The broken window fallacy in action

[Puppycow]

I was reminded of Bastiat's famous essay (http://en.wikisource.org/wiki/That_Which_Is_Seen,_and_That_Which_Is_Not_Seen) upon reading the following article:

New Zealand's Stocks Rise After Earthquake; Builders Rally, Insurers Fall (http://www.bloomberg.com/news/2010-09-05/new-zealand-stocks-open-higher-insurer-declines-in-wake-of-earthquake.html)

New Zealand’s NZX 50 Index of stocks climbed in Wellington, led by building-related companies, after an earthquake hit Christchurch, New Zealand’s second-biggest city at the weekend. Tower Ltd., an insurer and fund manager, plunged.
. . .
New Zealand faces a NZ$2 billion ($1.4 billion) damage bill, according to government estimates.

I suppose that an earthquake could be good for the companies traded on the stock market even if it is harmful overall, because the stock market represents expected future earnings of companies rather than current wealth, so I guess this makes sense. But no one should be fooled into thinking that the earthquake was actually a good thing on balance.

[Zep]

Same reasoning that war is brilliant for the economy, regardless of the fact it is likely to be personally disasterous and tragic?

[Puppycow]

Same reasoning that war is brilliant for the economy, regardless of the fact it is likely to be personally disasterous and tragic?

Similar reasoning I guess. The GDP doesn't distinguish between a $1 munition and a $1 vegetable, so higher GDP doesn't always mean a higher standard of living. If a war puts people to work, it may indeed "help the economy" and lower the unemployment rate although its destructive effects are not reflected in most economic statistics.

[ThunderChunky]

Some destruction can be good (net positive) because it allows for new things to be built. This would depend on what is being destroyed and under what circumstance.

[Zep]

"Nervi belli pecunia infinita" - Unlimited money is the muscle of war.

[rjh01]

The figures mentioned in this thread do not measure the capital worth of a nation. That means how much the roads, buildings and other things are worth.

[Madalch]

Wouldn't a better example be the fact that 9/11 didn't really help the economy?

[HansMustermann]

I was reminded of Bastiat's famous essay (http://en.wikisource.org/wiki/That_Which_Is_Seen,_and_That_Which_Is_Not_Seen) upon reading the following article:

New Zealand's Stocks Rise After Earthquake; Builders Rally, Insurers Fall (http://www.bloomberg.com/news/2010-09-05/new-zealand-stocks-open-higher-insurer-declines-in-wake-of-earthquake.html)



I suppose that an earthquake could be good for the companies traded on the stock market even if it is harmful overall, because the stock market represents expected future earnings of companies rather than current wealth, so I guess this makes sense. But no one should be fooled into thinking that the earthquake was actually a good thing on balance.

Except I don't really see the linked article saying that it's a win for the wealth of New Zealand. The only positive thing actually stated in the article is, "All that will come out of this is better, stronger buildings, which is probably a good thing", and it's immediately followed in the same paragraph by, "I can’t see any other lasting impact on New Zealand. It’s obviously negative for insurers."

So basically it's kinda like the broken window fallacy, except it actually isn't, and they're actually explicitly not making the claim that defines the fallacy.

I guess it's similar in the way that golf is similar to sex, in that both involve a club, balls and a hole, except in sex you put the club in and try to keep the balls out ;)

[joobz]

Some destruction can be good (net positive) because it allows for new things to be built. This would depend on what is being destroyed and under what circumstance.

shivaenomics?

[drkitten]

shivaenomics?

Google "creative destruction" sometime.

[kevinquinnyo]

Google "creative destruction" sometime.

But don't get carried away with it either.

Creative destruction is only beneficial if liabilities, not assets, are destroyed. In fact, it's not very creative at all to destroy an asset, just downright stupid.

And it goes without saying that an earthquake doesn't discriminate assets from liabilities when it knocks over buildings and bridges.

[cwalner]

shivaenomics?

very popular during the boom in Las Vegas during the 90's and 00's. The frequency of old casinos being demolished was considered a measure of the health of the economy there

[drkitten]

Creative destruction is only beneficial if liabilities, not assets, are destroyed. In fact, it's not very creative at all to destroy an asset, just downright stupid.

As usual, kevin, you're wrong.

If I destroy an asset and replace it with a more valuable asset, that's beneficial. That's why I might buy and knock down a row of dilapidated row houses and build a shiny new hotel or office complex. While I could rent out the row houses at slum rates -- they are technically not only assets (meaning I could sell them), they're even cash cows -- I can make more money with the new building. Enough to cover not only the loss of income from the rentals, but even the costs of demolition.

