Is there any scenario where Demand-side economics does not suffer from the broken window fallacy?
Demand-side economics and BWF
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@Greyparrot
huh? wha?
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@Greyparrot
Both are seemingly truisms.
Do you understand these economics soundbites.
Or did you just think that they were sort of cool.
Is there any scenario where Demand-side economics does not suffer from the broken window fallacy?
Idle resources, and consideration of velocity of money.
Specifically, the BWF only works if the money being spent on the broken window was going to be spent somewhere else. If the money was sitting in a bank account, savings, etc, then it’s new output.
The fallacy is correct for a low income individual who has little spare cash. But not for, say, a higher income individual who may have spare cash sitting idle in stocks, savings etc.
In this case the economic output is generated by increasing the velocity of the money in the system.
To be more specific, if you break a poor guys $250 window, he won’t be able to afford going to the baker and shoemaker. Break a rich guys window - so to speak - the glazier now gets paid and goes to the baker and shoemaker; but the rich guy still does too - as he has the money. So the glacier, baker and shoemaker now have more income; and they buy more ingredients from the Miller, who can now invest in better equipment, increases his yield etc; so that the original $250 may have been spent dozens of times in a year.
We already have a system in place to break the windows of a person both rich and poor that stuffs dollars under the bed.
Inflation.
We already have a system in place to break the windows of a person both rich and poor that stuffs dollars under the bed.Inflation.
Your original post was now demand side economics can work without falling victim to the BWF.
I think I’ve answered that fairly well, right? I can’t see any objections, questions, rebuttal, or anything related to it - so does that mean you agree? You’ve conceded that whatever objections you may have had are unreasonable?
I’m not sure - you didn’t say.
You’re now making a completely new statement - it’s not clear exactly why - but one that seems not to have anything to do with the OP.
What’s odd, is that the statement doesn’t make sense; the BWF is that if you have a broken window, while it seems like paying the glazier is New economic Activity, it’s preventing other activity.
Your suggestion that inflation “breaks the windows of both” doesn’t seem to make sense in context as broken window represents redirection of existing cash.
While it’s true that inflation dilutes spending power; that’s only true if wages don’t keep up with it.
I mean, I could go into a whole treatise one inflation and various impacts; but it’s not particularly clear what you’re trying to say.
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@Greyparrot
EILI5
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@Dr.Franklin
EILI5
The Broken Window Fallacy relates to economics.
The idea is that if you break a window, you have to pay for a glazier to fix it. But you can’t call this new economic activity (IE: growth) because the money that is used may be money that was going to pay for groceries, or petrol; so you’re just taking money out of one thing into another.
Demand side economics is the principle that if you want growth and high employment, you need to encourage people to buy things - to increase demand.
This is as opposed to supply side economics, which is where you cut rich people’s taxes under the hope they will invest in things and grow the economy. It has never worked, partly because of the velocity of money I explained, but mostly because there’s only so much growth you’re going to get if there’s less demand for any of the things you can invest in.
The hugely laboured point GP appears to be making is that taxing the rich to pay for things like infrastructure suffers from the broken window fallacy, as we’re paying for infrastructure - but taking away the money earned by rich people. Unfortunately for GP, the issue he omits is the velocity of money - it gets spent rapidly in one case but not the other; and investment in a low demand economy nets less economic growth than generating that demand.
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@Dr.Franklin
Demand side would be creating a virus in a lab so that a vaccine could be sold.
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@Dr.Franklin
Demand side would be creating a virus in a lab so that a vaccine could be sold.
If you wanted good examples of demand side economics - rather than silly strawman - a good example would be COVID stimulus checks - borrowing to supply money to spur demand, rather than borrowing to supply money to invest in supply.
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@Greyparrot
@Ramshutu
interesting? so is the point that demand-side economics is always bad?
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@Dr.Franklin
interesting? so is the point that demand-side economics is always bad?
That seems to be the implication.
However that point omits the case of velocity of money, or the concept of borrowing to pay for demand.
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@Dr.Franklin
interesting? so is the point that demand-side economics is always bad?
Yes because artificial growth is bad and natural growth is sustainable. Artificial growth promotes production of a lot of shit people actually don't want or need like GND products, drone missles, and other shit. When the subsidies run out or the debt limit is reached, the market crashes.
