There is something grimly amusing at reading Matt Yglesias, purveyor of conventional (ie, wrong) thinking on matters economic, getting a bit sniffy about the way in which certain commentators, such as Bryan Caplan, cite the great insights of the 19th Century French thinker, Frederic Bastiat (well known to this blog, of course):
“Bastiat’s alleged broken windows fallacy involves simply assuming that there’s no such thing as genuinely idle resources or an “output gap.” In that context, yes, it’s a vibrant intuitive depiction of crowding out. But this doesn’t counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do. In defense of Bastiat, at the time he was writing the modern industrial business cycle was a very new thing and the vast majority of economic ups and downs were caused by things like bad weather which—as you can see in the corn futures market today—is indeed a decisive consideration in an agricultural economy. But that’s no excuse for people sitting around in 2012 to be pounding the table with an old book that’s non-responsive to modern issues professing to be baffled why people don’t find it more persuasive.”
The point is that the issue of “idle resources” or an “output gap” only makes sense if you start from the position of assuming that there is an optimum amount of economic activity to be had, and that supposedly clever central bankers (try not to laugh please) know what this “gap” is and have the skills to fill it. Given the manifest failings of Keynesianism – and arguably also some of the cruder forms of monetarism – it seems those who want to push this approach are under an onus of proof.
Yglesias also writes about one of Bastiat’s most famous satires of businesses, the one where he mocks firms that ask for protection against competition: the “candlemaker’s petition”:
“The best example of this is probably “The Candlemaker’s Petition” which is a pretty hilarious satire of rent-seeking. And obviously rent-seeking is a real thing, worthy of being satirized. But there are no political controversies for or against pure rent-seeking. The candlemakers’ petition is a devastating satire of pharmaceutical companies’ endless lust for patent rents, unless you happen to think that pharmaceutical patents and the monopoly rents they generate are a crucial engine of R&D funding and life-saving research. Are the pharmaceutical companies right? I think it’s questionable, but I also don’t think you’ll find the answer in Bastiat.”
That is quite cute and he has a decent point – not all requests for protection of a business are, ipso facto, wrong, but this does not really work as a smackdown.
The argument for patents (and as we know, classical liberals have sharp disagreements about intellectual property rights, as shown by the likes of Greg Perkins, say, or Tim Sandefur, or this guy), is that they are incentives to capture the commercial use of an idea for a specified period of time on the basis that creating such property rights in commercial inventions increases the likely existence of said in total, which is different from tariffs, where there seems to be clear evidence that such things reduce the overall economic pie. (Critics of IP sometimes argue that it stifles overall innovation, but I have seen no conclusive evidence either way.) Thinking of Bastiat’s satire, it does not really, in my view, mean that I would scorn a firm or individual for seeking to protect an original idea from being copied by someone else without payment. In any respect, the presumed “rent seeking” failings of IP (and there are problems) can be seriously reduced by reforms, such as granting patents to independent inventors of a gadget, greater disclosure of invention processes in patent filings, an efficient secondary market in IP, shorter IP durations, and so on.
It is good that those of us who venerate Bastiat are forced to think through how his ideas apply to such matters, even to the point of working out if he has any weak spots. But I don’t see that Yglesias has landed the killer blow that he thinks he has. And he cannot just write Bastiat off as a witty Frenchman whose insights are out of date. They are screamingly relevant, just as Adam Smith and others of that vintage are.
I suppose it is good that Mr Bastiat is getting up the noses of some folk. That counts as progress. There’s plenty more where that came from.
(I realise that this is the second time in a row I have written something with a French angle. A pity that French president Francois Hollande does not share the wisdom of Bastiat.)
Update: Caplan responds with some more observations on how policy wonks live in the sort of bubbles that need to be pricked.
I think there’s something to be said for the fact that the enemies of a free society now know names like Bastiat and Hayek and find it necessary to directly address or attempt to make fun of their arguments instead of pretending they don’t exist. We’re definitely making progress.
