Posted tagged ‘Broken Window Fallacy’

Must Reads For The Week 10/14/17

October 15, 2017

ECON MUST READS

Our Crazy-Making, Profiteering Education Career Maze, by Charles Hugh Smith, at oftwoinds.com. CHS lists 7 things that you would do if you wanted an education system that fails. He calls our current education system a “career maze”. By design, a maze is difficult to get out of. The question is; who does our education system benefit? The students? No! The beneficiaries are the receivers of the borrowed money.

Excerpt from the article: “Clearly, it would be enormously beneficial to teach the skills needed to learn on one’s own and adapt successfully to changing circumstances. The current system is a hierarchy of credentialing that enriches those dispensing and funding the credentialing…………When the student graduates after borrowing a fortune and discovers their diploma has low value in the marketplace or is in a field they’ve found they loathe, then suggest the “solution” is to borrow another fortune and invest more years in obtaining another credential.”

The answer is always the same. Do more of what got you in the mess in the first place.

How Higher Education Became A Obscenely Profitable Racket That Enriches The Few At The Expense Of The Many (Student Debt Serfs), by Charles Hugh Smith, at oftwoinds.com. Another article by CHS concerning our education system. He offers great analysis. Excerpt from the article: “Student loan lenders are skimming tens of billions in profits guaranteed by the taxpayers…….The number of employees in central system offices has increased six-fold since 1987, and the number of administrators in them by a factor of more than 34…..While the higher-ed status quo is failing the students, it’s enriching itself immensely Assistant deans of student loans and thousands of other administrators who be managed to do without a generation ago are racking in huge salaries and fat benefits/pensions.

Financialization And The Destruction Of The Real Economy, by Charles Hugh Smith, at oftwominds.com. What happens when government leaders regulate a free market economy so much it becomes a crony capitalist (or crony socialist) economy, and the central bank (our Federal Reserve) prints (counterfeits) money? The real economy starts to consume it’s own seed corn (capital). Whoever has access to the printed money first is stealing the production of the people who don’t have access to the printed money (that would be you and me). The economy gets hollowed out similar to what termites do to wood. Termites eat the joists in a floor and the studs in a wall from the inside out so all that remains is the veneer of stability, but no interior strength.

Excerpt from the article: “Strip an economy of capital, productive incentives, talent and yes, ethics and what are we left with? An economy spiraling toward an inevitable collapse…….like a Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up. But the central banks no longer allow any creative destruction of umpayable debt and mis-allocated capital; Every brush fire is instantly suppressed with more stimulus, more liquidity ad lower interest rates. As a result the deadwood sapping the real economy of productivity and innovation is allowed to pile higher. The only possible output of this suppression is an economy piled high with explosive risk. Eventually Nature supplies a lightning strike, ad resulting conflagration consumes the entire economy.”

More Spending Does Not Drive More Employment, by Per Bylund, at mises.org. Excerpt from the article: “There is no escaping the fact that production precedes consumption in a very real and fundamental sense: that entrepreneurs endeavor in production before they know that they will be able to sell the goods produced. Spending is a possible outcome of entrepreneurial production, but not the other way around. The former does not employ people, but the latter does…..What drives the economy is not demand or spending, but entrepreneurship and production. In other words, entrepreneurs bear the uncertainty of their enterprise. They anticipate that consumers will value their goods and, based on this, estimate the price. That price, in turn, determines what costs and entrepreneur can reasonably expect to cove in production, which means the entrepreneur’s actual choice is for the cost structure in production – the price is an anticipation of consumer value.”

What does this mean? Production is the creation of wealth. The more you produce the more wealthy you become. Spending on the other hand, is the consumption of what has been produced. It is the destruction of wealth. This is true even though we know the reason we produce is so we can consume. We either consume what we produce, in the present, or we save what we produce for consumption in the future. We also use what we save for future production. It is like saving a portion of the corn we produce so we can plant it in the future in order to produce more corn. Production has to stay ahead of consumption or we start eating our seed corn (capital consumption).

