Aggregate demand, from all angles.

1. I've written quite a few times about the almost universal idea in the main stream that the way to end this recession is by spending more money, so that the idle resources [=the unemployed] will finally be hired.

I've rebutted this argument right here: http://smilingdavesblog.blogspot.com/2011/05/rebuttal-to-our-man-blinder.html. The gist of my argument was that the Austrians are right, that there is unemployment because of a combination of two things.

a. People got fired because they were working the wrong jobs in the first place.

b. They do not find new jobs because of govt regulations making them too expensive to be worth hiring again.

2. But one day Dave read Chapter 3 of Keynes' book. He found there a different narrative that he did not address in that article. Unemployment and idle resources happen because there is not enough aggregate demand. Meaning, bottom line, that many many people decided to hoard their money under a mattress.

Dave was shocked. He did not know a single person who did this. On the contrary, everyone he knew had spent every last dime they had, plus was up to their ears in debt. No hoarding was taking place whatsoever. He checked to see if his circle was typical of the USA in general, and sure enough, it was.

Result, a new article laying out his research: http://smilingdavesblog.blogspot.com/2011/08/classic-keynes-and-why-credit-card.html

3. An internet personality, "Lord Keynes", wrote that the problem was not that people are hiding cash under the mattress, but rather are doing something that the real Lord Keynes considered benign, buying stocks with their money instead of spending it on consumer goods. Both myself and the real Lord Keynes did not have the brilliant insight that the internet "Lord Keynes" had.

Well! Smiling Dave could not take this lying down. Out came the keyboard, and the result is the now classic article: http://smilingdavesblog.blogspot.com/2011/06/reddit-buries-ae-continued.html  Don't forget to look at the comments.

4. Dave's never ending quest for knowledge led him to ever more bizarre versions of Keynesian economics. The problem is not money unspent, or used to buy stocks and bonds, but something much more sinister. Nouriel Roubini claimed that the problem is exploitation of the workers. They make stuff, get paid starvation wages, and then there is no one to buy what they made. Mass production only works if the masses can afford to buy what is mass produced. Rip off the masses, and they cannot afford to buy all that mass produced stuff.

Amused, Dave wrote a three part rebuttal to Roubini's thesis. Links:
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-one.html
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-two.html
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-three.html

5. Always one to get to the bottom of things, Smiling Dave delved and delved until he actually found it! Dave, and Dave alone, knows why there is a lack of aggregate demand. And he spells it out right here, in a two part article:
http://smilingdavesblog.blogspot.com/2011/09/our-man-j-b-say-explains-why-we-are-in.html
http://smilingdavesblog.blogspot.com/2011/09/j-b-say-explains-why-we-are-in.html

6. Never one to leave us in the lurch, Dave then explains what we have to do get aggregate demand up and running again.

First, he dismisses the usual heavy handed, harmful, hackneyed solutions:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand.html

Then, and you may send all contributions to his secret email address in gratitude, Dave tells us what the great economists down through the ages [=Hazlitt] have told us is the key to ending this recession:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand-part-two.html

Note that an article previously linked to also talks about what another great economist, J.B. Say, had to say about ending our recession. Very eloquent piece:
http://smilingdavesblog.blogspot.com/2011/09/j-b-say-explains-why-we-are-in.html


 

The Veil of Opulence and the Veil of Ignorance.

It's about a New York Times leftist editorial, about how Obama is great and Romney is evil. Full disclosure: I have contempt for both candidates, but more for Obama.

For some reason, I felt sick reading that editorial. The gist is that if only we all took the point of view of the poor, downtrodden, unfortunates in life, who, through no fault of their own, need charity to survive, then we would all agree that Obama's program of tax the rich, of healthcare, and everything else he ever did or will do, is the way to go.

It is only when we, through some perversity of human nature, falsely imagine ourselves rich, that we take the point of view that the rich should not have to support the unfortunate poor as if they were their very own beloved children.

The author is Benjamin Hale, an assistant professor of philosophy and environmental studies at the University of Colorado, Boulder, and a co-editor of the journal Ethics, Policy & Environment.

 He looks like this: 

Note that he has no clue about economics. He knows about philosophy. He knows about the environment. He knows about shaving his head. But he does not know anything about economics. [As will be amply shown later].

