The Fallacy of the Broken Window Fallacy (Or as it is used on Mises)

    I was perusing the interwebs recently when I stumbled across this article on Mises: The Broken-Window Fallacy by Robert P. Murphy. Now I tend to avoid Mises.org and similar sites due to their general dogmatic propaganda but occasionally I like to see what particular mistakes they are peddling. This article struck me as worthy of a response because of how stunning the sleight of hand really is. I ask the reader to read the parable of the broken window either here or in Murphy's article.

     It all  seems reasonable enough until one thinks "wait! What does it mean if the shopkeeper were not going to spend those six francs!" Is there now an economic benefit because there are six francs more being spent than otherwise would be? Well, let us see what Murphy has to say on this matter:

"Specifically, Bastiat assumes that the shopkeeper would have spent his six francs somehow, and that the boy has merely forced him to spend the money on repairing the broken window. It is wrong to view the employment of the glazier as a net gain to the economy, because the shopkeeper (in the absence of the broken window) might have spent that six francs getting his shoes repaired, for example. In that case, the glazier's gain is exactly counterbalanced by the cobbler's loss.
Thus, if we assume that the workers in the community would have been "fully employed" had the boy not broken the window, then it's clear that the boy isn't "creating jobs" or "boosting total income." All he's done is to give more work/income to the glazier, at the expense of work/income for some other people in the community."

What I have underlined says it all really. So, Krugman (who I'm not overly fond of) argues that a destructive act will benefit the economy due to unemployed resources (capital and labour) and Murphy responds by saying that Krugman is wrong if we assume full employment. Did you get that? He assumed the argument away! Krugman's whole point was that there were unemployed resources which could be employed due to disaster and the response is to assume there are no unemployed resources??

Krugman: If and only if A then B.
Murphy: Not A therefore not B.

Did he miss the word 'if'? And if he did has he not seen the unemployment figures? And the cash at hand in major companies? (Apple has more cash at hand than the U.S. government).

Am I missing something here? Let us read on. Murphy moves on to make a reasonable point regarding the decrease in total wealth (which I will return to) and then quotes Krugman. Hurrying past this we find the next reference to idle/unemployed resources:

"One of [the Keynesian's] responses is to claim that the conservative/libertarian critics are ignoring the distinction between wealth and employment, and that they are unwittingly assuming that there is full employment (i.e., that there are no "idle resources")....

At this stage of the argument, I think there are two main answers. In the first place, we have to inquire why there are so many "idle resources" lying around? If it turns out that destructive government and central-bank policies are to blame — and not a sudden unwillingness for people to "spend enough" — then forced expenditures (due to a natural disaster or terrorist attack) won't actually fix the labor market. Mysteriously, the economy will suddenly become "worse than we realized," so that even in light of the new spending, unemployment is still too high. (This is what happened with the Obama stimulus package.) "


 So, now we have moved from assuming that there are no idle resources to assuming that if there are they must be a result of non-market forces. Now he does provide a link for this assertion but I've had my fill of rubbish today and may pick it up some other time.

 Other Points (Some Nitpicking)

For another point which I felt needed mentioning, I refer to this paragraph:

"At this point, one might think that the whole episode is a wash. Sure, the boy's vandalism doesn't help, but how does it hurt things? Is Bastiat implicitly arguing that it's better to give business to the cobbler, rather than the glazier? Where does he get off making that judgment?
 The answer involves the distinction between wealth versus income or employment. Just because "total income," or "total employment," or "total GDP" hasn't been changed by the boy's action — it's just that the composition has been rearranged — nonetheless the hooligan lad has objectively made the community poorer."

 This seems a more reasonable proposition. It is however odd in light of Austrian economics. Notice the phrase "nonetheless the hooligan lad has objectively made the community poorer". Objectively? Given that the Austrian school relies on 'revealed preference' and the subjectivity of utility in its every analysis, I find it odd to see the word objectively sneaked in here. How does the Austrian suppose to measure the utility gained or lost due to this act? Given that their analysis almost entirely relies on this utility or preference having to be 'revealed'. How do we know that the utility of the Glazer or indeed the utility of the new pane to the shopkeeper is lower than that which would have been otherwise? This is even more so the case if we assume that there are unemployed resources. Murphy refers in his article to the disutility of work: "Work is a necessary evil, not an end in itself." and later on at the end of an example where he states  "Sure, Jim caused some physical destruction of wealth, and that is a bad thing; however, let's not lose sight of the upside: the neighbor used more of his labor than would otherwise have been the case"?.  If we do indeed assume that there are no unemployed resources then his argument seems to hold up but if there are unemployed resources then we immediately see that his argument no longer holds. Furthermore, given the massively negative effects of long-term unemployment (this paper for example) this 'unecessary evil' is hardly so . Even though I could go on, I think I will wrap it up here as I have ranted for too long already.