The Myth Of Infrastructure Spending, by Ryan McMaken, at mises.org. Does infrastructure spending stimulate economic growth and create jobs? On the surface it seems logical that they do. Deeper analysis shows us a different picture. Excerpt from the article: “….it is assumed that government infrastructure programs were all necessarily “proven winners” for the metaphorical construct known as “the economy……But infrastructure spending is not some one-time thing that blesses the nation with new wonderful things that everyone can use indefinitely. It is often a commitment to simply spend much more money in the future. So, you’d better be sure you’re buying exactly what you need……. Building a new bridge or a new road brings totally unproven or hypothetical benefits, especially….. in less industrially dense areas. What’s worse, the promoters of such spending do not take into account the opportunity cost of the spending. After all, this sort of spending requires that the money must first be removed from the pockets of taxpayers. It is assumed that this is justified because it creates “stimulus.” It creates new jobs in building highways, and makes roads everyone can use. But what would the taxpayer and the worker have done in the absence of that spending?”

“……Borrowing immense sums to spend on infrastructure that doesn’t boost productivity actually cripples an economy by channeling scarce capital and tax revenues into projects that only boost spending for a few years at best, while the costs of borrowing the money pile up for decades to come……If a new highway is needed in Peoria, let the Peorians pay for it, either with a toll road or local taxes. If the benefits of infrastructure spending is so abundantly obvious, then it will pay off for every metro area that builds a new road. The great benefit of federal spending on infrastructure, however, is that the new spending can be forced on the taxpayers with much less political effort than would be required to obtain a new local tax.”

Paul Krugman Destruction Worshiper, at ecoomicpolicyjournal.com. It is hard to believe that economists could think that destruction of things which still have years of service left is some how stimulative to an economy. Have they never heard of the ‘broken window fallacy’? Or are they too smart to understand something so basic? Excerpt from the article: “ Ludwig von Mises once allegedly tried to encourage his students to speak up more freely in class by saying: “Don’t be afraid to speak up. Remember, whatever you say about the subject and however wrong it might be, the same thing has already been said by some eminent economist.”

 

CARTOONS

kYl8GJk.jpg

0ujxhvf.jpg

 

 

Advertisements

Must Reads For The Week 11/21/15

November 21, 2015

Krugman: Terrorism Will Be Good For The French Economy, at economicpolicyjurnal.com. You can’t make this stuff up. Here is a quote from the maestro: “[I once] facetiously suggest[ed] that we fake a threat from space aliens, to provide a politically acceptable cover for stimulus. Now France has been attacked, unfortunately by real terrorists instead of fake aliens, and Hollande is declaring that security must take precedence over austerity. Is this the start of something big? OK, obligatory disclaimer that will do no good in the face of the stupidity. I am NOT saying that terrorism is a good thing……..We’re just trying to think through some side effects of the atrocity.

The money used for Government spending to fight terrorism (aka stimulus) has to come from some where. The money is just transferred from the private sector to the public sector. Which means actual resources are moved out of the productive private economy and into the unproductive Government economy. This is just a version of the Broken Window Fallacy. Here is an article I wrote in September of 2013 which explains the Keynesian stimulus dream, A Keynesians Dream, Cruise Strikes In Syria.

Roubini Says Paris Attacks Could Boost Eurozone Economy, at economicpolicyjournal.com. Another Keynesian economist Nouriel Robini says these attacks could boost Euro zone economy if the European Central Bank increases its monetary stimulus by a larger amount than it would have before the attacks. Comments from above apply to this article.

Mass Exodus! U.S. Doctors Fleeing Medicine, by Greg Corombos, at wnd.com. Experienced doctors are quitting their private practices and either retiring or going to work for a hospital. The number of doctors is decreasing because of retirement, and the doctors who go to work for the hospitals aren’t as productive as they were when they worked for themselves. We are losing the quantity, quality, and productivity. Didn’t we say this would happen in this post, The Reality Of Obamacare, and The Economics Of Healthcare vs. The Right To Healthcare.

Forget Insurance. These Doctors Only Take Fees, by Jen Fini, at delawareonline.com. Obamacare is creating a free market in healthcare. The question is will the Government allow this market, or will it stop this market?

Hillary Clinton Threatens Comedy Club For Making Fun Of Her, by Robert Gehl, at thefederalistpapers.org. Is she acting like a college student who doesn’t like free speech when it offends them. Or is she acting like the totalitarian that she has always been? There is only a difference in degree not kind, because both are totalitarians.

Comedy, Outrage, and College: What We Saw At The “Can We Take A Joke Premiere, at reason tv.

Colleges students don’t want to be challenged by diverse opinions. Only people who agree are allowed free speech, diverse opinions are verboten.

A Legacy Of Liberalism, by Thomas Sowell, at nationalreview.com. Must read of the must reads. Once again Thomas Sowell hits it out of the park. Here is an excerpt, “The current problem facing blacks in America owe more to the great society than to slavery……Liberals have wreaked more havoc on blacks than the supposed “legacy of Slavery” they talk about.”