We will leave aside the philosophical and moral questions for the moment, and, for the sake of argument, accept all his assumptions. The role of the President is to make sure the poor get what they need so badly, and if that means taxing the rich to give to the poor, so be it.

The question now becomes, will Obama's plans actually work? Will the poor be better off if we follow his schemes? This is an economic question, and one that Benjamin Hale totally ignores. Austrian Economics argues that all of Obama's plans will leave the poor worse off than before. Obviously, poor Benjamin Hale does not know anything about economics, or he would have addressed this point.

He would have written, "Though we all want the poor to be taken care of, Obama's foolish programs will leave them worse off than ever. Vote for Romney as the slightly lesser of these two evils. Better yet, write in Ron Paul."

One humble blog cannot go into all the details of the horrific harm to the poor [not to mention the rich and the middle class] from all of Obama's insane programs. Thankfully, that work has been done for us over at Mises.org.

But I can paint you a little picture of what the future holds under Comrade Obama. Go look at Greece and Spain and basically all of Europe, as it crumbles step by step from exactly what Obama wants to institute here.

Greece and Spain's problems stem from one fact. The govt was incredibly generous to everyone. Until it ran out of money. Now they are all worse off than if they would have all actually worked for a living, instead of being supported by Big Brother.  

That's exactly what will happen here. Of course, here the problem will be compounded many times over, because the govt, in addition to throwing a few crumbs to the poor, throws bit fat banquets to itself. They do this by printing digital money and spending it. Over at mises.org, you can learn why this impoverishes the country.

Bottom line, philosophy and baldness and black plastic eyeglasses are all very nice, but they do not qualify one to preach an economic position. To do that, you have to actually understand economics.

Mises' Calculation Problem, in Simple Language, Part Three.

Welcome back, faithful readers. Let's talk a little more about Mises' Calculation Problem. Even though we have laid out the argument in full in the previous two articles [here and here], we want to go into the nitty gritty a bit more.

The heart of Mises' argument is that

1. There are no prices for the means of production under Socialism. [Obvious].
2. With no prices for means of production, they will be wasted. [Deep stuff, which we will go into a bit more in this humble article].

Let's look a bit more at how things work in a free market. Mr A is a successful businessman. He comes up with a great new idea, say laptops that glow in the dark. He does his market research, and finds that customers will pay an extra 50 bucks for a glow-in-the-dark laptop. [Yes, I am making this all up, and I'm going to make up all the prices involved, too.]

So he opens up his catalogue of Shines in the Dark Plastics, and he is very surprised to find that that stuff is pricey. In fact, it will cost him 60 bucks per laptop to coat them. He will not make any more money on those planned shine-in-the-dark laptops, in fact he will lose 10 bucks per laptop.

Not wanting his dream of great fortune to go up in smoke, he calls up Mr B, CEO of Shines in the Dark Plastics, and asks him for a discount. "I can't do it," says Mr B. Mr C is buying up all my stuff like there's no tomorrow, and paying full price. So he's going to get it all, unless you outbid him. I certainly can't give you a discount."

Intrigued at this point, Mr A calls up Mr C. "How can you possibly afford to pay B's outrageous prices for his Shine in the Dark Plastic™?"

"Simple," says C. "I make glow in the dark skeletons, and people love them. Every Halloween they pay a cool hundred bucks per skeleton. Sixty bucks for the plastic, a few more for other expenses, and I make about twenty dollars a skeleton. And it's become a tradition to buy a new skeleton every year. I'm a rich man."

Mr A hangs up indignantly, and decides to move to a Socialist country, where he thinks he might have better luck. Comrade Marx, leader of the country, welcomes the talented and experienced Mr A with open arms, and appoints him head of a newly opened laptop factory, with carte blanche to do as he pleases.

"This is more like it," says Mr A, rubbing his hands together. "To each according to his needs. Well, my factory needs some Glow in the Dark Plastic, and Comrade Plastic, who runs the factory that makes the stuff, has agreed to give me as much as I want."

