02
Apr
10

Wilkinson contra Avent contra Bastiat

(Geek note: from the title we should deduce that contra associates to the right.  Hey, I made an Oliver North pun!)

By way of Will Wilkinson we discover this quick post by Ryan Avent:

In it, Avent replies to Wilkinson’s plea for sanity on Bastiat’s parable of the broken window.  Here’s Wilkinson’s original:

Apparently some folks are so enamored of Keynesian ideas about demand-side juju that they are hesitant to admit that the broken window fallacy is a fallacy at all. […]  But we can agree that it is a fallacy at the micro level, can’t we? That a literal broken window represents a net loss of wealth? That the flood that wiped out downtown Cedar Rapids in 2008 wasn’t good for the economy of Cedar Rapids?

(Having been to — and eaten a delicious supper in — Waterloo, IA right after that flood, I can assure you that the flood fucking well wasn’t good for the local economy.  But then again I’m not a Keynesian.)

Avent replies — wait, hang on.  First of all I need to remind you, and myself, of a principle that David Henderson (after Friedrich Hayek) articulated and to which I’m trying to live up: the principle of charity.  Let’s be sure to assume good intentions from Ryan Avent, because despite what he writes I really doubt that he’s trying to hurt people and break their shit — and Ryan Avent’s a clever guy and we can learn from what he writes.

Okay, now that we’re all primed to be charitable, let me quote his response to Wilkinson:

A disaster represents an immediate loss of wealth, but it may create opportunities to improve long-term growth by, for instance, overcoming previous path dependencies. Or more narrowly: can we really say, in a world in which the sunk cost fallacy has power, that the broken windows fallacy is a fallacy? Let’s say my old window is a cruddy window, and I would derive net benefits from replacing it, but I am reluctant to because I’ve already paid for the original window and throwing it out would seem like a waste. If some delinquent then throws a rock through my window, I’m made better off.

Honestly, readers, can you not think of a handful of things in your life about which you’d actually be happy if some government agent came in and broke them? An old television? Your first generation iPod? Your deeply underwater five-bedroom home in a foreclosure-ridden neighbourhood?

twitch, twitch

I’ll be good.  But I know someone who won’t; Mr. Avent:

Okay, I promised you insight from Avent’s post rather than just a cheap excuse to post my favourite image macro.  That insight comes in Avent’s more hypothetical first paragraph, and in particular his comments on sunk costs and path dependence.  Avent suggests that there might be shop owners who, presumably because they were scraping by on the knife-edge of audaciously entrepreneurial spirit, have had to compromise on poor-quality physical capital — windows, in this case.  Having established themselves somewhat, they have reached the point where they can afford to replace the window (and indeed their shitty original window is now costing them money in lost business), but succumb to the sunk-cost fallacy and can’t bring themselves to invest in a new window (“the old one’s still good!”).  In Avent’s hypothetical situation, it is to the shopkeeper’s advantage for some young thug to break his window with a baseball bat: this removes the owner’s rationalization for keeping the old inferior window and allows him to convince himself to buy a new one.

Well, sure.  I suppose this situation exists somewhere, although I suspect it’s more likely in human capital (and we’re not about to start killing off union executives to rid Ford of their path-dependence).  But I doubt it’s prevalent enough to offset the costs of the disaster (in this case, the 2008 midwest floods) itself: Cedar Rapids business owners would have to be pretty fucking dim to hold onto path dependencies that cost them more than their entire physical capital was worth.

Avent goes off into full Keynesian barking-moonbat mode in the second paragraph I quoted, but there’s insight there too — insight into the Keynesian mindset.  Avent imagines a world in which a hypothetical reader is deeply unhappy with s/h/its first-generation iPod.  This reader wants a new iPod, but feels chained to the clunky 5GB first-gen brick of a thing.  (Back in my day, sonny, we carried around CD players and we liked it!  Okay, I’m done now.)  What to do?  S/h/it could go out and buy an iPod Touch, but keeps falling back on the sunk-cost fallacy: I already own this thing I hate, so I can’t really replace it, can I?

Suddenly heavily-armed federal agents kick down Avent’s reader’s door and an Agent Smith-looking fellow smashes the ancient iPod with a tire iron, turns to give the reader a silent, level look through impenetrably-black Ray-Bans, and walks out the door without a word.  O frabjous day; calloo, callay! Free from the evil tyranny of s/h/its sunk-cost albatross, the reader can go out to Best Buy and pick up the new toy s/h/it desires for a mere $398.99CDN.  And it gets better — the secondary effects of s/h/its spending let Best Buy (and Apple, and the shipping companies that connect the two, and… and…) invest in their businesses and hire more people, who can themselves buy new shit when the government agents of appliance renewal come by and smash up their shit.