“First they ignore you, then they laugh at you, then they fight you, then you win.”
The ‘viability’ of stimulus has been demonstrated to be effectively negative here in the US: not by abstract notions on a piece of paper (the only things Yglesias has direct experience with), but by the real-world examples of what happens when fabulous sums of money are distributed by bureaucrats with no real-world knowledge of how to channel that money to valuable endeavors. So instead of real repair schedules on electric grids or highways being pushed forward (and there are good arguments against even doing these) we ended up with union bailouts and Solendras.
I, for one, always assume that Yglesias writes in bad faith from a position of ignorance. I believe that I am batting nearly perfectly.
Yglesias is first and foremost a partisan and ideologue; his economic ideas are shaped in service to his political concerns. Why some otherwise admirable people, e.g., Tyler Cowen, take Yglesias so seriously is a mystery to me.
Whereas presently in the US businesses are holding off on hiring and spending due to what some call regime uncertainty, and what I call the very real fear that the EPA or IRS could turn around and f*ck me sideways with a rake. Stimulus spending in such an environment will flash and then go out, because the underlying fear has not been dealt with.
Yglesias assumes that our government is filled with saints and angels; providing real examples to the contrary is a ‘big fish in a small barrel’ exercise.
Really? I rather understood it to be government enforcement of a cartel in exchange for political support (or worse.) As I understand it, the candlestick maker who spends time and money developing a brighter or longer-burning candle might reasonably ask for patent protection; and thoughtful people can debate technical points such as duration or specificity. (I don’t own any patents.) But cartels exchanging political support for government enforcement of dubious licensing schemes for hair-braiding are a plain-faced outrage, and Yglesias has nothing to offer but misdirections and smoke-screens.
Maybe I misunderstand Bastiat on this; I think I can trust the Samizdata community to set me straight.
Regarding Bastiat’s “Broken Window”, the reason that essay tends to be so controversial is that it intermingles two different counter-factual arguments. Firstly, if the shopkeeper’s window is not broken then he continues to enjoy that capital good. Society benefits from that fact in the long-term. Secondly, if the shopkeeper’s window is not broken then he *may* spend his income on other output which has a labour component. The problem is it’s by no means certain that he will spend it that way. He may keep his money for a long while (of course not forever) or he may spend it on existing capital.
It’s essential that economists break up these two ideas which don’t belong together and analyze each separately. If we take Bastiat to be saying that if the window isn’t broken then the shopkeeper definitely will buy some other good then he’s wrong. That’s the short-run form of Say’s law, which is incorrect.
Society as a whole may be richer even if the shopkeeper doesn’t spend the income he has saved as a result of the window not been broken. That’s because that capital good (the window) supports production. That is, in the long-run Say’s law is right. From that point of view the argument about employment later is unnecessary.
However, the lower classes may be poorer in the short-term if the window stays intact than if the window had been broken, because breaking it causes labour demand to rise. The argument about the shopkeeper spending his money elsewhere is important for there.
All this is much less tedious to observe if you take Yglesias as a “Wordsmith” (per Nozick) rather than a Thinker.
A modern industrial business cycle seems to be a made-up name for the boom-and-bust cycles caused by those same Keynesians who are so desperately needed to counter these cycles. Could this argument be circular, and could it be the reason why reading this makes me dizzy?
Current: Labour has no inherent value. Given the choice between an intact window with zero work(i.e., it was never broken) and an intact window that requires work(i.e., it was broken and replaced), the former is always better, full stop.
– Yglesias
Here is a prime example of “smithery.”
Is this written as a critique of Bastiat’s presentation – or- as a statement of fact?
Either way it is dead false.
Indeed, nothing has inherent value.
But productive resources are then used to merely return to the previous level of total wealth. All that has been achieved is a transfer of wealth from the shop owner to the glazier, which wouldn’t even satisfy the aims of progressives if the glazier were already richer than the shop owner. It’s bizarre that the “lower classes” are somehow thought to be helped by the destruction of wealth, or that the shop owner’s interests are somehow secondary to those of the glazier. Is there something I’m missing?