The Myths Of The Industrial Revolution, by Richard Ebeling, at economicpolicyjournal.com. Excerpt from the article, “First, before the Industrial Revolution, life for everyone in all parts of the world, was “nasty, brutish, and short,” in terms of life span and the standard and quality of life. This was transformed by emergent industrial capitalism that offered an escape from the poverty, hardships, and class-based oppressions of feudal society.

Extra Pay For Chicago Police And Fireman Is Excessive, Unsustainable, by Austin Berg, at chicagonow.com. 32 percent of 35,000 Chicago city workers made six figures last year. Public employees wouldn’t be able to get these kinds of salaries in the free market. It’s easier to strong arm politicians who have no incentives to say no to these public employees.

How Puppy Love Becomes Sexual Harassment, at targetliberty.com. Are we losing our minds?

LED Hand Lights Are The Latest Trend Among Biohackers, at neatorama.com.  Why would you do this?

 

 

Solutions To California’s Drought: Government Fines, or Market Prices.

July 24, 2014

File:2003-09-28 Lawn sprinklers at NCSSM.jpg

California’s water shortage due to the drought is being dealt with in typical interventionist fashion. The Government wouldn’t even consider how the free market deals with scarcity. Murray Rothbard wrote about a water shortage that occurred in 1977 in northern California in this article titled, The Water Shortage, (at economicpolicyjournal.com). Time has passed since this was written but the economic principles are as true today as they were in 1977.

FREE MARKET vs. CENTRAL PLANNING

When Government is the supplier a good, whether it’s water, electricity, or healthcare, the first thing that happens when there is a shortage is they blame the consumer for using too much. When electrical use is high during the summer, suppliers always warn consumers to use less electricity because of the strain on the system. Rolling black outs may come into play if use outstrips the ability to supply enough electricity. I’ve always wondered why producers of electricity are always trying to get consumers to use less of their product, even to the point of giving them energy efficient light bulbs. In the free market, producers use advertising to try to increase demand for their product.

The first rule of economics is scarcity. What we desire is greater than the means available to fulfill this desire. These scarce goods have to be rationed one way or another. If there were no scarcity, there would be no need to economize on any good. Prices ration scarce resources in the free market. Bureaucrats and planning boards ration scarce resources in a centrally planned system.

ROTHBARD EXPLAINS SCARCITY, SHORTAGE, RATIONING

I’m going to let Rothbard take it from here because he is way better than me at explaining scarcity, shortages, rationing, prices, and supply and demand. Her are some excerpts from the 1977 article.

“….northern California, has been suffering from a year-long drought, ……. government must leap in to combat it—not, of course, by creating more water, but by mucking up the distribution of the greater scarcity.”

“…. on the free market, regardless of the stringency of supply, there is never any “shortage”, that is, there is never a condition where a purchaser cannot find supplies available at the market price. On the free market, there is always enough supply available to satisfy demand. The clearing mechanism is fluctuations in price. If, for example, there is an orange blight, and the supply of oranges declines, there is then an increasing scarcity of oranges, and the scarcity, is “rationed” voluntarily to the purchasers by the uncoerced rise in price, a rise sufficient to equalize supply and demand. If, on the other hand, there is an improvement in the orange crop, the supply increases, oranges are relatively less scarce, and the price of oranges falls consumers are induced to purchase the increased supply.”

“Note that all goods and services are scarce, and the progress of the economy consists in rendering them relatively less scarce, so that their prices decline. Of course, some goods can never increase in supply. The supply of Rembrandts, for example, is exceedingly scarce, and can never be increased—barring the arrival of a Perfect Forger. The price of Rembrandts is high, of course, but no one has ever complained about a “Rembrandt shortage.” They have not, because the price of Rembrandts is allowed to fluctuate freely without interference from the iron hand of government.”

“If the water industry were free and competitive, the response to a drought would be very simple: water would rise in price. There would be griping about the increase in water prices, no doubt, but there would be no “shortage”, and no need or call for the usual baggage of patriotic hoopla, calls for conservation, altruistic pleas for sacrifice to the common good, and all the rest. But, of course, the water industry is scarcely free; on the contrary, water is almost everywhere in the U.S. the product and service of a governmental monopoly.”

