Tuesday, September 11, 2012

How Sad Is This? Krugman Doesn't Even Understand the Broken Window Fallacy

Let us first take a look at what the broken window fallacy is, as described by Henry Hazlitt:
 A young hoodlum, say, heaves a brick through the window of a baker’s shop.  The shopkeeper runs out furious, but the boy is gone.  A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.  After a while the crowd feels the need for philosophic reflection.  And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side.  It will make business for some glazier.  As they begin to think of this they elaborate upon it.  How much does a new plate glass window cost?  Two hundred and fifty dollars?  That will be quite a sun.  After all, if windows were never broken, what would happen to the glass business?  Then, of course, the thing is endless.  The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum.  The smashed window will go on providing money and employment in ever-widening circles.  The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look.   The crowd is at least right in its first conclusion.  This little act of vandalism will in the first instance mean more business for some glazier.  The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death.  But the shopkeeper will be out $250 that he was planning to spend for a new suit.  Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury).  Instead of having a window and $250 he now has merely a window.  Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.  If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

 The glazier’s gain of business, in short, is merely the tailor’s loss of business.  No new “employment” has been added.  The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier.  They had forgotten the potential third party involved, the tailor.  They forgot him precisely because he will not now enter the scene.  They will see the new window in the next day or two.  They will never see the extra suit, precisely because it will never be made.  They see only what is immediately visible to the eye.
Now, let's examine a recent Paul Krugman post:
Broken Windows and the iPhone 5 
There’s been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy. I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture. 
The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them. 
In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” (sic) theory, in which destroying some capital can actually be a good thing under depression conditions.
Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.
Notice a few things here. Krugman has the "broken window fallacy"---and it is singular, not the way Krugman has it as plural---completely mixed up. First, the broken window and the iPhone are consumer goods, not capital. But more significant, in his version, there is no hoodlum destroying a good we desire, the window. The destruction of the window by a hoodlum  results in labor and capital being moved to build and replace the window versus being used in another sector of the economy if the window hadn't been broken. (Note again, capital is not destroyed but moved to a different use within the economy). But, overall, the fallacy shows us that destruction of valuable goods by hoodlums (even consumer goods) distorts the economy and makes us less well off.

In Krugman's example, there is no hoodlum damaging anything. Thus, there is no broken window. What is occurring instead is a superior product is being made---so superior that some are willing to throw away an old consumer good, in preference for the new consumer good. This is improving the economy, not resulting in a backward movement of the economy because of a hoodlum.

Krugman seems to get about half this in his comment, which supports my new suspicion that Krugman has trouble thinking more than two layers deep. Remember, the man completely misunderstands the baby sitting co-op example that he states led him to Keynesianism in the first place, and he doesn't understand Austrian business cycle theory, and now this.

I mean, think about it, Henry Ford's Model T replacing the horse and buggy is somehow an example, in Krugman's mind, of the broken window fallacy!


  1. Also - Krugman is falsely assuming that people are just going to throw away their old phones, rather than giving it to a family member, friend, or selling it used on EBay. This is similar to the shopkeeper taking out his old windows in favor of newer, better windows and moving the old windows to some other use, certainly not to the window being broken.

  2. Wow, he really does not understand the broken window fallacy--at all! Jeez...there is no way he could even double talk his way out of this slip up given that he clearly misstates it. LOL

  3. If the past is a future indicator, one will have to trade in their iPhone to get a decent deal on the iPhone 5. The old iPhones are recycled to new users.

    In Krugman's case, he's obviously decided it's better to rule as a lemming than serve as a genius. It's funny that so many left-wingers look to him for guidance.

  4. How did he ever win the Nobel prize? Broken window fallacy is so easy to understand and apply.

    1. You should read his study. It's so full of holes that I can hardly believe anyone bought it.

    2. How did Obama win the Peace Prize? I think the question answers itself, don't you?

  5. I call this my smile factor theory that I came up with in my teens before I read Hazlitt et. al:

    I could use my money to buy a new dirt bike, and that might get me a smile factor of 9/10 versus the current 7/10 I have with my current one. So my smile factor improvement is a 2.

