George L. Kelling and James Q. Wilson’s “Broken Windows” (1982) in which they say: “…one unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing.” This would also apply to trash left on the sidewalk or drunks sleeping on benches, that sort of thing. And because “disorder and crimes are inextricably linked,” a community that tolerates minor infractions of civility or small violations of social order signals to potential law-breakers that more serious crimes will be tolerated.

By the same token, effectively addressing minor social problems is said to prevent more serious problems. Thus in the 1990s when the Giuliani administration in New York City cracked down on fare-beaters on the subway and “squeegee men” on the streets, it claimed this helped reduce the incidence of violent crime.

So the broken-window fallacy and the broken-window hypothesis are quite different. It may not seem strange then that, as Mr. Ortigao’s comment illustrates, people who have heard of the one tend not to know of the other. That’s been my experience, anyway.

Complementary Analyses

But I think this is a little strange because I believe a classical liberal should find them complementary. That’s because both the fallacy and the hypothesis offer solid arguments against some forms of harmful intervention. Clearly, the BW fallacy does.

The BW hypothesis can be and has been used (as in the case of the Giuliani administration) to support a “get tough on crime” policy, which may not be particularly libertarian. But there is a deeper lesson here.

The one that I draw from Kelling and Wilson is that, when it comes to maintaining social order, it’s important to understand the underlying social relations in a community – what Nathan Glazer called “the fine structure of society.” These are the norms that guide behavior and the networks that help enforce them, which emerge spontaneously in a neighborhood.

Whether you quickly mend a broken window, bend over to pick up a piece of trash, or intervene when someone disturbs the peace depends in part on your personal ethics, of course. But it also depends very much on whether your neighbors will applaud or laugh at you for doing it. In a healthy neighborhood, if you don’t repair your window, one way or another your neighbors will let you know about it.

The support or approbation you get from the community for doing something that may not be in your immediate interest is an important incentive to follow local norms and help to enforce civility. When that weakens, so does voluntary enforcement of local norms and relations. That’s usually when citizens try to address public-safety problems by, for example, demanding more police on the streets instead of more private or voluntary effort.

Such interventions have a way of undermining the fine-structure of society. For example, when Robert Moses, so-called “master builder of New York,” leveled thriving neighborhoods in the name of “urban renewal,” he made those places significantly poorer and more dangerous. (The standard reference here is Robert Caro’s The Power Broker ].) Something similar happens when policies crowd out individual responsibility and initiative, as when the welfare state tries to provide for the elderly and infirm or the supervision of children, rather than leaving the primary responsibility with neighbors, friends, relatives, and local social networks.

Whatever the temporary benefits to a given group may be, it fosters a mindset that is more willing to accept or even demand more interventions to address social problems (many of which were themselves created by prior interventions) that might otherwise have been solved by voluntary action. This in turn makes informal, previously vital relations among people seem superfluous.

Both the fallacy and the hypothesis are well worth studying.
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#4
Pelosicare's Broken Window

By Ross Kaminsky

In his 1850 essay, "That Which Is Seen, and That Which Is Not Seen," French economist Frédéric Bastiat wrote his famous Parable of the Broken Window in which he explained that the economic benefit to the glazier hired to replace an accidentally broken window is offset by the economic loss to the shopkeeper whose window was broken. In other words, what is seen is the cash paid to the window-maker and his ability to hire an employee or buy products from others with that cash. What is unseen is that the shopkeeper no longer has the use of his cash, with which he could have done any of the same things or simply used the cash for his family's benefit or his own enjoyment.

We frequently hear a version of the Broken Window fallacy during natural disasters, such as people crowing about the boom in sales of wood and the increased hiring of repair crews and construction workers after a major hurricane. Bastiat posed a similar point, reduction ad absurdum, by asking the rhetorical question, "How much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?"

While the issue raised by Bastiat is most clearly seen through an example of a broken window or burning house, the principle of needing to consider That Which Is Not Seen is critical during any analysis of the behavior of government, not least during the current health care "reform" debate. Between the typical Chicago thug political style of Barack Obama and his henchman, Rahm Emanuel, and the shell-game CBO manipulations of Harry Reid, far more is unseen than seen in the proposed legislation. As if to make that point even more obvious, the Administration is rebuffing C-Span's request that it live up to Barack Obama's often-repeated promise to have these specific negotiations take place in public view, indeed specifically on C-Span. Health care reform is now literally unseen.

The relevance of Bastiat to the health care debate struck me when reading a quote from Nancy Pelosi in which she said that she wants whatever compromise health care bill emerges from their closed-door negotiations to "lower costs at every stage" of our health care system.

As someone who thinks carefully about word choices, I found her statement troubling not only because I know she's lying about what she wants. It took me a few minutes, but then it hit me. The Bastiat fallacy lies in the word "costs."

What Pelosi really means is that she wants to lower prices paid by end-user consumers of health care.

She wants it to appear that costs have gone down, but in fact the bill will exacerbate the single greatest existing flaw in our health care system: the insulation of consumers of health care from the costs of what they consume. The majority of Americans, when they go to the doctor, feel as if they're spending someone else's money -- a situation which both Milton Friedman and common sense tell us cannot lead to disciplined spending.

All credible evidence and opinion points toward the current "reform" plans increasing the cost of insurance and medical care. Health insurance companies have said that premiums for almost everyone will rise, with prices doubling or tripling for many, particularly in the individual/family rather than employer group market.

When Democrats' plans to give everything to everyone for free or near-free and their intent to allow people to wait until they're sick before buying insurance (which would seem to defy the very definition of insurance, i.e. insuring against an unknown future event), take effect, costs will skyrocket.

The only way, then, for Pelosi to make prices for consumers decline in an environment of actually increasing costs is through massive government subsidies. This is the direction in which Bastiat's ghost is pointing -- while jumping up and down and screaming (in French), "Don't let them get away with such a transparent lie!" (The lie being the only thing about the situation that is transparent.)

"Subsidies" is simply another way to say "redistribution of wealth." The proposed Senate bill offers "assistance", meaning your money, to families of four making up to $88,200 (or individuals making $43,320). The House bill's numbers are similar. Under each bill, such a family of four's price to buy health insurance would be limited to about $2,500 and their out-of-pocket expenses capped somewhere between $4,000 and just over $6,000 per year. These numbers will massively increase the costs within the health care system as the subsidized insured over-consume health care and pay for less than the cost of services they use. This means that all Americans who aren't subsidized will see their prices go up to cover the unreimbursed costs.

In a way, what the Democrats want to do is to cause millions of Americans to have the same impact on our health care system that illegal aliens currently do: using health care services while paying much less than the costs they impose on the system, thus raising prices for everyone else.

