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The Broken Window Fallacy

CrownThomas's picture




 

A reminder that destruction does not create wealth, it destroys it.

Paul and his followers are wrong... again.

 

 

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Sat, 11/03/2012 - 05:40 | 2943805 marginview
marginview's picture

the fallacy is a fallacy in a market driven fiat world where entrepreneurs, due to their ability to produce goods & services people want, end up accumlating a lot of fiat paper, and bankers carrying out rent seeking fiat activities also end up drowing in paper dollars.

With so much wealth stagnating in their bank a/cs the hooligan gets it moving as not only do they fix the window but also go out and buy and new suit. Also the new window hasn't been depreciated like the old one so society is even better off.

In sum as long as the hooligan breaks the windows of rich people but not so many that they leave the country then hey presto we've increased the velocity of circulation of money and hence the money supply.

ps gold still hasn't gone beyond 1600 for any time period in years - but you'll be right one day!

Tue, 10/30/2012 - 18:05 | 2932927 janus
janus's picture

that hooligan throws like a girl.  and since the argument hinges on the hooligan, it sorta throws everthing else into doubt. 

imagine if he'd thrown the brick like a man...

well, let's just imagine that there is a manly, throw-it-on-a-rope kinda hooligan; and supposin he wasn't always a hooligan.  let's say he'd started a bakery, and had attempted to run it as a solvent enterprise -- not dependent on rotating credit, but rather as an entity subject to market forces.  and let's also assume that this naecent entreprenuer cum baker soon discovered that the whole concept of solvency had long since been abandon in favor of debt monitization for every participant in 'the market'...big or small (and further, that there was no longer room for small...'small' is now midcap).  let's not forget that the unholy trinity of wealth-crushing and market destruction has 3 components.  and debt is just one of them.

so first there's ubiquitious debt-monitization undergirding the entire world's economy (except in the black markets...which are very substantial; but this hooligan was dead-set on following 'the law').  and in order to enforce this dynamic, central authority must magnify the effects of 'scale' (ecoonomies of scale, that is...so you econ 101ers can follow), and they accomplish this through a byzantie array of tax and regulatory policies -- all of which are specifically crafted to effect the desired outcome: monopolies or duopolies -- and whatever prefix qualifies the 'opoly', the explicit and clearly outlined objective is to reduce that prefix's value until it's ultimately mono; at which point it can be zeroed, and finally folded into the state.  selah.

so this baker understands that debt is truly slavery; and, verily, verily i say unto you, working in coporate is truly, truly slavery...and yet, he continues to entertain these zany ideas and dreams -- to wit, Liberty and Freedom.  for you see, the unholy trinty is inter-dependent and none of the planks can funtion without -- #1 -- sustained and exponentially multiplied debt (endlessly rehypothicated); #2 -- exacerbated economies of scale; & #3 -- impossibly intricate and atomically specific tax and regulartory policies articulated by the very lawyers who work for big & mid, caps and who stand to beneift most.

the bakery was a franchise.  the window was made in vietnam.  the guy who replaced it was up to his neck in student debt.  and the cop was private security under the employ of the bakery's parent company...well, actually secuity works directly for the off-shore firm that functions as a holding company.

the hooligan is no economist...he's a keen observer of the world around him; he seeks justice; he often waxes philosophic, and then wanes unto action.  he only hopes the broken window will cascade into broken windows all over...glass strewn everywhere, in fact.  because glass is the perfect metaphor for all this shit -- you can see right through it, but it still functions as a barrier. 

besides, smashin shit is fun.

http://www.youtube.com/watch?v=cu58lmx08oo

janus

Tue, 10/30/2012 - 14:55 | 2932241 steelhead23
steelhead23's picture

The real fallacy here is that government spending is merely reallocation of purchasing power.  First, please recall that the first three words of the U.S. Constitution are We the People...  Now, I will not disagree that our current government is far from an accurate representation of We the People, but that is the intent.  Thus, when government spends money, particularly on public works, it is acting as an agent for the People.  And it is completely stupid to assume that such spending is the functional equivalent of simple consumption.  Virtually all roads in the country were built by governments.  As were ports, airports and other critical infrastructure.  Hence, government spending often creates economic opportunity.  Now, I agree that a lot of government spending has little if any economic return to the public (e.g. aircraft carriers) but this moronic video equated infrastructure spending to mere consumption which is ludicrous.  Come on people, grow a brain.