Alisa: That’s also true, but what I mean is that, generally speaking, nobody places value on doing work. The value is in the results of the work – if you can get the results without doing the work, so much the better.
Alisa:
I find it informative that the number and vociferousness of Keynesians increases dramatically during the bust phase, when the calls for deficit spending are loud and frequent. During the boom phase, when the Keynesian response would be to run a surplus, it all becomes a lot quieter.
Yglesias is a prick. I loath the guy not just for his idea but personally. He is a dishonest jackanapes who insulted a friend of mine for committing the sin of actually knowing what she was talking about… she lived through the history that he only saw on CNN.
To be fair, Daniel Gross, who preceded Yglesias in the gig at Slate, was much worse.
Current,
I’m afraid I’m not understanding your argument. As Tedd pointed out above, it would seem be an across the board loss as wealth had to be destroyed (the window). That would seem a loss no matter the expenditure creating work for a glazier who may in fact be wealthier than the shop owner. I get your point that the shop owner might not have spent that capital but I don’t see how anyone would be poorer from him not having spent it. This of course assumes he’s working at a profit margin that allows him loose capital – unlikely for small businesses.
On the U.S. side of the pond we had a perfect example of this a couple of years ago with the Cash For Clunkers program. Several thousand cars were destroyed, most of which were in working condition. The end result was a destruction of wealth and many cars that were affordable for poor people were removed from the market. No jobs were created and the poor consumer lost out. Just think if someone in the current adminstration had read and comprehended Bastiat.
Alsadius,
Yes. The first part of Bastiat’s argument suffices to make his case. If the window is unbroken it continues to provide it’s service as a capital good to the shopkeeper and through him to all society, eventually. Because the continued existence and security of capital good enables competition. This happens even if the shopkeeper may not spend the money he saves through not having to replace the window for many years. That fact renders the second part of Bastiat’s argument much less important than people take it to be.
The problem is that economists know that the capital and labour of society provides it’s output or income. But, they are prone to work backwards, to assume that a particular national income infers that a particular amount of capital exists. When in practice rises in income can be related to production or destruction.
Tedd,
Let’s take a more modern example… Suppose the government build a “road to nowhere”; a road to an obscure place that will not economise on societies travel costs significantly, but will consume raw materials. People have to be employed to build the road and it must be paid for. The funds may come from taxation, lending or depreciation of currency. The latter is taxation in another form, and lending is not a substitute for taxation but a means of moving it’s burden through time. Since taxation is generally progressive this already means that redistribution is likely to occur unless those employed in roadbuilding are rich. They would have to be not only better off than average but significantly so because of progressive taxation. Even then the extra demand for labour will drive up wages in other related fields where wages may be lower. We can certainly think of cases where redistribution happens in favour of the rich, but they aren’t very likely.
Yglesias ought to read Derek Lowe’s blog. He might get a clue about how difficult and expensive drug development is, and how pharma corporations pour billions of $ into it.
And how different revenues from a patented drug are from revenues created by artificially suppressing competing sources.
It’s tricky to remember which forums use quote and which use blockquote 🙂
In terms of short-run income I don’t agree. What I’ve learnt recently is that the Keynesians are often right about short run income even if they are wrong about long-run income and wrong about capital accumulation, wealth.
Let’s suppose that those cars had continued to exist and traded on the second hand market. That would have benefited those who could buy them, but it wouldn’t have risen incomes. Second-hand goods are capital goods not output goods. They compete against output goods.
(There’s an analytical mistake made by many economists here, even free-market ones that I think you’ve picked up on…. The “price level” that the common man sees is not the price level of new consumer goods, which is what the CPI attempts to measure. Rather, it’s the price of consumer goods in general. If second-hand goods get cheaper than the price-level that matters to us practically falls, but CPI doesn’t.)