The way in which politicians want to mask higher costs with lower prices is to increase taxes. Some suggest taxing "Cadillac" health insurance plans. Some suggest taxing upper-income earners, either through an income tax surcharge or lifting the cap on Medicare payroll taxes.

Should this "reform" pass, we will be living in Bastiat's nightmare -- in terms of the scale of what is seen and what is unseen -- when you go to the doctor's office or hospital. What will be seen, at least for many, is a low price. Reality, however, will be a health care system with costs exploding in a way that will make recent medical price inflation look tame. Some day, when the Democrats' intentional Broken Window fallacy is bankrupting the nation, reality and their schemes will have a violent collision. Even Pelosi won't be able to keep the cost of that collision hidden…and we'll all be paying the price.

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#5
This is from Henry Hazlitt's "Economics in One Lesson", where he discusses "the Broken Window".

Quote:The Lesson Applied: The Broken Window


Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
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#6
The Broken Window Fallacy Reapplied

by Llewellyn H. Rockwell Jr.


The claim of the Austrian School that has scandalized members of other schools for 150 years is the following. The propositions of economics are universal. The principles apply in all times and all places, because they derive from the structure of reality and human action.

What brought about economic growth, inflation, or the business cycle in China in 300 BC are the same institutions that drive phenomena in the United States in AD 2008. The circumstances of time and place change, but the underlying economic reality is identical.

That claim has made other economists — to say nothing of sociologists, historians, and politicians — scatter like pigeons. The Historical School poured scorn on this idea, and Carl Menger, the founder of the Austrian School, fought them tooth and nail. The Chicago School of positivists found the claim preposterous, and Mises and Hayek and Rothbard battled them. The Keynesians have long been outraged, and the postwar Austrian generation reasserted the truth. The socialists, who posit that rearranging property titles will transform all of reality, say that the claim is absurd, capitalistic nonsense.

But there it stands. No matter where or when, the essential prerequisite for economic growth is capital accumulation in a framework of freedom and sound money. The consequence of price control is shortage and surplus. The effect of money expansion is inflation and the business cycle. The effect of every form of intervention is to make society less prosperous than it would otherwise be.

The list of universals is endless, which is why every age needs good economists to explain and articulate the truth.

Well, I would like to add that there are universal fallacies too.

Frederic Bastiat pointed to one: the belief that the destruction of wealth fuels its creation. He explains this by means of an allegory that has come to be known as the story of the broken window. Most famously it was retold as the opening of Henry Hazlitt's Economics in One Lesson, which is probably the bestselling economics book of all time.


A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items, and the circle of rising prosperity will expand without end.

What's wrong with this scenario? As Bastiat put it, "It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented."

You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?

It is not a good thing to destroy wealth. Bastiat puts it this way: "Society loses the value of things which are uselessly destroyed."

It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American economic intervention.

If you are with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction is actually a good thing. Let me try to show that the fallacy is as pervasive as ever.

After every natural disaster, we at the Mises Institute start what we call the "Broken Window Watch."

After hurricane Katrina, the Labor Secretary said, "[W]hat will happen — and I have seen this in previous catastrophes and hurricanes — there is a bright spot in that new jobs do get created."

And The Economist said, "While big hurricanes like Katrina destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins."

And the New York Times said, "Economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding."

After last year's California fires, we heard this from Alan Gin, a University of San Diego economist: "In the odd nature of economic accounting, this will probably be a stimulus. There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments."

And CBS Marketwatch said, "Economists have noted the perverse reality that in the wake of disasters, reconstruction spending helps the economy, even as people are still struggling to recover from their personal losses."

Note that personal loss here is deemed rather irrelevant compared with the beneficial macroeconomic results. Here we have a theme we find often in economics, the attempt to drive a wedge between what makes sense for individuals and what is good for society. We see this on display in this recessionary environment, when people are told to spend spend spend, even though most people understand that recessions are times for saving.

Continuing on, we find the Broken Window fallacy popping up even after 9-11.

Timothy Noah of Slate wrote, "We live in a very wealthy nation that responds to horrible disasters by spending large sums of money…. It will also provide a meaningful Keynesian stimulus to a national economy that, let's face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it."

Another economist declared, "Initially, this could provide a significant boost to an economy that had been slumping. The construction industry could benefit from the rebuilding process. There may also be a boon for slumping tech sales, in replacing lost equipment."


Thus can we see the continuing relevance not only of Bastiat's allegory but also of the characters in the story. The posturing wiseguy who says that breaking windows is good for the economy keeps reappearing again and again. So entrenched is this mistake that we might call it official economic doctrine for the whole country.

I ask you to consider the absurd discussion of a stimulus package designed to rescue the economy from recession. The idea is that the government will inject funds into private markets to stimulate them to the point that they will run on their own. Not once in this debate have I heard anyone ask the core question: where is this money going to come from?

It seems that Washington wants us to believe that they have some magic machine that can turn up $150 billion in new assets without anyone having to do anything to make these assets appear. One wonders, then, why we need to wait until a recession to stimulate the economy. Why not magically create hundreds of billions every day, and not just for this country but for the entire world? Why are we holding back?

Now, the ideas of the stimulus package are not 100% awful. Some people are talking about tax cuts, which is a good thing but rather pointless without spending cuts. I'm particularly intrigued by the underlying assumption here that taxes work as a drag on an economy whereas tax cuts fuel expansion. If that is the case — and it is indeed true but for different reasons than Washington gives — why wait until the recession to cut taxes? If taking less from us is good for the economy, we should institute this as a universal policy.

One great lesson of political economy, emphasized for centuries, is that the government creates no wealth of its own. Everything it has it has to get from you and me, one way or another. It can tax. It can borrow. And, finally, it can inflate by means of credit-market manipulation. This third option is the most disguised. When people hear the words "monetary policy," they figure that this is something they will leave to experts. And central bankers have an astonishing talent for obfuscation to the point that no one knows with certainty precisely what they are doing.

The whole show is designed to make us go to sleep and not think about what is really going on. The unvarnished truth is that when the Fed artificially lowers rates, it is creating new money that waters down the value of the existing money stock, yielding a lower purchasing power for the dollar. That's another way of saying that it creates inflation — perhaps not right away, and perhaps not across all economic sectors, but eventually and certainly.

This, my friends, is a form of breaking windows. It is wealth destruction. It matters not that there will be more dollars to spend, because prices will be higher and wealth has been drained out of the private sector — and redistributed within it. It is Bastiat's fallacy reinvented in a new form.

New money also distorts production structures. At the very time when the market is pressuring long-term investment to pull back, the lower rates encourage expansion in ways that prolong the crisis. It only delays and worsens the inevitable. The Great Depression taught us that government is capable of doing this to the point that the crisis can last for 17 years. So this is no small matter. A government determined to prevent recession is a government that might end up sustaining one to the point of the collapse of civilization itself.