The glow-in-the-dark laptops hit the shelves. People are pretty pleased with the cute little novelty laptops, which sell at a very reasonable price, until Halloween comes around. They go to their shops to get some skeletons, but there are none on the shelves. When word leaks out about what happened, that all the plastic went to coating their laptops, they go home disappointed, cursing their stupid laptops, and look yearningly over the border at Freemarketville's homes, all gloriously decorated with shiny, scary, skeletons.

You see what happened. The free market, with its price system, made sure that the shiny plastic was used for what people wanted most. The Socialist country, by contrast, had no clue about how to use its supply of glow-in-the-dark plastic.

Of course, this story is not just about novelty plastic. The exact same thing will happen to all the resources at the Socialist country's disposal. Lacking a price system, they will have absolutely no idea how best to use them. Result: Suffering for all.

Mises' Calculation Problem, in Simple Language, Part Two.

Part one is Here.

We'll slide into Part Two by pointing out some deep mysteries of prices and profits. Let's take them one at a time:

Price. Why does something, a laptop, say, cost what it does, no more and no less? The answer is pretty obvious. The price is whatever the market will bear, meaning the more somebody wants that laptop, the more he is willing to pay for it. And a person wants that laptop because it of some use to him, whether for business or for entertainment purposes.

Now Marxists will say that the price of an object depends on the amount of labor put into making it. Old time economists will say it depends on the costs of making it. We won't go into that for now, because even the most stubborn Marxist and old time economist will agree that if a lot of labor and a lot of cost went into making a piece of garbage, nobody will buy it. So that satisfying the desires of the customer is certainly a consideration in what the final price is.

OK, so we'll go with that for now. The price of an object depends [partly or exclusively] on how much happiness it gives the buyer.

Profit. The Marxist will claim that profits come from ripping off the worker and paying him less than he deserves. We won't go into that for now, because even the most stubborn Marxist will agree that if you sell something for less than it cost you to make it, there won't be a profit. And the more you can lower the costs of production, the greater your profit will be.  So that making something the most inexpensive way possible, the way that uses the least resources, the least means of production [that still gives you a product that the customer is happy with] is the most profitable way.

OK, we'll go with that for now. A bigger profit means you have made the customer happy using up the least amount of resources. And if you did not make a profit, that means you used up a lot of resources [high cost of production] to give the customer very little satisfaction [because we see he will only pay a paltry sum for it]. It makes him happy, but not THAT happy. In fact, if the resources were used to make something profitable instead of the expensive boondoggle that it did make, that means the customer would be made more happy, meaning the resources were used in a useful way and not a wasteful way.

OK, say the Socialists. We get that. Maximizing profit means making best use of the country's resources. A loss instead of a profit means the country's resources were wasted. So we, too, will maximize profit and minimize costs of production. So where's the doom?

The doom, says Mises, is staring you right in the face. Because how are you going to measure your profits, and your costs of production? One person [=the govt] owns all resources, meaning there is no buying and selling of resources, because one person owns them all already. If there is no buying and selling of resources, there can be no known price for them. If there are no known prices for resources, and thus no way of knowing what is the most efficient use of resources, no way of knowing if you are wasting your resources or using them wisely, you are doomed.

Here the Socialsts turn a little pale. They try to force a ghastly looking sickly smile on their stunned faces. Maybe we'll be lucky? Maybe, of the many hundreds of thousands of possible combinations of resources, we'll hit on one that is profitable [if we had a way of measuring it]. Hey, people win lottery tickets, at odds of ten million to one, all the time. Maybe we'll get lucky, too.

You are doomed, says Mises.

[The best is yet to come. Make sure you look at Part Three].

Mises' Calculation Problem, in Simple Language.

Mises' Calculation Problem is the name for a problem Mises claimed will exist in any Socialist or Communist country that will spell the inevitable economic doom of that country.

Many have criticized Communism and Socialism from the psychological side. Why will anyone work if they don't get paid? How will you find the angels to run the country and not be cruel dictators? The Communists reply was a pretty lame one, that Socialism will breed a New Man, one free of the free market mentality, which is all about selfishness. Thanks to the fresh air of Socialism throughout the land, men will from the very cradle, or maybe after a few years of schooling, understand that selfishness is bad, and will live to serve their fellow men.