Because old cars compete against new cars the “cash-for-clunkers” probably did increase incomes. Compared to what would have happened otherwise it will have risen the demand for new cars, and thereby the demand for auto-workers, steelworkers and so on. You may say that demand fell during the cash-for-clunkers, I agree, but without it it would have fallen further.
EDITORS NOTE: actually we use html tags… I have edited your comment(s).
Current:
Okay, that clarifies it. This is not actually an economic argument you’re making, but a moral argument. The shop owner ought to be giving some of his money to the glazier anyway, in this moral calculus. The act of breaking the shop owner’s window, while not (I assume) a moral act on its own, nevertheless is somewhat redeemed by resulting in the presumed moral good of redistributing some of the shop owner’s wealth.
Still not working for me. I get the point about second hand cars being capital goods but I don’t see that necessarily having an impact on output goods, in this case new cars and the jobs they maintain – (not create necessarily?) Old cars compete with new cars because people can’t afford new cars. So some go into needless debt ( assuming they have the appropriate credit rating) to keep other people in a job that apparently is only created through top down manipulation? Also, is this not how artificial booms begin?
The “defence” of Bastiat that the statist offers is based on an error – the error that Keynesianism (or Irving Fisher style monetarism) is new.
Actually the idea that increasing the amount of money (or credit – rather than borrowing from real savings) is good for the economy when there is unemployment or other “idle resources” was old before Bastiat was even born.
For example, it is the heart of John Law’s position (a well known historical figure – at least in the France of Bastiat’s time.
Also (at that time in England) the fallacies of the “Banking School” were being refuted by the “Currency School” (although they made their own error by assuming that limitations on bank notes dealt with the problem of bankers lending out “money” that DOES NOT EXIST, the regulations on bank notes that they pushed for did not achieve what they hoped, REGS NEVER DO).
For recent work refuting the fallacy about “monetary and fiscal stimulus” being a good thing in a time of recession or “idle resources” see “Meltdown” by Thomas Woods, and “Where Keynes Went Wrong” by Hunter Lewis.
Keynesian economics is akin to medicine using bleeding and leeches.
A bad idea due to ignorance.
Even if Keynesian economics could theoretically iron out the booms and busts the information it works on is always out of date. Ask any pilot about “pilot induced oscillations”.
Editor – got it about the tags.
Tedd,
No, I don’t agree with redistribution, I don’t think it’s moral. What I’m trying to explain here is why progressive governments want these policies. The Keynesians are right that owners of capital may not spend enough on new output goods and services to keep wages high. That doesn’t justify keeping wages high by policy at the expense of other things though, especially not at the expense of long-term growth. But it explains the political motivation. I was also attempting to explain why national income statistics may show rises in GDP even if capital wealth has fallen.
For people who do not have time to read books….
The “bust” is caused by the “boom” – the credit-money expansion (more “money” being lent out a lower rate of interest than real savers would demand) MUST end in a bust. And the bigger the credit bubble boom – the bigger the bust.
When the bust comes (and it is always a surprise to “Progressive” economists) hair-of-the-dog-ism (yet your credit-money expansion “monetary stimulus”) is not the answer.
Wages and prices must be allowed to adjust to reality – as they were after the 1921 credit-money bust (and the economy started to recover within six months) and were NOT in 1929 (when Herbert “The Forgotten Progressive” Hoover used the full weight of the government to PREVENT wage flexibilty – for he was in the grip of the “demand” fallacy).
As for HIGHER government spending (“fiscal stimulus”), people who believe that higher government spending is good for economy (especially in a bust) might as well believe in elves and pixies.
Current:
Sorry, I didn’t mean to imply that you subscribed to the argument, I was just trying to paraphrase it to be sure that I understood what you were saying.