Tue, 10/30/2012 - 12:30 | 2931700 Surprese
Surprese's picture

Is the windows glass imported from China?

Tue, 10/30/2012 - 12:44 | 2931744 Mountainview
Mountainview's picture

Don't worry, the money is immediately printed by oncle Ben!

Tue, 10/30/2012 - 11:12 | 2931431 baldski
baldski's picture

Under this theory, taxes spent for education is taking money away from the people that could be spent for goods. What bullshit!

Tue, 10/30/2012 - 10:45 | 2931353 tok1
tok1's picture

amm well yeah if the guy buys another car
by selling non productive asset then another car is consumed
( even if the guy is not happy)

final example of your stock of everything remains unchanged.

the classic is farming . you may have a stock of 100 trees
so in your world that is finite and if there's too many people
everyone starves.

but in reality one tree can produce many seeds and thus
increase the supply .
With improved techniques the volume can be increased further .
So thr stock of goods is not limited to what's currently avaliable .

so that theory is flawed and worthless .

Tue, 10/30/2012 - 10:18 | 2931244 semperfi
semperfi's picture

Hey Liesman old pal,  go shell out $200k on a new Ferrari and drive it home, don't bother with insurance cuz you are the 1%.  Let me then take a sledge hammer to it for an hour.  Then you can call up the scrap yard to come haul it away out of your garage - stimulus one.  Then call up the clean-up crew to clean the debris out of your garage - stimulus 2.  Then go shell out another $200k for the same exact car - stimulus 3.  You just spent $400k on a $200k car - priceless.

Tue, 10/30/2012 - 10:16 | 2931240 tok1
tok1's picture

or simply a society is located near a forest.  The cut down trees and build 100 houses (everyone busy working).. Then no more houses needed so not so busy..  A storm comes.. as and destroys the houses.

So they cut down more tress and build them again (eveyone busy again)..

If we had a machine that could produce whats needed at zero cost from say air.. then the world would fall into deflation (kind of what Marx said about the death of capitalism as inproved technology reduces profit. ect)..  So the destruction creates demand and  activity (ie work).. 

Tue, 10/30/2012 - 10:04 | 2931185 tok1
tok1's picture

I think what you guys miss is 

yes its true when a transaction takes place nothing new is added to the stock of commodities ect on the earth... so volume remains the same but the increase is in the added value. ie if some one builds a house .. techincally they have not increased the supply of wood / nails ect.. in the economy. but the combination if done profitable produces an asset that is of more value that the components.. (ie pieces involved in making Iphone ect).. so if you look at everything as static commodity then the theory falls flat because its not reality..

Tue, 10/30/2012 - 09:49 | 2931113 tok1
tok1's picture

To make your concept correct then there is no such thing as savings.. Ie all saved money is considered consumed by the investment vehicle holding th funds..  For instance what if the insurance company  buys gold (which is non productive) and then sells the gold to pay out holdings. And  then  the insured spends it..

ie insurance money invested in bonds supported by tax revenue (or combination of tax revenue and QE) what ever it takes... is fresh spend money that would otherwise not be circuating.

(ie insurance company sells bonds to bank (who borrows from FED at Zero so increase moeny supply)  or maybe the FED buys them directly  what ever.. and then passes the funds to the insured which puts it into the real economy.

 

maybe you need a new text book

 

Tue, 10/30/2012 - 09:44 | 2931102 Rusty Trombone
Rusty Trombone's picture

Did you really just use the music from Nuggla's "Unicorn's Fantasy"?      Yeah you fucking did.  Brilliant!

Tue, 10/30/2012 - 09:25 | 2931039 JailBank
JailBank's picture

Krugman should be rock hard right now. NYC has lots of broken windows right now. I know he wanted a new war to get the economy back online, but maybe he can settle for a giant violents storm.