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@Greyparrot
ahh i got it now
55 days later
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@Greyparrot
The general claim of demand-side economics is that there is a coordination problem that prevents output from reaching an economy's potential.
The broken window fallacy says, given some level of resources, we shouldn't be creating additional demand, because that'd simply be redirecting resources from one place to another. So if you break a window, given some level of resources, you're simply diverting investment from something else to fixing a window. In the context of macroeconomics, this could describe one of two phenomena:
- For an economy at potential, more aggregate demand simply means more inflation, so all it does is divert resources within the economy.
- Government spending, in particular – which is not all of demand-side economics, demand-side economic policy is generally monetary policy – drives up interest rates and hence crowds out other private investment.
The latter effect is easily empirically studied. Lots of research accounts for this "crowding out" when aiming to estimate a fiscal multiplier.
The former effect misses the point of demand-side economics. That there's often coordination problems, where even if an economy has some potential output, the real output falls below that potential (for example, nominal GDP falls below nominal GDP expectations). So the economy as a whole is capable of producing some amount, but there's a "market failure" (albeit in every market) of sorts that calls it to fall below that potential. As for what causes these shortfalls, that's a big conversation – I recommend chapter 2 of the book The Undercover Economist Strikes Back for a very small-scale example of this. If output falls below potential, then bringing it back up, in theory, shouldn't cause much inflation. That was the reality in the U.S. in much of 2019 and pre-COVID 2020 – some combination of expansionary monetary policy and government spending (e.g. spending projects approved by the Trump administration) led to a situation of very low unemployment, but relatively stable inflation as well, because the U.S. economy was getting pretty close to its "full employment" potential.
Currently, in the U.S., it seems like nominal GDP is roughly at its trendline, but it seems likely to overshoot soon, suggesting that maybe there's "too much" demand in the economy. It's hard to separate this from structural problems, though, like supply chain issues.
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@Greyparrot
Is there any scenario where Demand-side economics does not suffer from the broken window fallacy?
When taxpayer money is spent on the development of technology to keep ahead of various issues.
I don’t know, I have a rough understanding of it.
Does planned obsolescence fall under broken window?
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@Tejretics
You suggest "output" as a fundamental property of demand side economics when it clearly is a secondary property.
An example of demand side economics is providing tax funded grants for renters instead of taking those funds and paying construction crews directly to build new houses.
The policy encourages a trickle down approach to suppliers of housing through the funding the consumers (demanders). While this trickle down approach to "output" is clearly beset with all sorts of historical problems regarding individual human choice vs central planners (think recently of the Covid stimulus where people didn't spend the money like the government planned)...
The real problems with demand side economics are often obfuscated by politicians because of the monumental political benefit of putting dollars directly into the pockets of voters, regardless of whether they choose to spend the money shoring up supply chain problems or not like the ones we have now.
The proven factor that drives consumers to choose to spend money that directly creates the necessary supply is a select rising price due to scarcity. Printing money and distributing dollars to consumers further delays that targeted spending because the consumer has no incentive to reward any one individual supplier. So you have the scenario where an entire grocery bill is high despite the fact that 90% of the shelves are full. In a supply side economic model, only the producers working on filling the empty shelves are rewarded.
But then again this all goes to the inherent problems of central planning, which can't possibly know what exact section of the supply chain needs the most help fixing the supply chain issues as a person in DC cannot possibly know exactly what the suppliers all the way in California need. The best policy regardless of demand side (gifts to the public) or supply side (welfare to corporate suppliers) is often no policy so that the invisible hand Friedman refers to can work freely with no constraints as thousands of Californians decide through their own incentives regarding price and profits what the supply chain really needs instead of a handful of people way out in DC.
As far as central planning and these policies are concerned, we can actually use the BWF example to prove a point. In Demand side central planning, the shop owner is incentivized to break his own windows in order to replace them with new ones even though the old ones worked fine simply because he is not paying for it. In Supply side central planning, the glazier is incentivized to create business by destroying as many windows as he can or creating unnecessary holes in walls to place as many new glass windows as possible.