They compete “on the margin”. There are many people who can afford a new car or a second-hand car. Which they choose will be dictated by what they can get for their money. Taking some second-hand cars off the market will decrease their supply. Similar quality cars, whether new or used, will command similar prices, the smaller supply of used one will mean that new ones will make up the difference. Of course the price of similar quality cars will increase if this is done because the total supply of cars is lower than it would have been.
The rise in price may be enough to decrease total sales and sales of new cars along with it. That’s not likely though as car manufacturers will increase supply rather than simply letting prices rise. (If cash-for-clunkers had happened during a boom it may have happened).
I don’t think that vastly more people are likely to go into debt because of it. But, I agree that in the long run it’s pointless and destructive.
It does contribute to future unsustainable booms too. People often estimate future real income on the basis of current nominal income (“money illusion” and “permanent income”). Raising current nominal income at the expense of long-run growth makes that form of estimation less accurate. So, people consume more than they would have if they’d known that their rise in income was not permanent. (Auto-workers themselves may not be fooled, but people further down the chain, say plastics suppliers are likely to be).
The truth is so-called liberals everywhere get annoyed by anything or anybody related to free market capitalism and the sovereignty of the individual. Bipedal lemmings. Ants in human disguise. “Why can’t we all just be friends?”.
In apologia for my earlier snark-of-no-use, I offer to the Samizdat community of people who actually think about things, this, which may be wrong:
Does anyone wonder, as do I, that nearly half of the American voters, as postulated by the various polls, state that President Obama has done a good job and that my people would be best served by another four years of his administration?
Does anyone wonder, as I do, that nearly half of the American voters, as postulated by the various polls, state that the my people will be saved from destruction by a team who is in virtually all essentail respects identical to the current team?
Are we all mad? Or, less charitably, are we all stupid?
Alisa, about you finding intrinsic value in nothing- I bet my nothing has more value than yours!
Hey Current,
Thanks for the explanation. I’m not as versed in economics as I’d like but I find the discussion interesting and some things just ring false to my amateur ear. One thing that’s fascinating to me now also comes from Bastiat; the “unseen” part of the economic equation which I think gets very short shrift in these types of discussions.
In the case of autos since we’re on that now, I think of my brother-in-law. Does have money but as far as I know has never bought a new car. Does spend those funds elsewhere though and that’s the unseen. Sent kids to private school and now to university, owns a boat, owns land, tractor, a couple of utility trailers, guns and goes on vacation annually, etc. All these provide jobs for people and in tough times it seems to me that government intervention necessarily ends up focusing on the squeaky wheels and politically connected companies while neglecting everyone else. Of course, they claim the interventions will benefit the entire economy, but as someone who lives in a country (U.S.) that is going through this and just had the government spend a historically insane amount of money to stimulate the economy and create jobs I think we can say it’s been an abysmal failure. And it’s probably worse if we think of the opportunity costs of that stimulus except we will never know how much we lost because of the knowledge problem.
This is not only an economic issue but a moral issue for me. While I know that some of Bastiat’s economics has been supplanted by modern economics, the mix of his economics and moral insights still resonate with me.
The talk of cars reminds me of one of the smaller (but still demented) parts of the “fiscal stimulus” (which is financed by the “monetary stimulus” – as the Federal Reserve creates the credit money the Federal government borrows).
“Cash for Clunkers”.
Old (but perfectly good) cars destroyed, and the buying of new cars subsidised.
One of the effects of this insane program was to increase the price of second hand cars (as so many old cars were destroyed rather than sold), thus priceing the poor out of the car market.
Rather like the evil (and they were evil) activities of both President Hoover and President Franklin Roosevelt to keep UP farm prices (thus making it hard for the poor to even feed and buy clothing themselves – unless they agreed to beg from the government).
“Cash for Clunkers” was actually cited (without irony) by Andrew Sullivan as a example of “limited” (not unlimited) government.
It is useless to try and commicate with these people – a total waste of time.