It is a perverse belief, but pervasive nonetheless. It is believed by both political parties. It is held by the president, the media, and the congress (except for Ron Paul). It is a reflexive belief, one that reflects a failure to think between stages and see the unseen effects of government intervention.


One reason that Bastiat's example has power is that it applies not just in one area of policy but all areas. If it isn't true that breaking windows creates wealth, it is not true that government spending and inflating is a boon to the economy. It only ends up draining wealth from the private sector, which is the only source of wealth creation.

It doesn't matter what the government spends money on. For example, building pyramids with tax dollars is not good for the economy, despite what Keynes claimed. But neither is waging war good for us or the victim country, despite constant claims to the contrary.

It is surely one of the most deadly myths that the Second World War ended the Depression. As Robert Higgs has shown, it further prolonged it, all phony data aside. And consider the spending on the war on terror: if government spending were capable of stimulating the economy, we would not have recession right now

Chris Westley assembled some data on the last seven years of economic conditions, and it is sobering indeed. Since 2000, tax revenues are up 25%. That's wealth destruction. Government spending is setting records for expansion, with $1 trillion added to the annual budget, with military spending up $250 billion each year over the egregious $400 billion spent annually in 2000. That's wealth destruction. The national debt is up 59%. That has to be paid. More destruction.

Social Security liabilities are up 60%. That too is the promise of future destruction. The money supply is up 72%. More destruction. Inflation itself has risen 20%, so the dollar of 2000 is now worth 80 cents. The gas price alone is up 118%, so that too is wealth destroyed. As an indication of economic trouble, the gold price is up 206%.

Here is the story so far of the government's great stimulus. It has led to hard economic times. More of the same will create more of the same and worse. The unemployment rate is rising. Savings are falling. Prices are rising. We are less secure, less prosperous, and we have fewer opportunities than ever to dig our way out of this mess.

Government expansion has actually created the absurd scenario mentioned above. The boy threw the rock; the crowds in Washington believed the sophist; and now they are plotting to raze all homes on the block, in the name of economic recovery.

Have we learned from the Great Depression? Ben Bernanke believes that he has learned something. He believes that the key problem of that period was a failure of the central bank to pump in enough money and credit. He has never absorbed the critical observation of Rothbard that the Fed did attempt to pump up the money supply from 1929–1934. They used every mechanism, but the credit markets found few takers, and without their cooperation, the money supply does not expand.

The real lesson of the Great Depression is that there is nothing that the central bank can do to forestall a recession whose time has come, and nothing government can do to improve the situation once the recession has arrived. Everything it attempts to do — except shrink — only ends up making matters worse.

So it is in our time. We must ask ourselves what Washington is capable of doing this time around. I believe that the answer is anything and everything. Bernanke will attempt to flood the economy with money. Washington is perfectly capable of imposing price and wage controls on the entire economy. It is capable of terrifying levels of protectionist legislation. New taxes are less likely but taxation through debt accumulation is probably inevitable. There might be rationing, spending mandates, antihoarding legislation, and more.

The assumption that driving up consumption is the key to prosperity is particularly dangerous, and also pregnant with irony. During good economic times, we are hounded constantly by the intellectual elites for our consumption habits. It is said that we are a greedy nation, buying ever more fripperies and not looking after the long term. The American public is decried by the intellectual elites as materialist, consumerist, and short sighted.


Then recession hits and the tune changes completely. Reliable leftists, fresh from having complained about the egregious spending habits of the American consumer, suddenly turn on a dime and tell us that more consumption is the key to economic growth. They favor policies that would get us to fork over ever more of our money, under the belief that the core problem is a lack of demand!

A recent example is Barack Obama, who said last year that the problem with popular culture is that it "saturates our airwaves with a steady stream of sex, violence and materialism." But only this week, he seemed to endorse one of the three. "If the economy continues to decline in the coming weeks, we should" send checks to people, he said. "This is the quickest way to help people pay their bills and get them to start spending."

In fact, less spending and more saving is what is called for during a recession, which is nothing but a market correction writ large. Attempting to coerce spending threatens the value of the dollar itself.

Here we face a very dangerous situation. If the dollar ever ceases to be the international currency of choice — and this could happen — we could face roaring inflation. And with dreadful legislation that prohibits any kind of choice in currency, Americans will be stuck. Here is a problem that could cause near panic in Washington.

The irony here is that after a century of failed interventionism and socialism, Washington is no less likely, and probably far more likely, to take the path of least resistance and accumulate ever more power unto itself, at our expense.

We are in an election season, so of course people ask who would be the least bad person to head the state in the years ahead. The answer here is not at all clear, if it is not Dr. Paul. As with the 1930s we face a choice between militaristic fascism and Keynesian-style socialism combined with environmentalism. These are two very grim choices.

I tell you this not to spread gloom but merely to be realistic about the prospects for the future of American politics. But there is also good news to be considered. The private sector has raced so far ahead of the state, and is so global, that it is far more resilient than before. There are safety valves available in the form of international capital markets.

The government is so much bigger now than in the 1930s, but, paradoxically, that also makes it less effective than it once was, which is very good news. It is a massive, lumbering giant, whereas the markets are a speed racer.

I might also point out that the government enjoys nowhere near the respect it once had. Once the governing elite consisted of the nation's elite, coming from the best families and the best schools. Today, the governing elite has never been more transparently ridiculous and even freakish. Gone are the aristocratic public servants of yesterday; today, the government is made up of a class of hucksters and gangsters that inspires no confidence.

This is all to the good, for as Mencken said, it is always great when we do not get all the government we pay for.

On the intellectual level, the teachings of economics in the Austrian School tradition have never been more available to the world, or more frequently cited and discussed. And a recessionary environment guarantees more attention to the Austrian theory of the business cycle simply because this is the only model that makes sense of our current problems.


We should never underestimate the power of ideas to make a difference in the world. During the Great Depression, the resistance to the state was present but weak. Today we have built up a mighty intellectual army that extends across the globe. We are prepared in ways that they were not. We have thousands of students and faculty, and men and women of affairs who know real economics. We have the Internet. We have new books that put the whole problem in perspective, such as Jesus Huera de Soto's work on business cycles. We have the biography of Mises now, and it illustrates the heroism of political dissidence. The works of Rothbard on the Great Depression and central banking have never been more widely circulated and available. This time our masters in Washington will not go unopposed.

At the Mises Institute, now in our 26th year, we have tried to maintain a careful balance between serious and fundamental scholarly work, and public advocacy. We must never lose sight of the need for research and detailed work. It is not enough to merely repeat slogans. At the same time, there are some foundational lessons of economics that must be taught again and again with each new generation. The fallacy of the Broken Window is one of them, and its implications are truly radical.