The Interconnectedness of Business

    I stumbled across an interesting paper recently entitled The Network Of Global Corporate Control. It is concerned with the various links of ownership in transnationals. Here's the abstract:

Abstract:

"The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers."

The paper is a bit heavy but worth the read. I intend to print it off tomorrow to give it a proper read as I hate reading off computers. What aroused my interest in this was its implications for crises. If firms are so interconnected we can expect the economy to be less stable due to wealth concentration and we also have to contend with the influence of oligoply neverminding the bargaining power this gives companies when trashing out deals with states. It also brought to mind a previous study I read comparing the spread of economic crises to the spread of diseases: Worldwide Spreading Of Economic Crises.

Abstract:
"We model the spreading of a crisis by constructing a global economic network and
applying the Susceptible-Infected-Recovered (SIR) epidemic model with a variable
probability of infection. The probability of infection depends on the strength of eco-
nomic relations between the pair of countries, and the strength of the target country.
It is expected that a crisis which originates in a large country, such as the USA,
has the potential to spread globally, like the recent crisis. Surprisingly we show that
also countries with much lower GDP, such as Belgium, are able to initiate a global
crisis. Using the k-shell decomposition method to quantify the spreading power (of
a node), we obtain a measure of \centrality" as a spreader of each country in the
economic network. We thus rank the dierent countries according to the shell they
belong to, and nd the 12 most central countries. These countries are the most likely
to spread a crisis globally. Of these 12 only six are large economies, while the other
six are medium/small ones, a result that could not have been otherwise anticipated.
Furthermore, we use our model to predict the crisis spreading potential of countries
belonging to different shells according to the crisis magnitude."

Both papers have implications for the study of economic crises and are worth the read. We see that TNC's and links between various companies can have massive implications. I'm a bit pushed for time and so can't post more but I will have a post about tax shares relative to income shares soon.

Authoritarianism and Neoliberalism

     One of the great ironies of Neoliberalism is the fact that in order to provide freedom and economic progress it has to use increased authoritarianism in order to put down those who don't share in the economic progress (i.e. much of the population).

     This has been a constant theme throughout the Neoliberalist world and it is by no means a coincidence that the first Neoliberal experiment required the dictator Pinochet in Chile. Across Latin America, Neoliberal regimes were lead by dictators who ruthlessly crushed opposition to their plans. In countries like Mexico and Columbia, the war on drugs is the front under which opposition is fought, a great irony considered the explosion in the drug trade was a result of Neoliberalism The same was occuring across the world in Indonesia under General Suharto and South-East Asia in general. Even in Iraq, the invasion has lead to the crushing of trade unions and a Neoliberal constitution.

    The Developed World fares no differently in this repect. In the U.S., the poor were criminalised, again under the pretext of a war on Drugs. This gave both an ideological and practical way of dismissing the concerns of the poor. Throw them in prison, they're just drug addicts. This lead to the explosion of prison populations in the U.S., a country that accounts for 5% of the world's population accounts for 25% of the world's prison population. We have seen the same trend in the U.K.

Now, why is this relevant? Well, today Cameron is aboutfacing on his cuts to the police. Was this predictable? Well personally, I was surprised when I heard that he was cutting the police in the first place. That said, when nothing happened I thought I was perhaps mistaken. In the wake of the riots however it seems that Neoliberalism does indeed lead to increased authoritarianism in order to crush any opposition or discontent.


We should probably look back to the Queen of Neoliberalism, a Miss Margaret Thatcher who set the ball rolling in the U.K.. What did Thatcher do in terms of police spending? Well, she increased police numbers in England and Wales from 89,226 in 1979 to over 93,000 in 1981, spending on the police increased rapidly, going from £1,035 million in 1978 to more than double that amount by 1982-3 and up again to £3,825 million by 1988-9. [Source: R Reiner and M Cross (eds), Beyond Law and Order: Criminal Justice Policy and Politics into the 1990s (Macmillan, 1991).].Cameron should have learned from this as it allowed Thatcher to enjoy the support of the police in the crushing of the Miner's strike and other protests against her rule. Today he is seeing the mistake of his overconfidence in his abilities and will attempt to regain the confidence that the police have lost in him.