Tue, 10/30/2012 - 09:01 | 2930958 tok1
tok1's picture

this video is rubbish..  IF the baker has been paying insurance for 20ys and that money has been sitting idle .. then  taking the moeny out from the insuance companys holdings and consuming it is benifical to the economy. The video only applies to uninsured loss which yes are  obviously is negative..

 

Tue, 10/30/2012 - 09:23 | 2931030 Protrader
Protrader's picture

Wrong Tok1. Money used by the insurance company to pay for losses means less money invested in the economy. Insurance companies have reserves which are invested in government bonds, stocks, corporate bonds. real estate, etc. This pool of money makes a capitalistic society function. Without this pool of money, new companies would find it hard to start and existing companies find it hard to expand. So the broken window fallacy applies whether the loss was insured or not. For more information on this please read Henry Hazlitt's book "Economics in One Lesson" (free download if you look for it), or listen to my favorite economist, Peter Schiff.

Tue, 10/30/2012 - 15:34 | 2932407 Earth Ling
Earth Ling's picture

Good point, but so far it looks like everyone is assuming that private banks should be in control of the monetary supply.  While I believe our government is as corrupt as corporations, it would still be better if we had not turned over the most important function of government to private banks. 

If money were spent into existence for publics works and other ROI positive (or at least neutral) investments INSTEAD of being created as Debt by the Govt (US Treasuries) then the problem pointed out by the video would cease to exist.

If the government spent money on war and other made up issues like terrorism (Be Afraid, Be Very Afraid, Be Very, Very, Very, Very Afraid!) and the war on drugs, then we'd still have problems with the dollar losing value, but at least the banks would not be getting their illicit cut. And it would be MUCH easier for the People to see where the problem lay.  We'd have far less war and we wouldn't burden our children with unpayable debt.

Related to this is the ability of banks to create "money" (debt) out of thin air without creating the money needed to pay off the interest.  This is a root cause of the business cycle.  Taking away the anti-constitutional capability of banks to control the monetary supply would massively reduce the up and especially down swings of the business cycle.

Tue, 10/30/2012 - 06:33 | 2930730 flacorps
flacorps's picture

What about the redistributive effect of repatriation of all that money sent off to Europe as reinsurance premiums. What, you say Europeans don't have it anymore? Loaned it to the PIIGS? Uh oh.

Tue, 10/30/2012 - 05:33 | 2930696 Lord Koos
Lord Koos's picture

This simplistic, black-and-white, either-or thinking is stupidity on parade & there is some erroneous bullshit at the end of this video. If people's tax money goes to infrastructure projects intiated by the govt. *everyone* gets something.  Sure, if their taxes are a little higher, people don't have quite as much disposable income to spend on supporting Chinese workers and corporations, buying shit they mostly don't really need. However in return they get dams, freeways, power grids, bridges, transporation systems, etc that make things easier for everyone. That's how it's supposed to work... wars are destructive but infrastructure projects support the economy.

Tue, 10/30/2012 - 15:36 | 2932421 Earth Ling
Earth Ling's picture

Yes and the reason taxes are and should be progressive is because the wealthiest make far greater use of resources that taxes pay for; court systems, roads for their trucks, rails for their goods, armies for their oil, etc.

Very few people actually seem to know this very basic fact.

Tue, 10/30/2012 - 21:49 | 2933391 Louie the Dog
Louie the Dog's picture

Yes and the reason taxes are and should be progressive is because the wealthiest make far greater use of resources that taxes pay for...

Except for taxes that pay for police, firemen, EMTs, trauma care units, coroners, SNAP cards, govt.-paid cellphones, section 8 housing, WIC, unemployment....

Tue, 10/30/2012 - 04:07 | 2930668 AnAnonymous
AnAnonymous's picture

'American' economics is all about consumption.

This kind of scenario helps in 'american' economics.

This destruction will foster more consumption, consumption that could not have been there in the first place and that is now made compulsory.

'Americans' have triggered a race to deplete Earth's resources.

This kind of events are a blessing. Due to monetary advantages, 'americans' can outbid anyone. So all the resources of the world will converge to 'american' nations, given demand has the proper incentives.