Both Bastiat and Hazlitt saw that the government is the great window breaker, that destroyer of wealth that drives the economy backwards. The engine of creativity, recovery, and expansion is the private sector, completely unencumbered by state intervention. Ron Paul's newest book is called Pillars of Prosperity: Free Markets, Sound Money, and Private Property. The title nicely sums up the message of the economics of freedom.

It bears repeating in every age, in all places, for we will never be completely free of the great threat of the window breaker. So long as there are governments with stones ready to throw, there will be a need for someone to point out that destruction is never productive, never beneficial, and never a path to the good life that we all seek.
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#7
John Stossel comments on the Broken Window here.

Quote:Bastiat and the Broken Window Fallacy

Are you a journalist who has done original work that explains an economic principle?

There is still another week to enter the competition for the International Policy Network’s Bastiat Prize for Journalism. The award is given in honor of 19th Century French economist, Frederic Bastiat, who excelled at explaining economic fallacies.

Like the broken-window fallacy. Politicians always promise that their programs will create jobs. Alaska Rep. Don Young claimed the infamous Bridge to Nowhere would "create more jobs." President Obama called spending billions on green energy "an investment that will lead to new industries and 5 million new jobs."

Bastiat exposed their foolishness with the following story: A boy breaks a shop window. He's called a vandal, until someone points out that a window installer now must be paid to replace the window. The window installer then will have enough money to buy a new suit. A tailor will then be able to buy a new desk. And so on. The whole town apparently gains from the economic activity generated by the broken window.

Bastiat points out that this “theory stops at what is seen. It does not take account of what is not seen. It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.”

Likewise, it’s easy to see the jobs in energy created by government spending. Unseen are the jobs that won’t be created in the future because the money went to those government jobs.

Stossel discusses the "Unseen" when talking about the 'so called' jobs creation bill that Obama has set up.

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#8
Here is what a professor/teacher has to say on his blog.

Quote:Bastiat's "Broken Window Fallacy": It Just Won't Go Away

Some time ago, a student at another institution wrote to me, asking,

Quote:When a person gets into a car accident, are they helping the economy? Does the GDP increase? His/her getting in a car accident requires that money be spent to get him/her back to where he/she was before the accident (hospital, new car, etc). Is this expenditure a net benefit to the economy?

Groan. This type of spending is a net benefit, perhaps, to the auto repair shop. But it is a net loss to the person who got into the accident. Here are two approaches to see the fallacy:

1. Real Economics. There are scarce resources being used to repair the car. These are scarce resources that could have been used to produce something else in the economy. Repairing the car involves an opportunity cost. This is the only answer I like. But the next portion of this replay has relevance, too.

2. Spending. If the person had not been in an accident, they'd have had the money to spend on something else. Or if they would have saved it, the money would have been available for others to borrow and spend. Either way, it makes no sense to count this spending as a benefit without considering what would have happened had the accident not occurred.
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#9
And here is an article, by my hero, Dr Walter E. Williams, on Economic Lunacy.

Quote:Economic Lunacy

by Walter E. Williams


Here's a couple of newspaper headlines following Florida's bout with hurricane disasters: "Storms create lucrative times," St. Petersburg Times (9/30/04). Then there's USA Today, "Economic growth from hurricanes could outweigh costs" (9/26/04). The writers, Joni James and Barbara Hagenbaugh might have been listening to economists like Steve Cochrane, director of regional economics at Economy.com, a consulting firm in West Chester, Pennsylvania who said, "It's a perverse thing ... there's real pain, but from an economic point of view, it is a plus." Why are Florida's hurricanes a "plus"? It's simple. According to St. Petersburg Times reporter Joni James, "Construction creates thousands of jobs, insurance provides for billions in consumer purchases and new facilities built to higher standards might help offset future storm-related losses."

This kind of reasoning, often put forth by poorly trained economists, doesn't even pass a simple smell test. Think about it this way. Using Mr. Cochrane's statement, if "from an economic point of view, it [hurricanes] is a plus.", would the country have been even better off if the entire east coast shared Florida's damage and destruction? If it would have been a plus for the east coast, what about hurricane destruction for the entire nation east of the Mississippi? Almost anyone with a speck of brains would recognize that equating economic growth with destruction is lunacy.
French economist Frederic Bastiat (1801-1850)wrote a pamphlet "What is Seen and What is Not Seen", where he says, "There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen." In the case of Florida's hurricane disaster, what is seen is the employment associated with rebuilding. What is unseen is what Floridians would have spent the money on and the benefits therefrom had there not been hurricane destruction.

Bastiat wrote a parable about this which has become known as the "Broken Window Fallacy." A shopkeeper's window is broken by a vandal. A crowd forms sympathizing with the man, but pretty soon they start to suggest the boy wasn't guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all fixing the broken window creates employment for the glazier who will then buy bread and benefit the baker, who will then buy shoes, and benefit the cobbler, and so forth.

Those are the seen effects of the broken window. What's unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The broken window produced at least two unseen effects. First, it shifted unemployment from the glazier who now has a job to the tailor who doesn't. Second, it reduced the shopkeeper's wealth, namely, had it not been for the vandalism the shopkeeper would have had a window and a suit; now he has just a window.

The broken window fallacy was seen in a column written by Princeton University Professor Paul Krugman after the terrorist attack on the World Trade Center, "After the Horror" New York Times (9/14/01). He wrote, "Ghastly as it may seem to say this, the terror attack - like the original day of infamy, which brought an end to the Great Depression - could do some economic good." He went on to point out how rebuilding the destruction would stimulate the economy through business investment and job creation. Again, do the smell test. If Professor Krugman is right, wouldn't the terrorists have done us a bigger economic favor if they had destroyed buildings in other cities?

Maybe we shouldn't be so harsh on these reporters and economists in light of the fact that they didn't receive training at George Mason University's Economics Department where there are no bad economists.
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#10
And here, the good Doctor refutes the little Ferret faced fellow, from the NYTimes, who claims to be an economist.

Quote:There's no free lunch

Each semester, I spend a few minutes explaining to my students, both graduate and undergraduate, the first and second laws of thermodynamics.


Why? Mother Nature permits us to do many things, but she prohibits the construction of machines of the first and second kinds. The first is a something-for-nothing machine, and the second is a perpetual motion machine. If students understand this, they can't be tricked into believing there's a free lunch.


Dr. Paul Krugman, Princeton University economist and New York Times writer, apparently believes in the machine of the first kind. In his column "After the Horror" (New York Times, Sept. 14, 2001), he says, "Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could do some economic good." He suggests that the destruction will stimulate the economy through business investment in rebuilding.