Allan,
I don’t think it’s that they’re mad or stupid particularly, just uninformed. Deliberately so, as if the US’s record on such things is anything like my own experience in the UK, all they’re exposed to via the media and the education system is the same, tired old “left-vs-right” argument that reinforces the present system – and suits the present political class down to the ground.
I was taught nothing about economics, politics or recent history in school, except for a dash of Keynsianism and a few off-curriculum ideas that one particularly subversive history teacher told us about one summer. If it wasn’t for that one man going deliberately off-message though, I’d probably never have tracked down anything to do with Libertarian ideas, even if it took me 25 years to do so.
I was lucky. Perhaps many people never run into someone impassioned and knowledgeable enough to open their eyes to ideas out of the left-right mainstream.
Cheers,
~R~
Paul, you seem to have missed some of the comments: Cash for Clankers was what started the talk about cars.
Since no one has said it outright in this discussion, I have to ask. Is not Iglesias really just engaging in more progressive diversionary tactics here?
He’s writing as if it is those who read Bastiat who are to blame for why we can’t have a sophisticated discussion of modern economic issues. But clearly it was not acolytes of Bastiat who created the European financial situation, or the failed stimulus in the U.S., or the Solyndra and countless other green debacles, or the Cash-For-Clunkers program or a dozen other “fixes” which were supposed to jump start the U.S. economy. It wasn’t Bastiat enthusiasts who created the housing boom, an unsustainable entitlement state, corporate bailouts, etc. ad infinitum. All were dreamed up and implemented by people who think exactly the way Bastiat described in “The Law,” people like Iglesias.
I’m also tired of the whole “shut up and let the adults talk” argument put forth by poseurs like Iglesias.
RickC beat me to the punch in raising the “unseen” part of Bastiat’s article as it relates to Cash For Clunkers. In addition to the observations he made, I’d add that another part of the “unseen” was the ripple effects throughout the automotive after-market. Auto mechanics and repair shops, parts manufacturers and distributors, even used parts dealers, were all adversely affected. So while Current might be correct (although I’m not willing to concede the point other than arguendo) that at the margin new car sales improved as a result, even as a short-term “fix” the program was a failure if one’s field of vision is even slightly wider than simple new car and used car sales.
I can, however, understand the appeal to politicians, whose entire careers rest upon the ignorance of the electorate and its focus solely on the “seen”. But that doesn’t make programs like CFC sensible on any time scale.
Alisa – I did indeed miss some of the comments.
In fact I have a habit of skipping a lot of comments.
For example, a comment that holds that Paul Ryan is “basically identical” in his political opinions to Barack Obama, is just going to irritate me.
As would any comment that pretended that Cash for Clunkers could have a good (rather than bad) economic effect.
I am not going to hurt people who write stuff like that (they have the right to hold any opinion they want), but I am not going to spend much time on such people either.
The nonaggression principle is about not attacking people – NOT about treating them with respect.
As usual J.S. Mill got it wrong.
Nonaggression is a right – but “respect” is NOT a right.
Respect has to be EARNED.
However, YES I should have read all the comments – and then I would have spotted that Rich C. had already made the point I made.
By the way.
It would be better for the the shop keeper to take his money and bury it in a hole in the ground – than it would be for the shop keeper to go round breaking his own windows and employ people (and glass and so on) to repair them.
If people really do not know “why” then I am not that interested in trying to explain the matter to them.
In my experience people either understand (at a “gut” level) or they do not.
If they do not – then it is pointless to try and explain it to them.
But O.K…..
To use resounces (and people) to repair damage one has intentionally done is a WASTE.
Even if one took all one’s money and buried it (indeed destroyed it) these people and resources would still be better employed on creating new things.
“But there are unemployed people and resources”.
In a FREE MARKET (i.e. where wages and prices are allowed to adjust) long term invountary mass unemployment is NOT POSSIBLE.
People (such as John Gray) who regard modern society as a free market are (to use a technical term) “idiots”.
Indeed “idiot” is the best one can say of such people.