Lame as that sounds to me and to anyone familiar with the human condition, one cannot refute it with cold logic. Maybe Socialism will change the world. Who can prove otherwise [emphasis on "prove"]?

But Mises came along and claimed he had found proof, logical step by step mathematical proof, that even if all men were angels from the get go, even if they were all-wise and all-generous without a selfish or stupid bone in their body, Socialism and Communism were doomed. And the doom would be because they would be incredibly wasteful  in ways that it would be impossible to stop, from the one feature of Socialism that is its very definition. In other words, a Socialist country would throw all its wealth, all its food, all its clothing, all its housing, all its everything, into the sea, where it could never be retrieved. [Well not exactly. But it would be so wasteful of what it has, on such a grand scale, that the results would be the same as if they had tossed everything into the sea].

Pretty bold statement, no? But apparently Socialists who read his proof were stunned. He's right! What do we do now? Of course, after a while, they found a way. They just straw manned his argument to death. And you can find as many articles as you want on the internet refuting, supposedly, Mises' argument. All of them have no clue what the argument was, either from ignorance or by design, and disprove something else instead. Mises' argument stands triumphant, as the lucky readers of this humble blog will find out right now.

The very definition of Socialism is that all the means of production belong to the gov't. Spin it any way you want to, that they belong to everybody, or to nobody, or to the gov't, but the important point is that there is no buying and selling of means of production. Nobody can buy or sell steel or coal or a factory, because it is illegal for anyone to own them. That would be Capitalism, if a private person owned any means of production whatsoever and could do with it as he pleased.

OK, say the Socialists. Fair enough. That is indeed the very essence of Socialism. But so what? Where's the doom?

The doom, say Mises, is that if you are not allowed to buy and sell stuff, then, obviously, you cannot put a price tag on them. A price for something comes when a buyer and a seller do some preliminary haggling, and then agree on a price.

OK, say the Socialists. Fair enough. You cannot make up a price and pretend it has meaning, we admit that. That's why every time there is a govt decreed price for something, as in wage and price controls that were imposed on various countries at various times by their gov't, there was always a black market. Meaning there were huge numbers of people who did not accept the gov't phony price, and set up a different price behind the gov'ts back. Fine. We agree that if you can't buy and sell stuff, there is no such thing as a price. But so what? Where's the doom?

The doom, say Mises, is that if you have no price for the means of production, then you have no idea of costs when you make something. Even if you have prices for the final product, say $100 for an iPhone, if you don't have prices for the components of the iPhone, the things that went into making the iPhone, then you do not know if you have made a profit.

OK, say the Socialists. That's true. If there are no prices for the means of production, then the manufacturer cannot know if he made a profit. But that is so Capitalist. We Socialists are not about profit. We are about for each according to his needs. Looking for profits is what got the world into the mess it is in now, with all that greed running wild. Agreed, if the govt owns all means of production, there is no way of knowing if a manufacturer is making a so-called profit. But so what? Where's the doom?

The doom, say Mises, will be explained in Smiling Dave's very next article.

Smiling Dave Hits the Big Time.

Lo and behold, our humble blog has been chosen one of the Top 40 Austrian Economics Blogs by no less than the prestigious Commodity HQ website. After all, anyone who recognises that we are in top 40 must be prestigious, right?

Not only that, we have more visitors thanks to their recognition. Here is what they said about Smiling Dave's blog, coming in at number 35 out of 40:

Smiling Dave: Certainly one of the more entertaining economics blogs as the tagline promises to offer “gentle sarcasm”.

To make my cup runneth over totally, I found that someone from Baku, Azerbaijan has put my humble blog on his Рекоммендую [= recommended, for those of you who don't speak Azerbaijanian] list. Our humble blog's influence is spreading to all corners of the Earth.

Keep 'em coming. And to you, my enemies, I say,  "Grovel before me in the dust. Come back when you make top 40 and are recommended by an Azerbaijanian."

Woo hoooooooooo. 

Why So Many Do Not Understand AE.

Ever since I've posted links to this humble blog over at reddit, I have been pleased to see many new comments here. Thank you all for gracing the blog with your presence.

Enriched by the interactions with these new readers, backed by experiences over the mises.org forum, and by reading many anti-AE articles as well as youtube videos attacking AE, I begin to see a pattern. I think I now understand why so many have a hard time with AE.