We know this has to be fishy just by asking: Would there have been even greater "economic good" had the terrorists succeeded in destroying buildings in Los Angeles, San Francisco, Chicago, Philadelphia, Boston and all other major cities? Of course, you and I know that is utter nonsense. Property destruction always lowers the wealth of a nation. I hope one of Krugman's students asks him, "If property destruction is good for the economy, why aren't Beirut and Belfast boom towns?


There's another question related to both the Krugman article and measures that Congress is considering to jumpstart the economy: Where does the government or private money come from for rebuilding the destruction or bailing out the airlines? If it came from the Tooth Fairy or Santa Claus, then at least some of what Krugman and politicians say has some merit. They both might benefit from reading French economist (1801-1850) Frederic Bastiat's pamphlet "What is Seen and What is Not Seen," where he writes, "There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."


Since the money going to rebuild the destruction or bail out the airline industry doesn't come from the Tooth Fairy or Santa, we might ask what would have been done with the money if it weren't spent rebuilding destruction or bailing out the airline industry? What is seen is the employment associated with the rebuilding and the bailout. What is unseen is what the money would have been used for.


Not asking this question commits the "broken window fallacy." This is a story where a vandal smashes a baker's window. A person in the crowd that gathered (it could be Krugman) tells the baker there's a good side to his misfortune. It will create a job for the glazer, and when the glazer spends the $100 there will be multiplier effects that stimulate the village's economy.


That's the seen. The unseen is that the baker would have spent that $100 to buy a suit, and it would have created employment for the tailor. Had the vandal not struck, the baker would have had a window plus a suit; now he has just a window. Of course, there's greater employment for glazers, but at the expense of less employment for tailors.


Steps Congress could take to jumpstart the economy are cuts in the capital gains tax and taxes in general, and deregulation. But guess what: Krugman is against these steps; he calls them political opportunism. I call them sound economics.
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#11
Sandy Ikeda discusses the Broken Window Fallacy, with regards to the Haiti disaster.

Quote:Haiti and the Broken-Window Fallacy
Earthquakes are not creative destruction

Posted By Sandy Ikeda

In the days following the tragedy we are now witnessing in Haiti, I was wondering how long it would take before someone in the media would commit the broken-window fallacy — the belief that destroying a valuable asset will create net wealth as long as it’s replaced. That is, paying $100 to replace a broken window somehow creates more prosperity that having an intact window and spending that $100 on something else. What I didn’t expect was to find it splashed across an entire page of the Wall Street Journal.

In the midst of reports of the continuing misery in the earthquake’s aftermath, there it was, covering the front page of the “Weekend” section , a full-page spread on how we seem to have lost sight of the “truism of the modern age that disasters were instruments of progress.”

The author, Kevin Rozario, an associate professor of American studies at Smith College, explains how after the great fires of Lisbon (1755), London (1666), Boston (1676), Chicago (1871), and San Francisco (1906) “the enormous reconstruction projects demanded … put capital into circulation, produced enormous profits for some and enabled economic innovations that increased productivity.” He goes on to argue, citing the Journal, that the Northridge earthquake of 1994 “generated intermediate- and long-term economic gains that more than offset initial losses.” And after noting that the Sichuan earthquake of 2008 did kill 80,000 people, he sagely reminds us that after all it did “trigger a building boom that would boost national economic growth by 0.3%.”

Is he serious? Yes, I’m afraid he is. And they say that economists are cold and calculating!

This is the same “logic” behind the notion that the bombing of great cities to rubble during World War II was good for economic development because it was an opportunity to construct modern infrastructure that would have otherwise required many years to put in place. Heaven forbid that we should have to wait for economic depreciation and normal wear-and-tear! (It was, however, good for New York, which had the great fortune of being the only major western city left standing after the war, but that of course was because New York itself was not air-bombed.)

The fallacy becomes clear when, by logical extension, one ought then to recommend deliberately making our cities vulnerable to natural disasters, by perhaps refusing to build sea walls and tremor-resistant structures. Why wait for disasters? We should invite them! Why waste resources on homeland security when just one well-placed nuclear bomb could boost our own economy, perhaps by as much as 0.3 percent? Think of the jobs! If you’re not into bombs, then how about advocating a new wave of 1960s-style “urban renewal” by unleashing an army of federal bulldozers onto our major urban areas?

Professor Rozario appears to be sufficiently innocent of economics (or even common sense) to interpret Joseph Schumpeter’s famous description of the competitive forces of capitalism as “gales of creative destruction” literally. He is evidently unable to distinguish metaphor from reality; between the “creative destruction” manifested in the competition from new products, innovations, and markets pushing out established businesses — which is what Schumpeter was actually referring to — and, well, real gales (and earthquakes and other natural disasters).

Prosperity Just Around the Corner?

Does this mean that Haiti will now prosper? No, here Professor Rozario explains, the problem is that it is not the sort of “dynamic, robust capitalist economy” for which he claims death and destruction would be good for business.

And what makes those things good for business? Well, in the case of Katrina-ravaged Gulf coast, it’s been “a fervent commitment to capitalist development.” In relatively impoverished regions “disasters have often been truly disastrous for the poor.” (Why it’s also not “truly disastrous” for all the other victims he doesn’t explain.) He points out (correctly), for example, that in Florida and New Orleans poor homeowners have been encouraged to rebuild and expand settlements “along vulnerable coastal zones, and thereby increasing the likelihood of future destruction.” Being innocent of economics, or evidently of economic history, Professor Rozario fails to mention how decades of government-funded programs to subsidize flood insurance in Florida and massive levy-building along the Gulf coast might have helped create the very situations he is bemoaning.

Moreover, Haiti hasn’t exactly been a bastion of capitalism, unless you have in mind the kind of intervention practiced by the International Monetary Fund. But this is indeed what Professor Rozario means by “capitalist development.” I won’t argue over terms here. If he wants to define “capitalist development” to include public-private partnerships, government-subsidized infrastructure expenditure, and mild top-down central planning, that’s his prerogative.

That, however, has nothing to do with the “free-market capitalism” that Ludwig von Mises, F.A. Hayek, and Milton Friedman so staunchly defended. Instead, it’s what Mises termed “interventionism,” one of the tragic unintended consequences of which is further immiserating the poor.

The poor do suffer disproportionately from natural disasters, and wealthier people and regions do recover from such things much more quickly than poorer ones. But we know, in part thanks to the work of James Gwartney, Robert Lawson, and others , that greater economic freedom translates to greater prosperity and wealth per person.

It’s economic freedom that’s most needed in Haiti, and not natural catastrophes, even should it grow into the kind of robust economy in which Professor Rozario thinks physical destruction is good for business. Please, let’s stop trying to spin these kinds of disasters into economic stimulus packages or into anything other than the human and economic tragedies that they are.
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#12
Sauvik Chakraverti thinks he has discovered the Real Public Enemy #1, in India: His government.