    Or I could keep my dirt bike and buy a snowmobile. I still have a 7/10 on the dirt bike and now have a 8/10 on the snowmobile. In total I now have a 15 which is an improvement of 8.

    Hence it's way better to get the new toy then replace the old one (i.e. get an Ipad and keep your Iphone 4s you'll smile more and indirectly everyone involved in that production has created more net)

    What Krugman is parsing out of his statements is a simplistic version of what I just said. Those that replace their perfectly functioning Iphone 4s for an Iphone 5 have wasted potential resources that could go further if put to new production instead of replacement production. (i.e. he thinks this somehow has relevance to replacing the window)

    But what he doesn't realize is that what he just did is prove that GDP is a stupid number that largely means nothing because it takes into account the 9/10 as a full 9 in production instead of the 2 that it actually is because it's the difference between what you've got and what you get that matters, not from 0 to 10. The only time that is true is in the isolated case where you have nothing to start with. Only if all production was NEW and not replacing or enhancing old production would GDP matter at all.

    In short it's how far forward you move the goal posts from where they were, not how far from the starting line the goal posts have moved that matters.

    So in a perverse way as I think he intended it he's right. But his explanation and obviously his understanding is AWFUL.

    1. (and obviously if you give/sell your phone away you can make the new transaction more valuable in the aggregate, I just simplified for sake of argument and his (lame) benefit)

    2. Uh, here's a simple refutation for you...

      "Psst - you gonna keep that bike? (wink, wink)"

      If you get something new to replace something old, you don't just swap up your utility by the difference between the two; you now have another good that you can exchange (perhaps at a discount, but still) with someone else.

      Imagine if someone else got a new snow cat, and the two of you swap your old models on eBay, craigslist, or something - now stick that in your "smile factor" calculator and scare people!

    3. Yes, but the basic position applies. One way or another it's how far the goal posts are moved forward for everyone. By definition of replacing something old for something new, you've written off the value of the depreciation of the object and the obsolescence of the object. (i.e. the YZ426F dirt bike is worth significantly less than it was new both because of wear and tear and because since it was new they've released auto-decompress cams and fuel injection which makes the bike's value significantly less than it would otherwise be if the technology stayed stagnant because the demand for the old technology goes down).

      What Krugman is observing is that loss in value of the original production. Your Iphone 4s has less value because it's obsolete AND has been used. Thus the aggregate value drops. It's the same as the government telling you to go out and buy a new energy efficient refrigerator. Sure it will save electricity and be more environmentally friendly... if and only if you ignore that you already had one. The amount you save is the delta between the cost of using both versus the cost of buying the new refrigerator and the environmental impact has a similar equation which makes buying a new refrigerator for the purpose of saving money a fool's game.

      The Iphone example is exactly the same. The increased utility of the new model will almost certainly not make up for the increased expense of replacing an old with a new phone. TO YOU, buying a new one to replace the old one has little value because it's a net loss. People that do so are fan bois and their purchase is short sighted at best. That was Krugman's ham handed statement that completely mistook the broken window theory. He unfortunately said way more than he intended by making reference the broken window... because he is a moron.

      My point is that there is a glimmer of an important concept in what he's saying because buying something new is not a 100% increase as in the example of the broken window if you are replacing something something you already have. Even in best case where you resell your old, you have loss of value that must be accounted for. Thus for any product that loses value over time (almost everything other than raw materials like gold, copper etc. so long as supply and demand stay stable) replacement does provide an increase to the economy, but not nearly the same as if you were buying something 100% new to you without replacement.

      So think of this has the broken window where the shop owner intended to replace his worn out suit instead of buying a new one.

    4. There is no such thing as "smile factor" or utils or whatever you want to call it.

      There are only oridinal value scales, such as "X is most important, Y is next most important, Z is next most important, ..."