In both cases, it would have been much better on a macro economical model to have the shop owner decide how to economize his own money instead of spending someone else's money on himself through centrally planned demand side policies.
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@Greyparrot
Are you just going to link shitty videos?
What does it mean to own money if it’s illegal for an individual to light it on fire?
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@Reece101
Are you just going to link shitty videos?
Really? You're going to call Milton Friedman "shitty?" I have no interest in replying to your shitposting anymore.
Good day.
Greyparrot, you blocked me. Why would you want to inhibit the expansion of your portfolio in the marketplace of ideas? This is a long-term financial disaster.
64 days later
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@Greyparrot
You suggest "output" as a fundamental property of demand side economics when it clearly is a secondary property.
Demand-side economics, when economists say it, generally means trying to boost production by increasing “aggregate demand” (some measure of how much people and businesses want to buy things -- I like to think of it as nominal GDP) rather than by increasing productivity. For example, if the Fed cuts rates during a downturn, that’s also demand-side economics.
While this trickle down approach to "output" is clearly beset with all sorts of historical problems regarding individual human choice vs central planners (think recently of the Covid stimulus where people didn't spend the money like the government planned)...
This is a criticism that applies to only one flavor of demand-side economics – government spending as a form of fiscal policy.
In the context of the COVID-19 spending, I’d argue that a large number of people not spending the money meant a significant part of the package was focused on relief, not stimulus. To that extent, it met its objective.
More generally, I think there are two common ways fiscal policy fails in its prediction of human behavior:
- Overestimating the size of the output gap (the difference between real GDP and potential). If the economy isn’t significantly below potential, that means spending hasn’t decreased (or it has decreased because of supply-side problems), so people might not spend when they get the money. However, if you are correct about the output gap, then you’re fixing a “gap” in spending (since it seems like most recessions are demand-side/caused by people and firms not spending enough, rather than due to real or structural problems in the economy).
- Failing to gauge the reaction of monetary policy (e.g., a central bank tightens a bit in response to a stimulus package, if it’s committed to a particular inflation target), which could “offset” the fiscal stimulus.
These aren’t problems with demand-side spending in general, as much as common ways policymakers do one specific type of it poorly.
The proven factor that drives consumers to choose to spend money that directly creates the necessary supply is a select rising price due to scarcity. Printing money and distributing dollars to consumers further delays that targeted spending because the consumer has no incentive to reward any one individual supplier. So you have the scenario where an entire grocery bill is high despite the fact that 90% of the shelves are full. In a supply side economic model, only the producers working on filling the empty shelves are rewarded.
Obviously, COVID-19 was a once-in-a-generation large-scale supply-side shock.
But most recessions, historically, in developed countries, are primarily demand-side rather than supply-side. The simple evidence for this: If the problem was scarcity, a recession wouldn’t be accompanied by low inflation (because scarcity causes a fall in production, but also an increase in prices). However, most recessions in the U.S. in the past three decades have been accompanied by low inflation. Here’s some simple correlational data, showing that inflation seems to generally move in the same direction as GDP growth.
Another piece of evidence (a bit of a restatement of the above point, to be honest): if the problem were about supply in most recessions, we wouldn’t expect nominal GDP to change much (we’d expect nominal GDP to match nominal GDP expectations). We’d only expect changes to real GDP. However, nominal GDP and nominal GDP expectations tend to diverge during recessions. Here’s David Beckworth presenting some data on the NDGP gap.
More generally, the idea that business cycles are driven by supply-side issues – often called real business cycle theory – is rejected by most economists, and doesn’t have a solid empirical foundation.
But then again this all goes to the inherent problems of central planning, which can't possibly know what exact section of the supply chain needs the most help fixing the supply chain issues as a person in DC cannot possibly know exactly what the suppliers all the way in California need. The best policy regardless of demand side (gifts to the public) or supply side (welfare to corporate suppliers) is often no policy so that the invisible hand Friedman refers to can work freely with no constraints as thousands of Californians decide through their own incentives regarding price and profits what the supply chain really needs instead of a handful of people way out in DC.
I don’t have a comment about ongoing supply chain issues. I agree they can’t be fixed simply by demand-side economics. In the abstract, I don’t think demand-side economics helps fix supply-side problems.