Quote:Broken Window Effect

I love my car. I do not appreciate the fact that our lousy pot-holed roads damage it. I was cribbing about the cost of a suspension overhaul the other day when an unsympathetic friend quipped: At least the bad roads are good for our mechanics. What does an economist have to say about a statement like that? Let us turn to Frederic Bastiat’s famous example of the broken window.

A hoodlum smashes a shop window. The townspeople gather, survey the damage, and conclude that their settlement is not worse off because the town glazier has just got some business. Bastiat says this view is incorrect; the townspeople are fools who do not see the economic effects
of the incident on all the town’s economic actors. They only see its immediate effect on the glazier. If a wider view of society were taken, then the townspeople would see that the shopowner will have to forgo a new suit in order to pay for the new window. The tailor’s loss of business is something the townspeople have overlooked. Thus, the town is actually worse off. Property has been destroyed.

Similarly, in the case of my damaged suspension, my unsympathetic friend was missing out the numerous CDs I would have bought if the flyover was smooth. If I did not have to fork out huge sums at the garage, I would have been able to indulge my passion for music to a much greater extent.

There are numerous examples of broken windows in India. All our generators, inverters, UPSs and CVTs are broken windows: these are not industries. Similarly, our water pumps and water storage tanks are not industries. They are also broken windows. If electricity was of good quality in terms of voltage and frequency, and if supply was reliable, we would have spent a lot of money on other things: clothes, books, music, food and drink. All these industries are losing out because of bad quality electricity. If water utilities were properly run and if we had 24-hour supply at correct pressure, we would not have a plastic
water tank and domestic water pump industry. Instead of these broken windows many real industries which contribute to our quality of life, would gain.

These poorly-run public utilities and our horrible roads are not promoting any economic activity whatsoever. They are simply destroying our property. In the case of my car, I do not take the damage lightly. I
do not wish to pay any taxes to a regime that systematically causes major damages to my most treasured private property, earned the hard way.

Through the example of the broken window, Bastiat wanted to teach a very important lesson to all budding economists: that they should look at the effects of any policy on all economic actors and not just focus on the immediate benefits to a few. Henry Hazlitt’s famous textbook, Economic in one Lesson, now in its 50th year of publication, begins with an exposition of Bastiat’s broken windows. Yet there are many who ignore this important lesson.

In India, the greatest example of a massive broken window is one that is actually perpetrated by the state’s economists on the gullible public. This is the charade known as employment generation schemes. Crores of rupees are spent in this way, and the state’s economists, these sophists, would have us believe that, by spending money in this way, gainful employment is being generated. We, the gullible public, see a district magistrate spend huge funds in the countryside ostensibly employing people in constructive activity and conclude that employment is actually being generated. We are making a big mistake. We are not looking at the effect of the policy on all economic actors.

If we looked at all the economic actors in society, we would quickly see through the state’s cunning. Something, in this scenario, we are missing
out the taxpayer. It is his money that the district magistrate is spending. Would not the same amount of employment occur if the taxpayer had spent the money himself? We are also missing out the fact that much of the district magistrate’s loose spending is financed through deficits. We are missing out the fact that the resulting inflation will be a tax on the poor. These schemes were originally thought of by the Congress. But the BJP continues with the charade. Indeed, the NDA government recently announced an additional employment generations schemes by setting
up a ministry for urban employment generation. All this is nothing by grand larceny on a grand scale.

So, who is public enemy No 1? I do believe I have identified him as the government of India. Instead of protecting our lives and properties, its minions are actually destroying our most precious assets. The mismanaged utilities and the corrupt public works on repairing the damages caused to us. And, as if this was not enough, the state spends
taxpayers’ money on the politics of spoils while basic issues of governance lie neglected.

We must realise that, with socialism, we do not have a democracy; we have a kleptocracy. True democrats represent taxpayers and see to it that tax revenues are well invested. The present lot loots the treasury, and when that is not enough, they print money. Public money is systematically stolen and the lives and properties of the taxpayers are not looked after. Every scheme, every PSU, every plan is just another way of stealing public money. This must end, and soon.

There is no alternative but to amend the section of the Representation of Peoples Act that restricts electoral competition to socialist parties. The BJP has disappointed b not jettisoning Nehruvian socialism and
dispatching it to the dustbin of history. Theirs is the same rent-seeking. There is space for a secular free market party and it is the only democratic way by which we can overthrow this corrupt socialism. The spirit of Minoo Masani’s Swatantra Party as is being sought to be revived by many of his liberal followers. They have filed a PIL in the Bombay High Court. This must be decided upon soon.
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#13
Well, Bastiat certainly hit the nail on the head, and his parable is wonderful. (Kudos: I learned about it from JohnL on this forum some time ago.) I think it is refreshing and encouraging that so many people are now becoming aware of the parable.

The parallel parable is that government spending (by and large) does not create wealth, it only takes wealth and destroys it. I think more people are becoming aware of that.

However, I think that the government did well when it created the RR system and the interstate highways, for example. These were too big to be done by private institutions and lead to a great flowering of commerce, benefiting many. Probably government expenditures for basic research falls into this category, although there are numerous silly example of "pure research".
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#14
His essays are so clear and concise, even Jeff could understand them, should he attempt to do so. Wink1

Actually, I discovered him from two like minded places. First there is my hero, Dr Walter E. Williams, and second is the FEE(Foundation for Economic Education). Prior to all that, I had been a student of Wanniski, studying his Supply-Side University lessons. But he never really spent any significant time on Bastiat.

But Dr Williams cites him quite a bit, and the FEE reveres him. And for good cause too. Now, Dr. Williams and FEE are of the Austrian school of Classical Economics, whereas Wanniski was a seperate sub-branch of classical economics. And if you read Wanniski a lot, you can definitely see a difference in philosophy.

With the Supply-Siders, the main emphasis is on economic growth, and fiscal restraint takes a secondary role. With Austrian economics, both of the above are important, but fiscal restraint is an absolute given. If a nation cannot restrain itself, it will not be capable of sustaining itself in the long run. I usually consider myself in between the two, but have been slowing moving to the Austrian side more over time, especially in light of what is happening under Obama. And let's not forget Junior either. Both deserve condemnation for their fiscal malfeasance.
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#15
jt Wrote:...However, I think that the government did well when it created the RR system and the interstate highways, for example. These were too big to be done by private institutions and lead to a great flowering of commerce, benefiting many....
Yes and no. Getting out of the way and letting the market work was the correct way to build our rail systems and Interstate highways. Having government running things - as FDR tried to do in electrifying the Tennessee Valley was counterproductive, slowed the process, and blocked the private companies already doing that job. I have great kudos for Eisenhower envisioning the need for highways - then stepping back and letting the market work.