What will Cameron do now? It seems he may have to call on the old reserves of Neoliberalism, patriotism and fear. In yet another irony, Neoliberalism which is supposed to end the idea of nation-states and terror often requires nationalistic fervour and fear to maintain support. Whether it was the Soviets for Reagan, the Falklands and the IRA for Thatcher, The War on Terror for Bush and Blair it is a constant trend in Neoliberalism, fear and patriotism. It remains to be seen whether or not Cameron will be able to whip up nationalist fervour in the wake of the riots, if not he may have to declar a war, perhaps on some new aspect of terrorism (maybe an IRA resurgence) or some small-time dictator. These remain unlikely however as declaring war on dictators is becoming more and more unpopular and the IRA don't seem to be giving him anything. 

    Cameron could attempt to build up fear regarding a collapse of moral society but this runs the risk of causing it to become true and may cause a strengthening of class differences. All in all, Cameron's best target is the EU. He can paint the EU as the external enemy, the problem, and he can use the recent riots to help. He will probably propose tough measures and then when these contradict EU laws he will use that as a platform to launch a general attack on British involvement in the EU. Other than that, only an attack on British soil will help Cameron create a mood of nationalism and fear.

A Predictable Mess

Anyone who is in anyway familiar with my posts will know I tend to concentrate a lot on income inequalities in the First World and how they affect society.

In particular I have often highlighted the fact that homicide rates (a proxy for measuring total crime) are most affected by income inequality:

People would also know that the U.K. has some of the worst income inequality and social mobility levels in the developed world. I have often pointed out that social mobility in the U.K. has collapsed. In the wake of the riots I can't help but feel vindicated.

Now, a disclaimer. I am not making any comment on whether or not the rioters should or should not have rioted. I am not questioning whether or not this was the 'right' response to income inequalities or anything else. It remains criminal behaviour.

What I am saying however is that certain economic conditions result in predictable effects. In this case, income inequality and low social mobility result in an underclass which is waiting to explode. The spark in this instance was the shooting of Mark Duggan but that was by no means the gunpowder that has steadily accumulated over the past few decades.

   In this case there are two solutions to the problem. The first is increasing authoritarianism and the second is economic and social reform. Given that neoliberal policies that have dominated since the 80s and given the watchword 'austerity' it seems we will find ourselves moving towards authoritarian policies rather than reform. We have seen the same in the U.S. where incarceration rates have increased dramatically since Reagan.

  More police and tougher sentences is the easy and comfortable response, it appeases the masses and it fits nicely with Conservative thought. Already the recent cuts to the police are being reconsidered.
    In direct contrast, the cuts to the social services in these areas are being flatly ignored. There has been no talk of acutally solving these issues (Cameron's 'big society' apart). It seems the vested interests and prevailing dogma won't allow for this problem to actually be solved. Sigh.....

Number of Wars Increasing

Recently I stumbled across this article which surprised me as I had thought that the prevailing opinion (a reduction in wars) was correct.

http://www.world-science.net/othernews/110630_war.htm

"Military conflicts between states have been increasing in frequency from 1870 to 2001—even without counting the best-known conflagrations such as the world wars and American interventions, a study has found.

The survey of conflict counted everything from all-out shooting wars and uses of military force to displays of force such as sending warships and closing borders. This doesn’t measure the intensity of violence, researchers said, but does capture governments’ readiness to settle disputes by force. Only conflicts between states, not civil wars, were counted.

Identifiable factors behind the increase—two percent more wars each year, on average—are that there are more borders and weapons are cheaper, according to the investigators. By their count, the total number of nations rose from 47 in 1870 to 187 on the eve of the World Trade Center attacks."

I think the primary cause was the dismantling of Empires and the establishment of Africa states which now fight due to the poor idea of arbitrarily dividing up states. This is an interesting question. In Marxist thought it is believed that the number of wars would increase due to competition between nation states on behalf of their respective captialist elements. Neoliberalism and other such theories argue that peace is more likely as countries benefit from trade. The second theory lead to the McDonald's Theory of War which is the statement that no two countries with McDonald's have ever gone to war with each other. This was violated in 2008 when Russia waltzed into Georgia or the 2006 war Israel waged on Lebanon.

  Either way it seems to easy to tell given the explosion in the number of countries. Also, many would argue that there will be peace during times of plenty and growth but that as soon as things begin to turn sour (as in the present day) then warmongers once again find a voice.