Let us think back to high school. What was the most difficult course there? Even those who are adept at math might say they found the hardest time with high school geometry.

And what was so hard about it? For one thing, you could not toss together a string of buzzwords and get a passing grade. Faced with a proposition, you had to actually prove it, step by step, justifying each step with support.

The proof had to obey the strict rules of logic, too. You could not say Pythagoras was wrong because he is long dead, hopelessly outdated, a member of the bourgeoisie, or did not have an internet connection. That didn't cut it. You had to address the idea, not the man.

And when you addressed the idea, you had to show exactly why the idea is wrong. At what line of a proof is there a mistake, and what is the mistake, exactly? 

Many people had no clue in high school geometry. They, of course, will also have no clue about AE, because the structure of AE is similar to that of geometry. It is composed of statements backed up by step by step logical proofs.

Even those who excelled in geometry often found that the kind of thinking that went on in geometry class was never used in the real world, as seen on TV. No politician, for example, ever discusses an issue using logic. Instead they use every kind of argument that would have guaranteed them an F in geometry class. I imagine many college courses work the same way. One learns that tossing together buzzwords will earn one respect, and that actually thinking things through earns one failure, if one reaches conclusions disliked by the teacher.

Thus, the role model of proper thinking, seen only in geometry class, was drowned out by a flood of role models that did not use logical thinking. Pretty sad, pretty pathetic, but pretty common.

So guys, I welcome all comments. But don't be surprised if my reply will be that you please show me exactly where the flaw lies in my thinking, and why it is a flaw. No more of this "Mises is dead and did not have an internet connection, so he must be wrong" stuff. Get used to logical thinking. Be liberated.

Bitcoin, all in one place.

I've written 8 times about bitcoin, and why it is doomed to never be a currency.

1. http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.html Explains Mises' Regression Theorem, and why bitcoins violate it.

2. http://smilingdavesblog.blogspot.com/2011/06/bitcoin-and-bitclothing.html Explains that just as clothing made out of bitcoins is absurd, so is money made out of bitcoins.

3. http://smilingdavesblog.blogspot.com/2011/07/bitcoin-yet-again-in-simple-language.html Gets to the very essence, in a few short words, of why bitcoin will never be a currency. The comments here are especially enlightening.

4. http://smilingdavesblog.blogspot.com/2011/09/bitcoin-we-hardly-knew-yeh.html Graphs bitcoins decline from $30 to $5 in a few short months. Recently it has climbed back to about $10. Time will tell.

5.  http://smilingdavesblog.blogspot.com/2011/12/bitcoin-and-mises-regression-theorem.html Summarizes someones claim that bitcoin is compatible with Mises' Regression Theorem, and shows him wrong.

6. http://smilingdavesblog.blogspot.com/2011/12/was-mises-regression-theorem-mere.html Summarizes a claim that bitcoin is compatible with the regression theorem because the regression theorem is just summarizing history, and proves that claim wrong.

7. http://smilingdavesblog.blogspot.com/2011/12/one-more-detail-about-bitcoin.html Summarizes the claim that although Mises' theorem apparently shows bitcoin is not a currency, yet in reality bitcoin already is a currency as we speak. And so Mises' theorem is proven incorrect by the real world. Refutes this claim.

8. http://smilingdavesblog.blogspot.com/2012/07/bitcoin-and-intrinsic-value.html
Explains the concept of intrinsic value, its two meanings depending on the context in which it used, why bitcoin has no intrinsic value, and gives a vivid image of how to determine with ease whether something has intrinsic value.

Bryan Caplan, All in One Place.

I wrote seven articles about Caplan's famous Why I am Not an Austrian Economist.
Here are the links to them all.

1. http://smilingdavesblog.blogspot.com/2011/05/partial-refutation-of-brian-caplan.html

2. http://smilingdavesblog.blogspot.com/2011/05/more-on-caplan.html

3. http://smilingdavesblog.blogspot.com/2011/05/caplan-and-continuity.html

4. http://smilingdavesblog.blogspot.com/2011/05/caplan-and-welfare-economics.html

5. http://smilingdavesblog.blogspot.com/2011/05/more-on-caplan-and-welfare-economics.html

6. http://smilingdavesblog.blogspot.com/2011/05/concluding-blog-about-caplan-and.html

7. http://smilingdavesblog.blogspot.com/2011/05/caplan-on-public-goods.html

The careful reader will note something very interesting. I'm pointing out very elementary mistakes in logic. But Caplan makes them. And yet his paper is widely praised on the internet as the very best refutation of AE that exists. That should tell you something.