A nation wishing to accomodate the domestic environment will consume. 'Americans' have largely acccomodated their own national environment.So demand for it can no longer be that of the past.
But thanks to that kind of events, a near reset happens. 'Americans' restart from fresh their consumption to accomodate their domestic environment.

Therefore giving them or maintaining a headstart in the race to deplete the planet's resources.

Consumption is all in 'american' economics. This kind of events will boost the consumption.

There is a kind of destruction that is lethal in 'american' economics, that is the one 'americans' are used to practising in foreign countries or sometimes domestically when targeting certain groups.

That is the destruction of capacity to consume. This one is lethal as it decreases competitiveness in the 'american' race to depletion of resources.

The other kinds of destruction are benefitial in 'american' economics.

Know your 'american' way.

Tue, 10/30/2012 - 09:06 | 2930970 Winston of Oceania
Winston of Oceania's picture

Perhaps you could enlighten us to a better way? If you wish to truly effect change you must offer up something of yourself in exchange.

" Before you embark on a journey of revenge, dig two graves. " Confucius

Tue, 10/30/2012 - 03:26 | 2930646 boiow
boiow's picture

it is not the economy that requires growth.It is the banking system that requires growth as it is a ponzi scheme.

Tue, 10/30/2012 - 08:32 | 2930869 Widowmaker
Widowmaker's picture

Absofuckinglutely.

Destruction is good for EVERYONE ELSE!  Imagine who COULD afford a home if TARP and crony fascist justice Inc wasn't sucking Sams dick.

CrownThomas equity is a double digit loss.

Tue, 10/30/2012 - 03:06 | 2930630 Peter Pan
Peter Pan's picture

I disagree that destruction does not create wealth. The problem is that it's only for some.

Tue, 10/30/2012 - 01:58 | 2930578 Never One Roach
Never One Roach's picture

Excellent and very true. My family has cut back spending over 75% in the last three years due to stagnating or dropping income, essentially 0% on savings and plunging house value. The best part is it taught us the fun of being frugal and working together.

Tue, 10/30/2012 - 08:34 | 2930887 Widowmaker
Widowmaker's picture

0% on savings is the fascist elephant in the room.

 

Tue, 10/30/2012 - 00:40 | 2930485 ebworthen
ebworthen's picture

Now wait:

Government mandates open loans to anyone.

Banks happy to comply, and give anything to anyone wihile raking in fees and bonuses.

Banks use this as an excuse to bundle crap mortgages and sell as securities and derivatives at 40X leverage.

Banks make fees and bonuses.  Betting it all on 30 to 1 double sixes roulette spins - win some then lose; banks cry to government, government gives them three generations worth of cash for nothing.

Government begins to talk about debt after creating it to benefit banks.

Banks and corporations begin to talk about "austerity" for the little people.

Little people get bent over not getting a penny in interest (o.k., two) while banks increase fees, corporations increase costs, government cuts entitlements and jiggers unemployment and inflation figures.

So...breaking windows and drowning people has worked so far...what's wrong with this picture?

Regards,

Ben and Timmy and Washington and Wall Street

Tue, 10/30/2012 - 15:40 | 2932437 Earth Ling
Earth Ling's picture

remember who's really mandating open loans to everyone - Government Sachs and the like.   You don't think the government would "force" banks to make loans that the banks didn't really want to make do you? 

Apart from that nitpick, I think your analysis is spot on.

Tue, 10/30/2012 - 00:31 | 2930462 sbenard
sbenard's picture

Thanks for posting this!

If unbridled destruction was such a great economic boon, we would then want to wage continual warfare just for the benefit of rebuilding entire cities from the dust. We would level every city every five years just for the economic boom incurred when we rebuilt everything from scratch. How can anyone be so foolish as to believe that destruction is good!
Oh that's right. One has to be CRAZY Krugman to believe such tomfoolery! He obviously didn't witness the devastation of Europe that we witnessed during World War II! No one, having seen that with their own eyes, could suggest with a sane mind that such devastation is good for the economy!

