Tracing consequences both seen and unseen.
Eric D. DixonThe Keynesian Celebration of Destruction
Posted at 12:05 am on October 19, 2011, by Eric D. Dixon

Here’s a great cartoon from Completely Serious Comics published earlier this year, currently being passed around on Facebook by critics of Keynesian stimulus:

Marketing, by Completely Serious Comics

I doubt the cartoon’s creators were thinking about government stimulus of aggregate demand when they conceived this, so it has become a piece of appropriated satire. And, like pretty much all great satire, it doesn’t play completely fair with its target. Even so, it contains a substantial nugget of truth.

Readers of this blog who are familiar with the book from which it takes its name will be well-acquainted with the broken window fallacy, first created as a parable by Frédéric Bastiat and later appropriated by Henry Hazlitt, who applied it to a mid–20th century economy.

In a nutshell, the parable explains why destruction doesn’t make a society wealthier. It may stimulate short-run economic activity as people rush to replace and rebuild what they’ve lost, but always at the expense of overall prosperity.

Within the past few years, Bastiat’s and Hazlitt’s critical heirs have applied the fallacy again and again to modern Keynesians. Here’s a video that does exactly that to Paul Krugman’s application of Keynesian theory to the destruction wrought by terrorist attacks (featured on this blog last year):

One objection to this line of thought could be that the broken window parable doesn’t apply to general stimulus, because government spending absent a disaster isn’t the same thing as destruction, and so isn’t analogous with a broken window. One response to this objection would be that the broken window parable is part of a larger essay about the unseen effects of various types of economic action. People explaining the arguments in the larger essay, which does indeed include government spending, might reasonably refer to them by invoking the best-known portion of that essay, the parable of the broken window. Conjuring the whole of an essay by referring to one part would be a kind of allegorical synecdoche, if you will.

Another response would be that spending may not destroy useful physical objects, true enough, but it does divert resources from more productive to less productive uses. Although private-sector businesses can’t be sure what their most productive potential investment will be, the government is by nature even less informed and therefore less capable of investing wisely. Siphoning resources from the private sector to the public sector destroys wealth, even if it doesn’t destroy specific goods. An allegory of a destroyed object certainly applies to the reality of destroyed wealth.

Keynesian apologists, and even some non-Keynesians, have cried foul in still more nuanced ways, pointing out that advocates of government stimulus don’t per se want destruction, and may not even think it will bring increased wealth, but think instead that it will increase short-term economic activity, increasing employment and smoothing over economically troubled times.

There are indeed shades of meaning and intent here. Believing that destruction may benefit the economy in some structural way, thereby sustaining short-term damage for long-term gain, isn’t the same thing as thinking that any individual act of destruction will increase economic wealth. After all, as Joseph Schumpeter pointed out, entrepreneurs engage in short-term “creative” destruction all the time, writing off temporary losses as a necessary cost of pursuing their visions for long-term productive investment.

The evidence, however, shows that government spending intended to stimulate the economy and smooth out the business cycle instead exacerbates the business cycle, leading both to higher peaks and lower valleys.

As Russ Roberts pointed out at Cafe Hayek:

So the hurricane will put carpenters back to work. But it would be even better if there had been no hurricane and people had just given them a check. Charity is more productive than destroying stuff and paying people to get back to square one.

But the charity approach is what we’ve been doing for the last few years. It’s called unemployment insurance. I know, it’s supposed to be stimulative but there’s no sign that it is. Why would it be? It doesn’t solve the problem that there are too many carpenters.

When there’s a downturn in the business cycle, there’s a structural problem with the economy — too many people in some occupations, not enough people in others. General stimulus provides no economic information about where people should go to find sustainable productive work, meeting real demands by providing the goods and services that people want rather than the trumped-up illusory demand prompted by government spending. You can’t build a healthy body on a string of sugar rushes, and you can’t build a healthy economy on a series of artificial top-down influxes of cash.

Stimulus only spurs some sectors of the economy by dampening others, whether present or future. The more that government officials tamper with the economic signals that let entrepreneurs know when they should invest and when they should steer clear, the more skittish investors become. Regime uncertainty entrenches malinvestment, and keeps the economy limping along.

So, Keynesians, please stop celebrating destruction as a cure for economic ills. If truly creative destruction needs to happen in order to move less productive resources into more productive uses, private-sector entrepreneurs have the decentralized knowledge necessary to determine which of their own resources need to be replaced or reshuffled. Government officials do not.

The only real cure for our lagging economy is for the government to quit breaking windows.

[Cross-posted at Shrubbloggers.]


Filed under: Economic Theory, Efficiency, Government Spending, Market Efficiency, Regulation, Spontaneous Order
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  1. [...] at The Lesson Applied.] — Eric D. DixonComments [...]

    Pingback by The Shrubbloggers » The Keynesian Celebration of Destruction — October 19, 2011 @ 12:11 am

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Henry Hazlitt"[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Henry Hazlitt, Economics in One Lesson
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