      The replacement of an iPhone with a newer version is someone deciding to increase their value scale - iPhone 4 is lower on the scale than iPhone 5. There is no broken window fallacy here. The fallacy would be if their scale did not differentiate - something like "phone, (tablet PC), (HDTV)", where they would fulfill the highest non-fulfilled (in parenthesis) desire, but they have to buy a new phone instead as a PREVIOUSLY FULFILLED DESIRE was TAKEN FROM THEM by someone else's action.

  6. The Nobel Prize must come with a free lobotomy. This political hack is no economist.

    1. It comes with $4,000,000 and a funky tie.

  7. No wonder he doesn't want to debate Bob Murphy.

  8. It's been said that, given enough time, an army of monkeys banging away on typewriters could eventually produce the works of Shakespeare. In the case of a Krugman column, it's one monkey and he needs about four hours.

    1. That monkey doesn't need a typewriter, either. Flung poo will do.

  9. Krugman is a moron. No doubt about it, but to be bipartisan about things I would argue that Mitt Romney is just as bad. The other day Romney was arguing that, oh no, we can't cut military spending because we would lose jobs.

    What Romney doesn't understand is that, like Hazlitt's broken window analogy, military spending is basically pure waste since, other than causing loads of death and destruction in places that we shouldn't be in the first place, none of it has any real use in the civilian side of our economy. We also spend more on the military than the rest of the world combined, and most of the top spending countries are allies of ours. Yet, Romney, like Krugman, argues we need to spend more money on government--specifically, the Pentagon--than on things like the iPhone 5 in order to create jobs. And Romney is campaigning on his supposed prowess in turning around the economy? Please, he is as clueless as Krugman.

    1. Defense spending is a hedge on risk. If there is a danger of invasion that would cause $X damage to property, then any defense spending over time that is less than $X is justifiable, if voluntary.

      So the question becomes, do we really believe that the US is in danger of an invasion that will total damages of $800,000,000,000 per year for 11 years since 9/11? That's $8.8 trillion... And if so, are we willing to fund defense voluntarily?

  10. I can has broken windozs?

    But not creative destruction.


    lmao at Krugman

  11. The baker had a clear window an Iphone 4 and wanted a tinted window Iphone 5--consumer good and choice
    Also the glazier may reuse tho old window on a discount sale
    Or resize for other use--sale
    Krugman is a fool

  12. Krugman may have butchered Bastiat's parable, but he is no moron. He has millions of readers, most of whom now have a badly flawed conception of one of the more important aspects of Austrian economics. From his perspective, mission accomplished.

  13. Just a real world example from when I upgraded to the iPhone 4. I "junked" my iPhone 3G and had it gathering dust in my closet.

    Then, when a friend broke his phone, I was able to give my old one to him. He got a good extra year of use out of it and saved a couple hundred dollars.

    And of course, given his income levels and the fact that he needed a mobile phone for work, the subjective value of that old iPhone 3 became very high indeed.

    That old phone became a true capital good, used in daily work for a year as we had important business conversations on it.

    Giving it to him also provided intangible benefits, improving our personal relationship and establishing a pattern of exchange between us. He gave me a spare wireless router a few months later.

    I predicted none of this when I boxed it up, I just wanted a new toy. I got tremendous enjoyment and satisfaction from my iPhone 4, even though it was "technically" not that much better than what I gave up.

  14. It always needs to be pointed out that Krugman's Nobel Prize was not in macro or monetary econ, but it was in something minor related to geography. Both the keynesians, the NY Times, and Krugman himself never bring that minor detail up, but they do like to leave the impression that he is some sort of macro econ genius.

    1. It was in the theory of international trade. Which is utter nonsense itself - any differences in international trade trace back to government intervention. There is nothing economically special about lines drawn on a map.

  15. Wow. Incredible he could screw that up. Mad props to Krugman.

  16. Hi Robert,
    I do appreciate your writing in this topic.

    Bad esn