Wed, 10/31/2012 - 02:48 | 2933845 Incubus
Incubus's picture

Dabble a bit in sociology, psychology, poltics, and economics,  and you'll realize the world is far more nihilistic than you'd think.

 

It's quite unsettling how destructive & self-destructive people can be because of their own ignorance to the reality right before them.  You dare not try to tell someone that their narrative is a bunch of bullshit, through.  That's all they know, and something they're familiar with is better to them than having to make something out of themselves that isn't from the mold.

Tue, 10/30/2012 - 00:13 | 2930426 Bear
Bear's picture

It may not destroy wealth in absolute terms, but it does redistribute it from the taxpayers who will ultimately pay to the industries that will complete the rebuilding work. In large cities (i.e. NYC) these will be owned by the .01% people. So, we have another distribution from the middle class to the wealthy.

Tue, 10/30/2012 - 08:31 | 2930874 Widowmaker
Widowmaker's picture

Pay no attention to the man behind the curtain!

Mon, 10/29/2012 - 22:26 | 2930075 batterycharged
batterycharged's picture

But let's say the baker is a billionaire. And he has tons of gold in his basement. Then you forced the baker to spend money in the economy that he would normally just hoard.

That's why I hate economics, it's a social science that pretends to be hard science. You can call anything "a law" or a "fallacy", how the fuck do you disprove it?

The benefit of taxing the rich is economic stimulus. What's the difference between some rich bastard building the biggest yacht imaginable or the gov't building the best bridge?

Tue, 10/30/2012 - 15:38 | 2932428 batterycharged
batterycharged's picture

LMAO, I didn't realize there were so many BILLIONAIRES on ZH.

That's the fun mentality of the American psyche, i.e. the LOTTERY CASINO mentality.

In other words, people that think they have a shot of becoming rich (like the lottery or casino) are more likely to embrace a system that impoverishes them despite the clear overwhelming odds against it.

Casinos should be shut down because they make people poorer, they in fact destroy many lives. Our economic system of making those with money wealthier at the expense of those without money, should be shut down as well.

But alas, all the billionaires on ZH don't want that....LMAO.

 

Tue, 10/30/2012 - 19:00 | 2933037 nmewn
nmewn's picture

"Our economic system of making those with money wealthier at the expense of those without money, should be shut down as well."

Explain to me how someone becomes wealthy at the expense of someone without money.

Tue, 10/30/2012 - 20:11 | 2933151 batterycharged
batterycharged's picture

Have you heard of slavery? Maybe you should Google the titans of the cotton industry in pre-civil-war America.

And it was hyperbole meaning "those without wealth".

I work for one of the biggest retail lenders in the country and every day I see how the wealthy charge 30% interest rates on the poor.

I've seen people pay on a $500 debt for 5 years, with a current balance exceeding $500.

Are you really that stupid?

 

Tue, 10/30/2012 - 22:02 | 2933428 nmewn
nmewn's picture

"And it was hyperbole meaning "those without wealth".

But it was YOUR hyperbole wasn't it? And that little diddy of "slavery" was also hyperbole wasn't it?

And then you go full circle and admit to being one of the "overseers" on the plantation of "slavery".

Now, who's stupid?...fucking communist.

Mon, 10/29/2012 - 22:57 | 2930180 Manic by Proxy
Manic by Proxy's picture

Where to begin with such ideologically driven shit. Taxes do not stimulate anything, unless it is government spending. But that is not manufacturing, does not create capital goods and therefore does nothing to improve an economy. And since when is saving "hoarding"? Oh, right. When someone has more than you and holds it, that's hoarding. When you hold something that's saving and being prudent. Self-serving shit. You have defined yourself as the enemy. Thanks for the clarity. Is your last name Bloomberg, or Mao, or Obama, or........?

Tue, 10/30/2012 - 15:48 | 2932473 Earth Ling
Earth Ling's picture

I'd be hard pressed to find a good link (apologies) but my understanding is that in the 1700s the government of Pennsylvania levied almost no tax on its citizens because the government issued its own scrip.  It charged 5% interest on loans to its citizens and that was all the money it needed to provide its services.

Until we remove banks from money (debt) creation, we're fucked.