However, I disagree that the market simply “solves” demand-side problems. The fact that recessions even exist for fairly prolonged periods of time is evidence that there are sometimes large-scale coordination failures that markets are bad at adapting to. For example, unemployment wouldn’t be very high for any long period of time, because workers looking for work would simply accept lower wages, and the invisible hand of the market would either find them jobs or cause them to quit the labor force (rather than stay unemployed and looking for work). And before you blame minimum wages for this, this is a phenomenon in places where the market wage – even during a recession – is much higher than local minimum wages, but wages simply don’t fall due to factors like long-term labor contracts.
To be sure, I’m all for free markets and deregulation in many contexts. For instance, I think most occupational licensing should be abolished, and that zoning regulations in major coastal U.S. cities are among the most significant factors driving costs of living that shut off economic opportunity to the middle class. I don’t think “not putting up a response to a crisis” is a good idea, though. Whether that response should come in the form of stimulus spending is a different question.
I guess you could argue that in a world with free banking, the market’s rate of interest would become the actual interest rate, and maybe that’d make prices way more flexible. I’m not sure how you feel about the existence of central banks, but my intuition is that free banking would be pretty bad (even if I think central banks are often not responding to market signals fast enough and end up accidentally being too tight/too loose, hence essentially “causing” many recessions).
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@Tejretics
I generally agree with most of your response but I do take issue with this.
The fact that recessions even exist for fairly prolonged periods of time is evidence that there are sometimes large-scale coordination failures that markets are bad at adapting to. For example, unemployment wouldn’t be very high for any long period of time, because workers looking for work would simply accept lower wages, and the invisible hand of the market would either find them jobs or cause them to quit the labor force (rather than stay unemployed and looking for work)
This presents a false dichotomy that a person has only 2 choices, be unemployed or work for pay at a rate that is worth less than the market value of their work output. In a free market, there would be few barriers to competition and incentives for workers to choose the obvious third option, work for themselves.
The only barrier to this 3rd option is a government that passes the regulations preventing competition. (such as the situation in California where it is illegal to transport goods piling up on the docks if you are a non-union worker)
Setting a minimum wage doesn't affect your market value of your labor. It just raises the prices.
I guess you could argue that in a world with free banking, the market’s rate of interest would become the actual interest rate, and maybe that’d make prices way more flexible. I’m not sure how you feel about the existence of central banks, but my intuition is that free banking would be pretty bad (even if I think central banks are often not responding to market signals fast enough and end up accidentally being too tight/too loose.
The functionality of a central bank ended when it became a tool for the political elites and neutral in name only. The fact that it took so long to relax QE in an obvious inflationary period as we have today demonstrates that we might be better off with decentralized currency. It's entirely possible much of the world will run on a decentralized currency in the future.
I think central banks are often not responding to market signals fast enough and end up accidentally being too tight/too loose
When the Central bank messes the calculations up, the result (penalty) is far worse than a market driven recession. And longer lasting.
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@Tejretics
I think most occupational licensing should be abolished, and that zoning regulations in major coastal U.S. cities are among the most significant factors driving costs of living that shut off economic opportunity to the middle class.
While minimum wage doesn't affect the market value of labor, the restriction of job opportunities does. Friedman described the role of Labor Unions as minimizing the amount of jobs in order to inflate the market value of labor due to scarcity. This kind of monopolistic behavior destroys upward mobility.
28 days later
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@Greyparrot
........"This kind of monopolistic behavior destroys upward mobility. "....
I.e. to raise the standard of living. The whole ---7.7 billion people and their pets--- worlds standard of living has always risen. They may ask themselves, well, how did we get here? Sung to David Byrne { talking heads }
Spirit { initiative } > family local
............philosophy { consider and reconsider } > family local and global
................information { input output } Meta-space flow of mind/intellect/concepts > the networking of inter-relationships
....................... all-for-one and one-for-all theme { spiritual unity i.e. no human left behind is optimal }
...............greed { all for me and less for others }
.........ego { double edged sword that can lie to maintain its false integrity }
ego { doubled edges sword that can lead others with truth to maintain its integrity }
Lets consider the trajectory of humanity, on the humble blue marble in space,
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