I can vouch for this!

Narcissists Need No Reality Check:

"Narcissists make spectacles of their supposedly awesome selves, but they don’t see the world entirely through rose-colored glasses.

These sultans of self-regard accurately appraise their own personalities and reputations, say psychologist Erika Carlson of Washington University in St. Louis and her colleagues. Carlson’s team unexpectedly finds that narcissists acknowledge their own narcissism and assume that their arrogant strut gets frowned on by others."

Leaving aside this paper (that was about me).  I want to bring up the question of free-will. I have always contended that we are far more affected by subconscious impulses than we tend to recognise (and so I tend to oppose extensive advertising). This article New Questions About Free Will seems to run in favour of that view.

 "The sci­en­tists cit­ed work by re­search­ers such as John Bargh at Yale Uni­vers­ity and Pe­ter Goll­witzer at New York Uni­vers­ity start­ing in 2001. Bargh and col­leagues showed how mo­tiva­t­ion to­ward a goal could arise with­out con­scious aware­ness, Cus­ter and Aarts wrote. “S­tu­dents were seated at a ta­ble to work on two seem­ingly un­re­lat­ed lan­guage puz­zles. For some stu­dents, the first puz­zle in­clud­ed words re­lat­ed to achieve­ment (such as win or achieve), and for oth­ers it did not. Stu­dents who were ex­posed to achieve­ment words were found to out­per­form the oth­ers on the sec­ond puz­zle.”"

"Ear­lier re­search has shown that ac­tion goals, such as mov­ing a fin­ger, that were in­i­tially con­sciously set are un­con­sciously pre­pared be­fore they are acted on,” they wrote. “The lit­er­a­ture re­viewed here sug­gests that the un­con­scious na­ture of the will has an even more per­va­sive im­pact on our life. Goals far more com­plex than fin­ger move­ments, can guide be­hav­ior with­out be­ing con­sciously set first, when they them­selves are ac­ti­vat­ed out­side con­scious aware­ness."

 I find this question regarding free will (and by extension questions regarding the influence of subconscious factors on both our decisions and our values) to be one of the most pertinent. If it is the case that factors such as advertising and large levels of income inequality do massively alter subconscious values (and hence decisions) and if this is particularly true of children then we will have to reconsider the role of these conditions.  

How Wealth Accumulation Can Promote Cooperation

So I can't be accused of being completely biased in all my posts, I offer this paper for consumption:

How Wealth Cooperation Can Promote Cooperation

Abstract:

"Explaining the emergence and stability of cooperation has been a central challenge in biology, economics and sociology. Unfortunately, the mechanisms known to promote it either require elaborate strategies or hold only under restrictive conditions. Here, we report the emergence, survival, and frequent domination of cooperation in a world characterized by selfishness and a strong temptation to defect, when individuals can accumulate wealth. In particular, we study games with local adaptation such as the prisoner's dilemma, to which we add heterogeneity in payoffs. In our model, agents accumulate wealth and invest some of it in their interactions. The larger the investment, the more can potentially be gained or lost, so that present gains affect future payoffs. We find that cooperation survives for a far wider range of parameters than without wealth accumulation and, even more strikingly, that it often dominates defection. This is in stark contrast to the traditional evolutionary prisoner's dilemma in particular, in which cooperation rarely survives and almost never thrives. With the inequality we introduce, on the contrary, cooperators do better than defectors, even without any strategic behavior or exogenously imposed strategies. These results have important consequences for our understanding of the type of social and economic arrangements that are optimal and efficient."

There are however some caveats I would add (in addition to those examined by the authors). The main one is the desire for relative wealth over absolute wealth. In the stock market (in particular) it is how much money one has relative to one's peers that is often the guiding force, this may increase temporary defections. It also fails to examine more complex strategies (such as Tit-For-Tat as they mention) and particularly strategies that would arise if an 'eliminating' element was added. If it were the case that competitors can be eliminated if they face a large loss. Obviously the elimination of competitors is an element in the economy and even cooperative oligopolistic arrangements don't stray away from this.


    There may also be problems relating to kabals, where cooperating groups operate at the expense of other elements of society (again oligopolies). One should also note that the gini coefficient tends to rise drastically in this set up (approaching 1) and this leads to ill-effects as examined in previous threads, including the undermining of trust that is essential to cooperative strategies.

Thoughts Blogosphere?