Tue, 10/30/2012 - 15:45 | 2932463 batterycharged
batterycharged's picture

"And since when is saving "hoarding"? Oh, right. When someone has more than you and holds it, that's hoarding."

Hmmm and thievery is when someone is poor and steals from you, but it's good business when it's 30% interest rates on student or medical loans?

Hey if a business is sitting on trillions in cash, and they won't lower prices, won't hire new workers, and won't pay dividends.....go get that money! 

Personally I'd like to see laws rather than taxes that redistribute wealth. Like mandating profit-sharing.


Tue, 10/30/2012 - 18:52 | 2933023 nmewn
nmewn's picture

Another godamned communist.

Tue, 10/30/2012 - 18:08 | 2932933 lunaticfringe
lunaticfringe's picture

You have just identified yourself as a statist. A moonbat. Stalin thought like you too.

When farmers refused to turn over the crops- Stalin had them killed. We alteady have laws that redistribute wealth to the wealthy via loopholes and deductions and allow the poor a few crumbs. They are called taxes.

Tue, 10/30/2012 - 20:19 | 2933175 batterycharged
batterycharged's picture

Really? Well so did Hitler. Hmmm, so I'm a facist as well?

Such exageration. It's called the Slippery Slope Argument.

Because I think we should tax the wealthy....suddenly I'm Stalin. Brilliant.I also am bald....I guess I must be Mussilini.

Name a country that doesn't tax. Name a Socialist country in Europe that has a lesser standard of living than the US.

It's kind of bizarre that people still use the Red Scare to deter citizens from demanding equality and justice.

Oh snap, He's uh commie!

Tue, 10/30/2012 - 21:37 | 2933367 Louie the Dog
Louie the Dog's picture

Name a Socialist country in Europe that has a lesser standard of living than the US.

Greece.

Wed, 10/31/2012 - 02:42 | 2933843 Incubus
Incubus's picture

My boy, even in their "poverty," the Greeks live better than your average American. (Don't count your 1%ers.)

Don't drink so much of the kool-aid.

Tue, 10/30/2012 - 07:03 | 2930754 Spastica Rex
Spastica Rex's picture

The Invisible Hand Saves.

Praise It!

Mon, 10/29/2012 - 22:54 | 2930171 dugorama
dugorama's picture

one benefits the many, the other the few.

 

one is an investment that increases future production, the other just sucks resources.  etc etc.  that's the difference.  one guy having everyone put grapes in his mouth helps no one else.  

Tue, 10/30/2012 - 09:57 | 2931142 Imminent Crucible
Imminent Crucible's picture

He went wrong from the very beginning: "Let's say the baker is a billionaire with a giant hoard of gold in his basement."  Huh? Why not say the baker is a Vulcan from the Andromeda system? It's more likely.

If a baker works really, really hard for a lifetime and ends up with a chain of bakeries, he might be a millionaire by retirement. He won't be a billionaire. Billionaires are money-shufflers and insider traders like Jamie Demon and Honest Uncle Warren Buffett.

If you take the baker's life savings by force to redistribute it to people like yourself that can't bear the thought of working hard for a lifetime and delaying gratification, pretty soon you won't have any millionaires--because you will have discouraged saving and delaying gratification. Maryland tried to boost revenue by raising taxes on millionaires, and most of the state's millionaires left the state--and revenues fell.

On the other hand, if you want to build yourself a nice bridge by taking all of Jamie's and Warren's and Paul Krugman's money away, have at it. You'll soon find out who the real government is.

Mon, 10/29/2012 - 22:20 | 2930048 Herkimer Jerkimer
Herkimer Jerkimer's picture

Up in Ontario, in our local area, we have a govy program where the business owners can apply for govey grants to "spruce" up their business, in the area of new fronts, awnings, entrances, et cetera.

The lefty types just don't understand, that the government took our money and in giving it to these business people, they have demonstrated that they look upon the people from whom they took this money, in the form of taxes, not only as if we don't know better than they, how to spend it, but now we don't have that money to go to those businesses and spend it there ourselves.

 

This is tyranny.

 

Where does it stop?

 

OJO

V-V

 

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