There’s a vitally important disconnect here between Avent’s first and second examples, and it cuts to the heart of Bastiat’s parable.  In his first example, the shopkeeper had $C (capital) and a revenue stream of $R/mo (with his original shitty window).  After the flood (or baseball bat-wielding thug, or whatever), the shopkeeper had $C-W (capital minus cost of new window) and a revenue stream of $R+k (with the new shiny window).  One presumes that, after a short while, the extra revenue would add up to more than $W — the new window “pays for itself”.

This is not not NOT Bastiat’s example.  In Bastiat’s broken-window parable, the new window was identical to the old.  Circumstances haven’t changed except that the shopkeeper has spent some money.  (This goes similarly for the traditional Keynesian stimulus example of hiring people to dig holes and fill them up again.)

Avent’s second example is similar to Bastiat’s parable: you go from having an old iPod and $400 to having a new iPod and $1.01CDN.  You’re also out sales tax, and the gas you burned driving to and from Best Buy, and the time you spent shopping, and &c. other secondary effects.  And if you had that $400 and were willing to spend it — you’re out what you were going to buy in the first place. (You’re also also out a front door, but maybe you hated that too.  And if the feds shot your dog — even better, you can buy a new puppy!  Puppies are so cuuute! Libertarians may hate kittens, but at least we won’t shoot your fucking dog.)

But what happens to those folks who aren’t trapped in sunk-cost local minima and go off and buy the new iPods they want?  Now they have an old iPod, a new iPod, and less money than they did before.  Isn’t that old iPod just taking up space?

Nope.  You can keep it as a backup, on the off-chance that you drop a dumbbell on your new iPod, or leave it on the bus, or it shits its little software guts out on its own.  (Two is one and one is none.)  Or if you’re less cautious than I am, you can sell it on Craigslist, and someone who can’t afford to buy a new iPod can buy yours.  In Ryan Avent’s happy fantasy world, poor people lose.  Nowhere is this more evident than in the results of the Cash For Clunkers programme, in which Keynesians destroyed hundreds of thousands of perfectly serviceable used cars to line union pockets.  Those cars could have been sold to families that couldn’t afford to buy new, but they weren’t.  Avent would have us believe that we’re all better off for that.

Or consider someone like, well, me.  Ryan Avent assumes that if Tasers On Horseback kick down my door and smash my “old television” (acquired used, in exchange for a guitar I never made time to learn to play), I’d skip out my busted door and hop on down to Best Buy to pick up a widescreen flat-panel TV.  Well… no. I can’t afford a new TV.  If someone fucks up my TV, I’ll do without a TV.  If someone fucks up my iPod, I’ll go into debt to buy a new one because I derive some of my income from iPhone development, and the iPod Touch is a cheaper version of the same platform.  While Keynesians might not worry about temporary debt in a macro sense (mind that in the Keynesian world, debt accrued during downturns is supposed to be offset by surplus during booms), I doubt Avent would really think it’s to my advantage to go into debt merely to tread water in the middle of a recession.

This, I suspect, is the situation in which most of Cedar Rapids’ business owners found themselves after the floods: they couldn’t really afford to rebuild, but they couldn’t at all afford not to.  So now they have, in Bastiatan terms, new windows and a whole shit-ton of debt.  That’s great for the fucking economy, isn’t it?

Let’s extend this thought experiment even further: what about a world in which someone up and shoots Ryan Avent right through his Keynesian fucking head?  (Don’t do that.  This is the “wildly exaggerating to prove a point” portion of the blog post, not the bit where I give you relationship advice.  Shooting Ryan Avent will not repeat not impress Jodie Foster or anyone else.)  Hey, maybe The Economist wants a new econoblogger, but they’re trapped in a sunk-cost dilemma and keeping Avent on seems easier than going through the process of hiring someone new and paying out Avent’s severance package.  Sound unlikely (and I hope it does)?  Well, then we’ve established that the far end of Avent’s second thought experiment doesn’t hold.  At what point does it work out?

When someone burns down your house?  Probably not.

When someone grinds up your car’s engine?  Nope.

When someone smashes your iPod to pieces?  Negative.

Even in Avent’s original thought experiment, where the shopkeeper has “a cruddy window” and the means (but not the will) to replace it, he has something else of which the window-smasher deprives him: he has a choice.  He can replace his window, or not, and stay in business either way.  If he’s a rational member of H. Sapiens economicus, he’ll choose to replace it; if he’s flawed and human like the rest of us, he might choose not to.

But we’re far better off when people have that choice.

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