From my article on Dysfunction:
The history of our country is clear: It was the government that charged outrageous prices and tried to pawn off shoddy merchandise, while the private businesses that supplanted them did the job right, charged lower prices, and did it without government subsidies that kept the monopolies afloat.
Dr. Burton W. Folsom Wrote:url=http://www.mackinac.org/article.asp?ID=238
The school books give the impression that robber barons stepped in to exploit whatever they could, and were a negative point in history. The lesson the books should be teaching is that in the world of commerce, the profit motive, the structure of incentives. and the stifling tendencies of bureaucrats are such that those businesses run by entrepreneurs will consistently outperform those run by the government. Instead, the authors had a bias for a strong central government. When the authors were called on these reports, they agreed that they were not reporting fact, but incorrect, unsubstantiated ideology.

As a prime example, what happened in Michigan, my home state, is the rule and not the exception.

Based on Grace Kachaturoff, author of Michigan, Folsom Wrote:When the state builds a project, the incentives are different from those of private enterprise. Satisfying political interests is often more important to legislators than building a railroad that is financially sound and well constructed. State builders use taxpayers' money, not their own. If the road fails, it's the state, not the builders, with empty pockets. The Michigan story is full of accounts of padded vouchers, illegal bidding, cost overruns, and the stealing of materials by contractors and even by the citizens themselves. Since no one actually owned the railroads, no one felt the responsibility to take care of them.

Judge Thomas Cooley, Michigan's most famous 19th-century lawyer and a president of the American Bar Association, observed this waste firsthand. He wrote about it later and said, "By common consent it came to be considered that the State in entering upon these works had made a serious mistake." The people of Michigan, Cooley reported, became convinced "that the management of railroads was in its nature essentially a private business, and ought to be in the hands of individuals." In 1846, therefore, the state of Michigan abandoned all the canals and sold the Central and Southern Railroads, which were only partly completed, to private investors. The new owners promised to do some rebuilding and to expand the lines to the Chicago area. From this distress sale, the state recovered one-half of its $5 million investment and ended its headaches from being in the railroad business.

Once the railroads had been privatized, they were rebuilt with care and extended across the state. At last, Michigan citizens had the roads they needed to trade and thrive. This turnaround was so startling that its implications were not lost on Michigan voters. They learned from history.

In 1850, Michigan threw out its old constitution and wrote a new one. It read, "the State shall not subscribe to or be interested in the stock of any company, association, or corporation." Furthermore, "the State shall not be a party to or interested in any work of internal improvement, nor engaged in carrying on any such work" except to provide land. The heavily taxed voters were determined to learn from their mistakes and chart a better future for the state. In the years of laissez-faire that followed, Michigan's entrepreneurs developed the state's natural resources: lumber and iron ore - so effectively that Michigan soon became a major industrial state.
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#16
And here again is the NY Times, showing one and all, their so called bastions of Journalistic Integrity, and knowledge, and is so far off key. I quote:

Quote:Reconstruction Lifts Economy After Disasters

No one would suggest that disasters are a desirable form of economic stimulus. But economists who have studied the impact of floods, tornadoes and hurricanes have found that after the initial anguish and huge economic disruptions, periods of increased economic activity frequently follow as insurance money and disaster relief flow in to jump-start rebuilding.

This should have been caught by a savy editor, before the writer could be allowed to make such a Fool of himself, by showing everyone just how blind he/she happens to be, at not realizing the "Unseen" in this loss.

Sigh, Perhaps that Little Ferret Faced fellow, who passes himself off as an economist, could teach him a lesson about Bastiat.
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#17
Here is another great example of how the "Unseen" is so grossly overlooked by the political class: Chrysler to pay back all but $1.3B of bailout

Quote:Chrysler Group, newly profitable and confident in its revamped products, will soon sever its ties with the U.S. government after most — but not all — of the bailout loans it got two years ago are repaid.

That is obviously the "Seen". But what about the "Unseen" how that money would have been used had Chrysler not been saved?

Quote:The truth behind Chrysler’s fake auto bailout pay back


It is not every day that the White House and Democratic National Committee celebrate a supposedly private company’s debt restructuring plan, but such is the marriage of big government and big business under the Obama administration. The New York Times reports: “Chrysler said Tuesday that it had paid back $7.6 billion in loans from the American and Canadian governments, marking another significant step in the revival of the company, the smallest of the Detroit automakers.”

But as The Truth About Cars reports, the loan pay back is just another Obama con job:

Quote:Back in November of 2009, when GM announced that it would repay its government loans, it didn’t take much investigation to realize that The General was simply shuffling government money from one pocket to the other and that true “payback” was still a ways off. … And now that our government finds itself “contemplating a runaway deficit and getting rid of its 8 percent of Chrysler’s equity,” would you believe that a similar federal money-shuffle is under way? Believe it.

American taxpayers have already spent more than $13 billion bailing out Chrysler. The Obama administration already forgave more than $4 billion of that debt when the company filed for bankruptcy in 2009. Taxpayers are never getting that money back. But how is Chrysler now paying off the rest of the $7.6 billion they owe the Treasury Department?

The Obama administration’s bailout agreement with Fiat gave the Italian car company a “Incremental Call Option” that allows it to buy up to 16% of Chrysler stock at a reduced price. But in order to exercise the option, Fiat had to first pay back at least $3.5 billion of its loan to the Treasury Department. But Fiat was having trouble getting private banks to lend it the money. Enter Obama Energy Secretary Steven Chu who has signaled that he will approve a fuel-efficient vehicle loan to Chrysler for … wait for it … $3.5 billion. TTAC [url=]comments[/url]:

Quote:Now, technically the DOE loan program is supposed to be used for specific, qualifying retooling projects, so Fiat can’t literally take the DOE money and use it to pay back the government loans. But freeing up $3.5b in capital that would otherwise be spent on retooling with low-cost loans will make it infinitely easier for Chrysler to secure the $3.5b in debt refinancing it needs. And, in light of the GAO’s pointed criticisms of the DOE loan program’s fairness and transparency, it’s hard to overlook the coincidental nature of Chrysler’s need for $3.5b and the government’s allocation of extra funds to apparently guarantee a low cost loan to Chrysler for precisely the same amount. After all, we’ve seen this movie before..

So, to recap, the Obama Energy Department is loaning a foreign car company $3.5 billion so that it can pay the Treasury Department $7.6 billion even though American taxpayers spent $13 billion to save an American car company that is currently only worth $5 billion.

Oh, and Obama plans to make this “success” a centerpiece of his 2012 campaign.

Aren't you just proud that your Big Government is doing such a wonder, and efficient, job of utilizing your taxes so wisely?

The Law of Unintended Consequences strikes again.
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#18
(02-02-2010, 01:23 PM)John L Wrote: And here is his follow-up article to the one above.

