The broken window fallacy is a pretty straightforward argument. If a kid smashes the window of a bakery, sure, the destruction creates work for the glazier. But in focusing on that, we ignore what the baker might have done with the money otherwise spent on replacing the window. By smashing the window, the kid forces resources that might have otherwise enriched the community to be used to bring the community back to its previous level of wealth. So far, so good.
Here's where things get fun. Suppose the baker was going to sit on the money? Things look bad for him; maybe his wife was expecting or he thought the price of wheat was going to go up or maybe he is just a miser- whatever the cause, the baker wasn't going to spend the money. Murphy sort of addresses this point by taking away the assumption of full employment (an extremely convenient assumption, as I've noted before). He does it in the section headed, "What's the Point of Employment?," a question Murphy comically assumes has one correct answer. Let's look at his answer first:
The goal of economic activity is to produce consumption goods and services. Work is a necessary evil, not an end in itself. [...] [S]uppose Jim sees his neighbor sitting in a lounge chair, sipping a martini on a Saturday evening. Jim then decides to set his neighbor's house on fire. Obviously, the neighbor jumps up out of his chair, and spends (let us say) the next hour putting out the fire and minimizing the damage the best he can. Would anyone in his right mind say of this scenario, "Sure, Jim caused some physical destruction of wealth, and that is a bad thing; however, let's not lose sight of the upside: the neighbor used more of his labor than would otherwise have been the case"?
The same principle operates on a communal level, when it comes to hurricanes, terrorist strikes, and alien invasions. The only difference is that specific individuals might actually benefit — yet the community as a whole is still poorer. For example, if an alien spaceship blows up a (deserted) factory and then leaves, it's possible that certain people (such as construction workers and their suppliers) will, on net, benefit. They will have gladly given up their leisure time in exchange for the wages they receive to rebuild the factory.
However, there are other people in the community who are clearly the losers. Not only are they "out" the wealth of their factory but they must then pay enough out of their remaining wealth to induce the construction workers and other people to rebuild it.
When reckoning costs and benefits on a societal level, the fact that hundreds of workers have to give up hours of their time, and that owners of scarce shingles, bricks, concrete, etc., have to give up some of their property, is a cost of the alien attack. Those are not benefits.
It's difficult to see this, because the people involved view it as an "increase in demand" for their services and products. The construction workers are happy to report to the site everyday at 8 a.m. rather than sleeping in, because now they "have a job."I snipped one small direct quote from Henry Hazlitt because it messed with my formatting. So there it is, his answer. Employment exists to produce goods; working sucks and we do it to attain a specific end. Smashing stuff impoverishes some to enrich others.
Yet when we push the analysis further and ask why it's good to have a job, the answer isn't that they want to stay fit. The answer, of course, is that they get a paycheck with which they can buy other goods and services.
Now I want to take two angles on this. The first is a messaging angle- libertarian messaging is a pet concern of mine- and the other is a more substantive angle. First, the messaging: no one feels bad for factory owners, especially compared to workers. You don't have to believe in Marxist exploitation to look at a rich person losing an investment to a natural disaster and not feel nearly as much sympathy as one feels for a poor person losing his job. Going around saying, "Sure, workers might be better off after a natural disaster, but what about the poor capitalists?," isn't going to convince anyone who isn't already a believer. Frankly, it makes you sound like a dick.
Now the more substantive angle: how many people do you know who work to enrich their community, "to produce consumption goods and services?" I frankly can't think of any. People work because you need money to eat. And, you know, to buy the other stuff you want and need. Like housing, health care, transportation, education, entertainment, etc. Yes, ceteris paribus, leisure is preferable to labor. But brother, ceteris ain't fucking paribus when you don't have a job. True, destruction impoverishes, it does not enrich. But it also gets the money sloshing around; it can take the money out of deep pockets and put it in empty ones. And that's always been Dr. Krugman's point, just as it was Keynes's point so long ago.
What's odd to me is that Dr. Murphy appears to almost sort of get this in a glancing way in the last sentence of that passage I quoted. Employment is necessary for survival. Well, in our social democratic downhill slide into absymal (name that song!) it isn't, but in Libertopia it certainly would be. And that brings me to my next point: the continued failure of the critics of Keynes to account for the possibility of suboptimal equilibria; that is, their refusal to face up to the possibility of a stable economy in which there exists surplus labor. If you want to yank the social welfare safety net away, you need to make a convincing case that your system will obviate the need for said safety net.
To be fair, Dr. Murphy makes an attempt to answer this in a brief plug of ABCT, wherein he basically says to the Keynesians, "You started it!" The problem with this answer is- as so many of my points- twofold. First, as Alex Tabarrok has noted, Keynesian politics have failed miserably. We haven't ever actually implemented Keynes's policy prescriptions. Yes, he recommended deficits and both monetary and fiscal stimulus during recessions. But he recommended budget surpluses outside recessions. As I've said before, even the most fanatical Keynesians don't think you should incessantly run deficits and relentlessly stimulate the economy. To analogize to medicine, Dr. Keynes prescribed one small dose of amphetamine during periods of extreme fatigue, but Nurse Congress put the patient on a nonstop amphetamine bolus and now we are wondering why the patient's heart exploded. This problem may well be unavoidable in democracy; Keynes himself famously stated his system would work better in a dictatorship. But let's move along.
Alex Tabarrok posited the correctness of Keynesian policy prescriptions; I will posit that the Keynesians are in error, that the downturn really is a classic ABCT downturn, and that more "stimulus" will only make things worse. So now what? Yes, we understand the long-term prescription- let markets works, let the bad investments liquidate and let real market prices reallocate the resources freed to more productive uses. But what do we do now? We have a legion of the unemployed surrounded by a vast penumbra of the underemployed (defined as: those willing and able to be more productive- and hence more highly paid- than they currently are). What do we tell them? Tough shit? Be patient? It's the circle of life? If you don't have an answer, if you don't have a concrete plan to help the people who are suffering now, then you have no hope of gaining the political influence needed to stop this from happening again.
And even if you have that answer, you have to prove, rigorously, that full employment is the natural state of the unhampered market. Because if it isn't, if an unhampered market creates an underclass without hope, that underclass will smash your system and take what they want. You can hate them, despise them, rant about their time preferences and lecture them piously on property rights and natural law. They won't care. They won't even listen.
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