Disastrous Economic Fallacies

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16 Responses to “Disastrous Economic Fallacies”

  1. The faulty broken window thinking that Bastiat counseled us to be aware of is found in the Keynesian view of the economy, which although was widely discredited is now revived by Mr. Obama and the Democratic Party. In their view, the simple macroeconomic formula: Y=C+I+G, means that as I (Investment and Savings) and C (Consumption) fall in a recession, increasing government spending (G) will stimulate a growth in Y, the economy. This is exactly the mind-set Bastiat warns us about, the mischaracterization of a negative as a positive.

    Even though the formula recognizes government spending as a plus, note that all government spending is a COST to the rest of the economy. The formula should read, +(-G) to better reflect what is actually happening. Yes, government spending is obviously a part of the economy and in many cases very desirable, but it is actually, nevertheless, a COST (like the broken window), not a positive.

    Intellectually mis-identifying a negative as a positive is part of a world-view, one described as ‘fallibility,’ or perhaps better as psychological ‘pessimism.’ Such a world-view grounds the thinking of Marx, Proudhon, Marcuse, Mao, and yes, Krugman and Keynes and center-left policies.

  2. Why isn’t Frederic Bastiat more popular amongst economists today? He just doesn’t seem to be taken that seriously. In my grad econ class, I recall bringing up the broken window theory. My professor didn’t say it was wrong, he kinda just shrugged it off. What accounts for this?

  3. Even in his country Bastiat, is unknown. France, mother of many french classical liberals is now, like many other countries, suffering from political lies, telling people that they can controle economy, fight markets and moralize capitalism – as if their moral is higher than peopl’s moral…cause what’s the market ? if it’s not just people exchanging … – and of course live at the expense of everybody. Remeber Bastiat quote : “The State is the great fiction through which everybody endeavors to live at the expense of everybody else.”

  4. To a Duoist: Y = C + I + G is an accounting identity showing the uses to which the total national product can be put. Everything in the formula is a “cost” in that sense. But there’s no fallacy, error, or misconception in the formula itself.

    Problems arise is one assumes that Y measures welfare. It doesn’t, and was not meant to do so. Making it bigger isn’t equivalent to making anyone better off. Depressions aren’t the result of insufficient aggregate demand to boost Y to “full employment” level. They are the result of malinvestment and insufficient productivity. *That* misunderstanding is the heart of the Keynesian fallacy, not a mistake in national income accounting.

  5. So the baker can no longer afford the suit because he had to buy a new window; can’t the window-maker now buy the suit, with his newfound income from the baker? How is society poorer?

    I’d very much like to see a video which explores wealth creation in more depth.

  6. Steve M.


    You are right. The window-maker can now buy the suit. But there is one fewer window.

    If it cost 50 bucks to fix a window and then someone comes along with a way to fix it for 25, wealth is created. You are achieving the same thing with fewer resources. Therefore the other resources can be used elsewhere, maybe for a new suit. It’s all about productivity. Not consumption or spending.

    At least that is my understanding of it.

  7. Ian,

    Sure, the window-maker can now buy a new suit with his income, but the point is that the baker lost out because he only has one window for the price of two, whereas he would have otherwise owned a window and a suit. There is a loss in wealth which is represented by the “consumption” of the first window.

  8. Steve and Jonathan,

    Thanks for the replies. My point was that the video doesn’t preempt a possible objection from broken-window-fallacy exponents, namely, how is society poorer? If the window hadn’t been broken, the baker would have a window and a suit. With the window broken, the baker gets a new window, and now the window-maker gets a suit. So how does anybody lose?

    Society loses because it costs the window-maker something to replace the baker’s window. Before, the baker would have had $100 to buy a new suit. But now he has to pay that $100 to the window-maker to get a new window. The window-maker gets $100 in income he didn’t have before, but he doesn’t pocket all of that. It costs him $20 to buy the glass etc. for the window, so he can really only afford an $80 suit. This $20 is what society loses; we’re poorer by what it costs to rebuild what we lost–a perfectly functioning window.

    I thought this point could have been made a bit more clearly in the video. Society doesn’t lose “a suit”, so much as it loses a suit better by $20. Even Hazlitt, in Economics in One Lesson, does not make this point as clearly as he could have.

  9. Ian, when Krugman talks about his hotdogs and buns, he says “you cannot do serious economics unless you are willing to be playful.” You have to accept some simplification to make a point.

    About Bastiat, I find it compelling that his arguments should have such strength after almost two centuries. You can pitch him against contemporary Keynesians, or protectionists, or mercantilists, and not only do the arguments hold up, he anticipates a lot of the arguments made even today.

  10. Tom G. Palmer

    I will look at the comments soon. I’ve been extraordinarily busy. (And there are more videos I hope to have out soon.)

    As to whether people may re-post elsewhere, please do.

  11. I forgot to mention to Ian the main point: it does not matter what the window costs. In the village, there are three players and 100 francs. The players are the baker, the glazier and the tailor. In the ‘broken window’ situation, you have:
    1. 100 francs
    2. One window

    In the ‘unbroken window’ situation, assuming the tailor is commissioned, you have:
    1. 100 francs
    2. One window
    3. One new suit

    Regardless who ends up with the 100 francs, the sum total at the end is larger in the ‘unbroken window’ situation. Bastiat’s point is that because #3 and the tailor is invisible in the ‘broken window’ situation, they are often omitted from discourse. Wrongly so.

  12. m.palmer

    “you don’t get rich by breaking your stuff” true.
    And yet we crushed thousands of perfectly functional cars.
    What does that say about our current administration?

  13. Very interesting discussion going on in here! I bet that’s what Tom was reaching for!

    The argument is both subtle and complex, and that becomes really obvious when you go read the original text ( http://bastiat.org/en/twisatwins.html#broken_window ). The whole What is Seen and What is Not Seen is likely to fuel Hayekian discussion about the complexity of society and how little we really know about it. It’s that good.

    Of course you can simply say that there was a glass, there is no more, therefore some value has been destroyed. But Bastiat’s argument is a little more subtle. He doesn’t say that there is a reduction in wealth, he says that there is no increase in wealth.

    Because obviously if you give in to the sort of calculations he was trying to denounce you’re always going to run into things like, maybe now it’s the window maker that can afford the suit, or other scenarios. And this is what’s great about Bastiat; such argument only fuel the fact that there’s been a redistribution of wealth from the the guy that’s had his window broken to someone else, namely the window maker. Had his window not been broken, he might have had spent it on a suit, but now the window maker can. Not only has there been no net wealth creation, but decisions about this society’s spending has been put in the hands of some rowdy kid.

    Damn meddling kids! 🙂

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