“When the drought hit northern California, raising the price of water to the full extent would have been unthinkable; accusations would have been hurled of oppressing the poor, of selfishness, and all the rest. The result has been a crazy-quilt patchwork of compulsory water rationing, accompanied by a rash of patrioteering ecological exhortation: “Conserve! Conserve! Don’t water your lawns! Shower with a friend! Don’t flush the toilet!”

“…. local ecologists and statists got into the act. They groused that the over-conservation had induced people not to water their lawns, which led to the “visual pollution” “unsightly” lawns…..”

“…. wouldn’t the poor be hurt by the water district raising its water prices? …No….the poor are not being hurt by the higher price because, being forced to cut their consumption, their total bill has not increased. Thus, a price rise by a private firm is always selfish and oppressive of poor people; but when a monopoly governmental agency increases its price, the poor do not suffer at all, since if they cut their purchases sufficiently in response to the higher price, their total dollar payments will not increase. It is this sort of nonsense that our statists and busybodies are now being reduced to.”

NOTHING HAS CHANGED

In the present drought situation, central planners are trying the same failed responses to the problem, while free market solutions siton the sideline waiting for their chance to prove they are better than these “first string solutions” of the central planners. Remember, there is no solution to scarcity, just a better or worse way of dealing with it.

This article, California City Will Fine Couple $500 For Not Watering Lawn, State Will Fine Them $500 If They Do, by Mary Beth Quirk, at consumerist.com, shows that central planners have not gotten any smarter in 35 years. They are true believers in their central planning religion, and no amount of conflicting incentives or failures will convert them.

The market is always trying to correct perverse incentives created by central planners. It will come up with alternatives to paying the fines, as shown in this article, Spray-Painting Your Grass Green Is One Way To Avoid “Brown Lawn Fees“, by Mary Beth Quick, at consumerist.com. The shame of it is there would have been no need for this lawn spray-painting business in a true free market. It only became viable because of Government planning. The labor, capital, and resources used to keep from getting fined, could have been used in more productive ways satisfying true free market demand. If the price would have been allowed to go up to ration water, each person could have decided how much to use at the higher price, allowing them to use their money for other things than complying with green lawn laws. This is a version of the broken window fallacy, read here, Hurricane Sandy And The Broken Window Fallacy.

Understanding some basic economic principles will give us enough knowledge to confidently argue against the political “solutions” bureaucratic central planners come up with in dealing with the first rule of economics; scarcity.

Related ArticleIncentives Matter, at austrianaddict.com.

Related ArticleThe Reality Of Obamacare, at austrianaddict.com.

Related ArticleMilton Friedman on Market Failure vs. Government Failure. Which Has a Higher Cost? at austrianaddict.com.

 

Must Reads For The Week 4/12/14

April 11, 2014
The pen is mightier than the sword...

 The pen is mightier than the sword… (Photo credit: mbshane)

Equal Occupational Fatality Day Will Occur On December 20 2023, by Mark J. Perry, at aei-ideas.org. When it comes to work related deaths, a huge gender gap exists that needs to be addressed. Women earn only 7.7% of the fatalities on the job, compared to the 92.3% of the fatalities that men collect. Why aren’t women’s rights groups and opportunistic politicians screaming for equality in this area?

The Value Of A Taxi Medallion In NYC Has Increased 5X Faster Than The S&P 500, by Mark J. Perry, at aei-ideas.org. It’s simple supply and demand. When supply is restricted it makes a scarce resource artificially more scarce. The price has to go up in order to ration the scarce resource. Quote from the article, “In fact, there are fewer NYC taxi medallions today (13,605) than there were in 1937 (16,900) when the medallion system first created the NYC taxi cartel.” Ultimately the free market rides to the rescue of the consumer. Read this quote, “… the app-driven ridesharing genie is out of the bottle” and too many consumers in too many cities have “gotten a taste” of the convenience and affordability of ridesharing services like Uber and Lyft, and they’ll never want to go back to the traditional taxi cartel model….”

Former Obama Girl Finds The Light, by Chris Rossini, at economicpolicyjournal.com. I’ve found that many young people are starting to naturally move toward the libertarian ideology. This is good news because young people have more energy, are more tech savvy, and aren’t as risk averse compared to us older people. They will lead the way toward individual freedom and away from big government. Our job is to mentor them, not tell them what to do.

Is Paul Krugman The New Economic Adviser In Rahmaland? at economicpolicyjournal.com. Funny video about the economic benefits of not fixing potholes. It is a version of the broken window fallacy.