Go ahead, read the articles, see for yourself. They are in non technical language, simply laid out.

Broken Window, Part two.

Part one is here.

Without further ado, we take a look at the attack on the Broken Window Fallacy posted recently at mises.org.

The gist of his argument is that if we accept the assumptions of Keynesians, that people are unemployed because those with money to spend are hoarding their cash instead of spending it, and also accept that lowering wages is hard to do, then breaking a few windows is a great way to end unemployment. Break those windows, and the hoarders will be forced to open their miserly wallets and hire the unemployed to fix those windows, and at the going wage, too.

Here's what he says:

The Broken Window Fallacy, in its basic state necessitates that the money which would be spent on the broken window, would otherwise have been spent on something else, either invested on producer's goods or spent on consumer's goods.

What he means here is that the fallacy is usually presented like this: Mr A gets his window broken by a vandal. Cost of repair, a hundred bucks. Some say that this is a good thing for the economy, because it creates jobs. The glazier now has employment, repairing the window.

This is a fallacy, say Austrian Economists, because had the window not been broken, Mr A would have spent the hundred bucks on something else, say a new suit. So yes, the glazier gained a job, but the tailor lost a job.

However, if we grant the usual Keynesian assumption that money is merely hoarded during a recession and prices are sticky, then this is no longer the case. If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window.

The poster at mises.org thinks he has found a flaw in this reasoning. What if Mr A is a hoarder? Then those hundred bucks will never be spent at the tailor's [Note for sticklers: The poster got his story confused, talking about spending money on windows that were not broken. He means spending it at the tailor's]. So that the only way to get Mr A to spend the money and increase employment and end the recession is to break his stupid window, forcing him to spend those hundred bucks hiring the glazier:

If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money, thusly [sic] boosting the economy from what it would have been.

One broken window and a lot of money is spent. Consumption is increased. The economy is "boosted".

In fact, the more windows you break, the better:
If we assume this on a mass scale, then unemployment will be reduced and output would increase from an increase in general demand, from many broken windows.

Bottom line, break tons of windows and you increase spending from those miserly hoarders, you increase consumption, you increase employment, you increase output, you increase general demand, you boost the economy. Gimme a high five, bro. We have done it all; we have saved the world.

The poster assures us there is no possible rebuttal to this argument:
So for once and for all, the broken window fallacy in and of itself cannot even touch Keynesianism by itself, and it does not apply during a recession.

Let's introduce Devil's Advocate [=DA] again, as he talks to Smiling Dave [=SD].

DA: He sure cooked your goose this time, Dave. Admit it, you never even thought about hoarders.

SD: You Devil, you forgot about Part One, where we discussed parasitic jobs.

DA: What do you mean? The glazier is being productive, fixing the window.

SD: Sure after it is broken, he is being productive. But we are talking about something different. The question is, is the economy better off before the window was broken, or after? So let's look at this way. The window is there, the money is hoarded, the glazier is unemployed. The poster at mises.org claims we are better off breaking the window, so that the glazier can fix it.

DA: You're darn tootin.

SD: I have a better idea. Why not cut out the middle man and have the glazier both break the window and fix it? Why wait for Hurricane Katrina or the gov't to break those windows? That will give the glazier even more employment.

DA: Great idea, Dave. You might win a Nobel Prize for this.

SD: Well. I'm about to win two Nobel Prizes. Why not save everyone a lot of bother by this simple expedient. The gov't will send letters to all the people saying "You have 5 windows in your house. The economy will be improved if they are all broken and then fixed. To save you the inconvenience of having your windows actually broken with the attendant health hazards, we hereby legally declare that your window has been broken by a hurricane, and that Sam Glazier has fixed them to exactly as they were before. You now owe Sam Glazier $100 per window. Thank you for improving the economy."

