Broken Window Fallacy
Bk Marcus has a good post on Bastiat's broken window fallacy at lowercase liberty.
Bastiat's evisceration of the broken window fallacy dovetails nicely with some of the material at the True Cost Economics site. See especially "Scrap the GDP."
The ASI and Globalization Institute blogs regularly feature enthusiastic posts about how "globalization" and "more trade" (neither one the same as free trade, by the way) lead to "economic growth" and skyrocketing GDP. But nobody in those circles stops to consider how much of the nominal GDP measures genuinely productive activity, and how much is the cost of replacing broken windows. How much of the GDP reflects activity that takes place only because it's subsidized, and the non-privileged bear the cost? How much of the GDP is made up of such externalities--the replacement of "broken windows" like cleaning up pollution, the inefficiencies of centralization and bureaucracy, or building more highways and airports to transport goods long-distance that would be more efficiently produced near the point of sale? How much of GDP reflects the monetization of activity formerly carried out within the household and barter economies, as evicted peasants work in sweatshops to earn the wages to buy the food they used to grow themselves?
Addenda. Some good stuff in the comment thread. colorless green ideas provides a link to a better index of economic output.
And Bill at Reasons to be Impossible says
What-is-seen-and-what-is-unseen is a powerful way to introduce someone to the concept of opportunity costs, but in the case of the broken baker's window in Bastiat's original essay (and in the cases of World War II, the World Trade Center, typhoon-ravaged coastal cities, and now New Orleans), what should be seen is the whole and functional window as part of the wealth in the world and the destroyed window as part of the destruction of wealth.
Before the little vandal, the baker had a window and some savings. After the vandal, the baker has a new window and less savings. That means less wealth. What exactly is unseen?
What is seen, unfortunately, is the increase in nominal GDP caused by replacement of the broken glass.
Bastiat's evisceration of the broken window fallacy dovetails nicely with some of the material at the True Cost Economics site. See especially "Scrap the GDP."
The ASI and Globalization Institute blogs regularly feature enthusiastic posts about how "globalization" and "more trade" (neither one the same as free trade, by the way) lead to "economic growth" and skyrocketing GDP. But nobody in those circles stops to consider how much of the nominal GDP measures genuinely productive activity, and how much is the cost of replacing broken windows. How much of the GDP reflects activity that takes place only because it's subsidized, and the non-privileged bear the cost? How much of the GDP is made up of such externalities--the replacement of "broken windows" like cleaning up pollution, the inefficiencies of centralization and bureaucracy, or building more highways and airports to transport goods long-distance that would be more efficiently produced near the point of sale? How much of GDP reflects the monetization of activity formerly carried out within the household and barter economies, as evicted peasants work in sweatshops to earn the wages to buy the food they used to grow themselves?
Addenda. Some good stuff in the comment thread. colorless green ideas provides a link to a better index of economic output.
And Bill at Reasons to be Impossible says
the old eastern bloc regimes used to use the semi-Marxian Gross Material Product (which would have roughly equated with added labour) - when they joined the western bloc they switched over to using GDP which basically doubled their effective appearance.Well, surprise, surprise, surprise!
posted by Kevin Carson | 4:35 PM
9 Comments:
Economists are quite open about the fact that the G in GDP stands for "gross" and that you have to account for other stuff as well in drawing the right inferences for any particular question. The trouble is that policy is not determined by making objective adjustments but by stopping when the choice of adjustments gives an answer that suits the agenda.
ISTR someone telling me that the old eastern bloc regimes used to use the semi-Marxian Gross Material Product (which would have roughly equated with added labour) - when they joined the western bloc they switched over to using GDP which basically doubled their effective appearance.
ISTR one difference was treating tax twice (once when the government claimed it and again when they spent it).
Peter,
Unfortunately, the line between "economists" and "policy-makers" is thin, when it comes to the polemicists who use rising GDPs to sell globalization.
Didn't Murray Rothbard propose an alternative in Power and Market to factor in government wealth destruction.
Dunno. I don't remember it, but it's been a couple of years since I read P&M. How did it work?
Kevin - I thought you'd be interested to know that (surprise surprise!) Alex Singleton objects to your dismissal of the GDP. His response is over at Samizdate.
He links to an old article from Reason written by some Fed big wig who thinks that we're all living large thanks to the free enterprise system and that the GDP actually underestimates growth!
Geez, I knew Samizdata skewed vulgar but I didn't expect the bone-headed response they gave. They seem to think accounting for broken-window spending would involve political types sorting all monetary exchanges into boxes marked "good" & "bad" for some reason.
Odd, I would've thought an attempt at bringing "lefty" issues like the environment under a strict market-rationality would be cheered. Makes you wonder what it is they really want....
Yes there is less total wealth after the broken window - but the thing is in the real world "broken windows" are usually used as a means of redistributing wealth (redistribiting a smaller pie but some may still see the redistribution as beneficial).
Thanks for commenting, Travis.
I disagree that globalization=free trade. Globalization, as defended in most public discourse, is *phony* free trade, or neoliberalism. The defense of globalization, for the most part, is just another vulgar libertarian defense of the interests of global corporations, under the guise of "free market" principles.
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