Consumer Spending “Recovery” Stalls As Pent Up Demand Fails To Appear, at  zerohedge.com. When will we learn that in an unhampered free market, spending {consumption} doesn’t create wealth, stimulate production, or make an economy grow. Spending {consumption} can only happen as a result of production. You can’t consume something that hasn’t been produced. In a hampered market counterfeiting money can bring about consumption before production. But ultimately counterfeiting destroys wealth, misallocates scarce resources into areas of production that can’t be sustained, and slows or shrinks economic growth.

The Game Is Up For Climate Change Believers, by Charles Moore, at telegraph.co.uk. People are starting to see through the man-made global warming hoax.

I saw these cartoons at theburningplatform.com.

146504 600 How To Deter Putin cartoons

146712 600 Saving for Retirement cartoons

 

A Keynesians Dream, Cruise Missile Strikes In Syria.

September 6, 2013
A Raytheon Tomahawk Block IV cruise missile du...

A Raytheon Tomahawk Block IV cruise missile during a U.S. Navy flight test at NAWS China Lake, California (Nov. 10, 2002) (Photo credit: Wikipedia)

THE KEYNESIAN MAGIC OF GOVERNMENT SPENDING

If we believe Keynesian economics, cruise missile strikes will help our economy, and the Syrian economy. First let’s look at how it is supposed to help our economy. By launching a couple hundred cruise missiles at roughly $1 million a pop, the Government will have to spend over $200 million to replace the missiles that are consumed in the attacks. Cruise missile maker Raytheon will be the beneficiary of the spending as they will get paid to produce at least 200 cruise missiles. Raytheon’s employees, stock holders, and the companies who supply parts to Raytheon, for these missiles, will have more money to spend, and as the money circulates through the economy it will stimulate even more consumption. As we all know consumption drives the economy, and if we can stimulate consumption through government spending there will be never-ending economic growth.

The same basic principle is in play as we look at how the Syrian economy will be helped by our cruise missile strikes. What ever our cruise missiles destroy, has to be replaced, whether it is buildings, vehicles, military equipment, and yes even the chemical weapons. Part of the collateral damage will be people, but if you look at it unemotionally, employment will improve because unemployed people will have to take the place of the employed who died. Employment will also improve as people will have to be employed to rebuild what was destroyed by the cruise missile strikes. Since Government only spends on important projects, for the common good, and the private sector spending is for frivolous things that individuals desire, our targeting of Government property will have an optimal stimulative effect for the Syrian economy.

We are consuming missiles when we launch them, and as we know consumption grows the economy. We could be selfish and create a stimulative effect for our economy only, if we launched these missiles into the ocean or a deserted place on the globe, but we are creating a secondary stimulative effect by dropping these missiles on real things. Fortunately for the Syrians we are targeting them, we could have chosen numerous other countries to stimulate with our cruise missile strikes. (more…)

A Tornado vs.The Fed, Which Is More Destructive?

May 27, 2013
Shamrock Texas Tornado

(Photo credit: Wikipedia)

DESTRUCTION DOESN’T CREATE WEALTH.

It’s been a week since the tornado went through Moore Oklahoma and I have yet to see an article or comment by an “economist” saying that the destruction by the tornado will help the economy and create jobs. This is what was said after Hurricane Sandy hit New Jersey and New York, read here and here. We showed the errors of this analysis in this post titled, Hurricane Sandy and the Broken Window Fallacy. But like all shallow thinking,  this fallacy will never be put to rest once and for all, so let’s be ready to shoot it down when it rears its head again.

Let’s look at the similarities and the differences between the destructive power of this tornado, and the destructive power of the Fed and the Government. It’s a version of the broken window fallacy. (more…)

Hurricane Sandy and the Broken Window Fallacy.

November 2, 2012

The economic ignorance of “experts” is demonstrated in the aftermath of Hurricane Sandy. The fallacy that it will be good for the economy because it will create jobs, is trotted out every time a natural disaster hits. The economy as a whole is less wealthy because of a disaster, because everything that is destroyed has to be replaced just to get back to even par.Scarce resources, capital, labor, and time that could have been used for new production, has to be used to rebuild or replace what was destroyed. How long will it take for a country like Japan to get back to where they were before the tsunami hit? We have to reteach the broken window fallacy every time a natural disaster hits.

Go to the Broken Window Reader by Daniel J. Sanchez at Mises.org for more videos and articles. Then read this in-depth analysis, The Broken-Window Fallacy by Robert P. Murphy also on Mises.org.