DA: But, Dave that's a parasitic job like no other!  

SD: Exactly. And it is just as parasitic if the govt breaks the window. And the loss to the economy is the same if a hurricane breaks it and it is fixed by the glazier as when the glazier does nothing and gets his gov't check.

Broken Windows.

Someone over at the mises.org forum came up with a critique of the Broken Window Fallacy, and how it does not apply in the real world.

You see the broken window fallacy quite often on TV. For example, right after Hurricane Katrina, some dude claimed that New Orleans would now be in better economic shape than ever, since all the destruction caused by the hurricane would have to be fixed, meaning there would be more jobs.

Indeed, the heart of the fallacy is one that is almost universal, come to think of it. When any politician talks about fixing our miserable economy, what does he talk about? Jobs. That's it. Never once is there any mention of increasing production. It's all about jobs.

Now from a politician's point of view, that makes a lot of sense. More jobs means more votes. More production doesn't mean anything, to him, because products don't vote.

And the broken window fallacy pretends that this is an economic truth, as well. Better to have more jobs and fewer products than more products and fewer jobs. Put that way, it sounds pretty feasible, even humane and moral.

Time to bring in our old friend, Devil's Advocate[=DA] , and have a dialogue between him and Smiling Dave [=SD].

DA: Well, what do you have to say for yourself, wicked Smiling Dave, you heartless thing oriented person. Aren't people's lives more important than a few baubles? Isn't "more jobs" a superior goal to "more production"? Do you want everyone to starve to death while more useless trinkets are made?

SD: Say I gave everyone a job at the post office. Everyone. What would happen?

DA: What a silly question. We would run out of food and clothing and everything else very quickly. Everyone would get a paycheck and spend it on what they want, but no new things would be made. When I said we need more jobs, I didn't mean moving people from productive into parasitic jobs.I meant moving people from off their couch and off the streets into dignified employment.

SD: Is working in the post office the kind of dignified employment you are talking about?

DA: Why not? Indoors, nice pay, good pension, doing something useful.

SD: If it's so great, why doesn't the post office hire all these people right now?

DA: Because the post office is losing money as it is, and hiring more people means it will lose even more money.

SD: Another way of saying those jobs are parasitic. The new employees get pay checks, but do not produce anything in return, at least not enough to cover the cost of hiring them. Meaning they get to eat for free. Nice for them, but not very nice for whoever is feeding them. In fact it's not very nice for the economy as a whole, meaning for everyone, because what the parasites eat is not replaced. After they spend their pay checks, there is less for everyone else.

Moving people from unemployment to a parasitic job is almost as bad for the economy as moving them from productive jobs to parasitic jobs. In both cases, there is less and less to go round for everyone. 

DA: Ok, Mr Smartypants, then what is the answer for all those unemployed people? You want them to just starve?

SD: Of course not. I want them to get productive jobs. Jobs in which what they take away from the general stockpile of goodies is constantly replaced by the work they do. And, of course, that is truly dignified labor. Where your work benefits humanity, as opposed to hurting humanity.

DA: And just who are you do decide which job is productive and which one isn't?
Do you think you are smarter than the brilliant President Obama, who created jobs at Solyndra to the tune of half a billion bucks, only to have the company go bankrupt in a few months?

SD: What do you think I am, a central planner, a Soviet Comissar? The free market will decide, of course.

DA: And what if the free market decides there are no productive jobs for these people?

SD: Then the gov't will have to lower the huge expense of hiring people, so that their jobs will become productive, meaning worth the money the employer has to spend on them.

DA: What if the gov't is too stubborn or too afraid to change the laws?

SD: Then we will have chronic high unemployment, like they do in Europe.

DA: Then shouldn't we give them free money?

SD: Sure, if you want to destroy the economy, meaning make everyone poorer and poorer because more is consumed than produced.

DA: And what has all this to do with the broken window fallacy, and that brilliant article over at mises.org?

SD: It's an intro. The hour is getting late, this article is getting long. But the takeaway is that more jobs means nothing. More productive jobs means something. And that if our pool of resources is lessened by a job, that job is parasitic and should not exist. Simple math. Take away more from a pile than you put in, and the pile gets smaller. Tune in for part two next time.