Quote:The Other Broken Window
Fallacy and hypothesis

Posted By Sandy Ikeda
My first article for TheFreemanOnline dealt with the "broken window fallacy." But in the literature on social theory, there's actually another important idea that also uses the metaphor of a "broken window."

In his comment on The Freeman's Facebook page, Flavio Ortigao raised this point when he wrote:
"I do not quite follow the putative analogy with broken windows theory. In many case[s] 'broken windows' has been used as an analogy for the necessity of not allowing the degradation of public space/utilities. Inferring that there is a psychological effect that compounds the problem. I think [it] is very important that cities do not surrender to vandalism. This has little to do with the situation of Haiti, struck by a natural disaster."

Mr. Ortigao is right. The idea to which he refers does not directly relate to the Haitian earthquake or to other situations in which destruction is supposed to create wealth. That's a different "broken window."

The typical way to commit the broken-window fallacy is to argue that a natural disaster, war, or economic crisis is actually good for an economy. The idea is that if the event causes an increase in spending on infrastructure or war materiel or what-have-you, the "new" demand will stimulate the economy and create more wealth than there would have been otherwise. But that's not what Mr. Ortigao is referring to.

One of the articles I assign to my students is George L. Kelling and James Q. Wilson's "Broken Windows" (1982) in which they say: "'one unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing.' This would also apply to trash left on the sidewalk or drunks sleeping on benches, that sort of thing. And because disorder and crimes are inextricably linked, a community that tolerates minor infractions of civility or small violations of social order signals to potential law-breakers that more serious crimes will be tolerated.

By the same token, effectively addressing minor social problems is said to prevent more serious problems. Thus in the 1990s when the Giuliani administration in New York City cracked down on fare-beaters on the subway and "squeegee men" on the streets, it claimed this helped reduce the incidence of violent crime.

So the broken-window fallacy and the broken-window hypothesis are quite different. It may not seem strange then that, as Mr. Ortigao's comment illustrates, people who have heard of the one tend not to know of the other. That's been my experience, anyway.

Complementary Analyses

But I think this is a little strange because I believe a classical liberal should find them complementary. That's because both the fallacy and the hypothesis offer solid arguments against some forms of harmful intervention. Clearly, the BW fallacy does.

The BW hypothesis can be and has been used (as in the case of the Giuliani administration) to support a "get tough on crime" policy, which may not be particularly libertarian. But there is a deeper lesson here.

The one that I draw from Kelling and Wilson is that, when it comes to maintaining social order, it's important to understand the underlying social relations in a community - what Nathan Glazer called "the fine structure of society." These are the norms that guide behavior and the networks that help enforce them, which emerge spontaneously in a neighborhood.

Whether you quickly mend a broken window, bend over to pick up a piece of trash, or intervene when someone disturbs the peace depends in part on your personal ethics, of course. But it also depends very much on whether your neighbors will applaud or laugh at you for doing it. In a healthy neighborhood, if you don't repair your window, one way or another your neighbors will let you know about it.

The support or approbation you get from the community for doing something that may not be in your immediate interest is an important incentive to follow local norms and help to enforce civility. When that weakens, so does voluntary enforcement of local norms and relations. That's usually when citizens try to address public-safety problems by, for example, demanding more police on the streets instead of more private or voluntary effort.

Such interventions have a way of undermining the fine-structure of society. For example, when Robert Moses, so-called "master builder of New York," leveled thriving neighborhoods in the name of "urban renewal," he made those places significantly poorer and more dangerous. (The standard reference here is Robert Caro's The Power Broker ].) Something similar happens when policies crowd out individual responsibility and initiative, as when the welfare state tries to provide for the elderly and infirm or the supervision of children, rather than leaving the primary responsibility with neighbors, friends, relatives, and local social networks.

Whatever the temporary benefits to a given group may be, it fosters a mindset that is more willing to accept or even demand more interventions to address social problems (many of which were themselves created by prior interventions) that might otherwise have been solved by voluntary action. This in turn makes informal, previously vital relations among people seem superfluous.

Both the fallacy and the hypothesis are well worth studying.
I suggest that you delete this because it does not seem to add anything to the discussion. Perhaps there is a point here, but it is annoying to try to fish out. OR, perhaps you could edit it to make it more readable.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#19
Sure, the Giuliani concept of cleaning up crime is a positive - but the "Broken Window" fallacy is about trying to increase wealth by a crime, which is a negative. The window seller may think selling new windows to people whose windows he broke for that purpose is a plus - but it is always the long-range marketplace that is hurt. The window seller is confounded by not being able to afford something because it is now priced out of reach after the broken window owner can no longer buy the things he would have had the window stayed in one piece.

The Giuliani action works whether a window is broken or not. The window crime creates an economic decision which will always prevent some normal transaction from taking place instead of an unnecessary cost.
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#20
Quote:Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

I've been studying Austrian economics a little bit, and I think I've hit upon my fundamental point of disagreement. How do you know a priori that every shopkeeper in the world, in every possible economic circumstance - such as the ones discussed here like Indian taxpayers Haiti before the Earthquake, various cities before their Great Fires, Sichuan before the earthquake, America before 9/11, etc. - were originally planning to spend the money? Sure that's true most of the time (and mainstream Keynesianism would not disagree.) But exactly 100% of the time? They also have an option to save, and they can do so indefinitely (as one example, some trust funds are intended never to be depleted...) So show me the proof. 100% is a very strong assertion.

Another minor note:

(06-01-2011, 04:46 PM)John L Wrote: And here again is the NY Times, showing one and all, their so called bastions of Journalistic Integrity, and knowledge, and is so far off key. I quote:

Quote:Reconstruction Lifts Economy After Disasters

No one would suggest that disasters are a desirable form of economic stimulus. But economists who have studied the impact of floods, tornadoes and hurricanes have found that after the initial anguish and huge economic disruptions, periods of increased economic activity frequently follow as insurance money and disaster relief flow in to jump-start rebuilding.

This should have been caught by a savy editor, before the writer could be allowed to make such a Fool of himself, by showing everyone just how blind he/she happens to be, at not realizing the "Unseen" in this loss.

Sigh, Perhaps that Little Ferret Faced fellow, who passes himself off as an economist, could teach him a lesson about Bastiat.
First, this is a case of "who are you going to believe - dead economists or your own eyes?" Krugman wasn't basing his conclusion on logic, but empirical studies. So you're only blaming the reporter here.

And if you had looked further into this issue, which you mistakenly concluded didn't exist because it didn't fit your preconceptions, you probably would have found a perfectly good reason for it. The insurance payments involve transfer from places that didn't have a disaster to those that did. The broken window fallacy doesn't have to work on local levels - only globally. Simple mistake, which could be forgiven, except for what led up to it.
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