Indeed, every time I take money out of my savings account to buy stocks with it, I'm engaged in destruction of an asset -- my savings account -- in order to create a new one. While I admit that it would be really nice if someone would give me $100,000 in Coca-Cola stock for free, those of us in the real world recognize that you sometimes have to spend money in order to make money.

[kevinquinnyo]

As usual, kevin, you're wrong.

If I destroy an asset and replace it with a more valuable asset, that's beneficial. That's why I might buy and knock down a row of dilapidated row houses and build a shiny new hotel or office complex. While I could rent out the row houses at slum rates -- they are technically not only assets (meaning I could sell them), they're even cash cows -- I can make more money with the new building. Enough to cover not only the loss of income from the rentals, but even the costs of demolition.

Indeed, every time I take money out of my savings account to buy stocks with it, I'm engaged in destruction of an asset -- my savings account -- in order to create a new one. While I admit that it would be really nice if someone would give me $100,000 in Coca-Cola stock for free, those of us in the real world recognize that you sometimes have to spend money in order to make money.


Eh, ok...

But the creative destruction of that first building would still involve selling off the copper pipes and wires, anything that is not a liability that's in it.

The assets would be removed and sold, the things that are cheaper to just throw out, would be liabilities.

And obviously that's not destruction of wealth, but "creative destruction."

An earthquake randomly destroying a shopping center and homes, is just destruction of wealth.

[drkitten]

Eh, ok...

But the creative destruction of that first building would still involve selling off the copper pipes and wires, anything that is not a liability that's in it.

The assets would be removed and sold, the things that are cheaper to just throw out, would be liabilities.

No. Nothing about "creative destruction" says that it has to be optimal. Re-read the Wikipedia article cited. The theory just points out that sometimes you need to clear out the old to make room for the new -- whether we're talking about "room" in a physical sense (as with the rowhouses) or a more abstract sense (as with "video killed the radio star").


An earthquake randomly destroying a shopping center and homes, is just destruction of wealth.

... which still clears out the shopping center and homes and makes it easier to build something new and better there.

One of the problems that developers often face, for example, is the inability to acquire the needed resources because the people who hold those resources hold them irrationally. A classic example is the little old lady who refuses to sell her house at any normal price to make room for the railroad terminal. The earthquake that knocks her house down also more or less forces her hand and allows a public good (access to transportation) to be provided for the improvement of the entire local economy.

[kevinquinnyo]

One of the problems that developers often face, for example, is the inability to acquire the needed resources because the people who hold those resources hold them irrationally. A classic example is the little old lady who refuses to sell her house at any normal price to make room for the railroad terminal. The earthquake that knocks her house down also more or less forces her hand and allows a public good (access to transportation) to be provided for the improvement of the entire local economy.

WHAT? "at any normal price?" and what would that be exactly? How is the little old lady being "irrational?"

You can argue irrationality in economics, but this is a bad example. If she's old and knows it, and the only thing she has left, is the house that she knows, it's not irrational to value it at close to infinity.

And who are you to make that call? It's her house.

[mhaze]

WHAT? "at any normal price?" and what would that be exactly? How is the little old lady being "irrational?"

You can argue irrationality in economics, but this is a bad example. If she's old and knows it, and the only thing she has left, is the house that she knows, it's not irrational to value it at close to infinity.

And who are you to make that call? It's her house.

This jus makes me laugh. The "rational value" of the lady's house is obvious 10-1000x the price of a normal house. An upper cap on the value can be established based on the economic worth and profit of the replacement structures. If the value the lady puts on the house consumes all or a substantial part of the replacement structures' profit stream, then no deal will occur and thus her valuation was too high.

As she scales her price down at some point it becomes economically reasonable because it does not consume a substantial part of the forecast future profit stream.

[drkitten]

WHAT? "at any normal price?" and what would that be exactly? How is the little old lady being "irrational?"

The house has a market value. Any appraiser will give her that market value upon request (including the value premium from having the railroad terminal by the balls).

As usual, you're wrong.

[Mark6]

Wouldn't a better example be the fact that 9/11 didn't really help the economy?
Or what WWII did to German economy? Or British economy for that matter?

[A Christian Sceptic]

One of the problems that developers often face, for example, is the inability to acquire the needed resources because the people who hold those resources hold them irrationally. A classic example is the little old lady who refuses to sell her house at any normal price to make room for the railroad terminal. The earthquake that knocks her house down also more or less forces her hand and allows a public good (access to transportation) to be provided for the improvement of the entire local economy.

That easily fixed ... hire someone to burn down the place where you want to build.

[A Christian Sceptic]

the problems that developers often face, for example, is the inability to acquire the needed resources because the people who hold those resources hold them irrationally. A classic example is the little old lady who refuses to sell her house at any normal price to make room for the railroad terminal. The earthquake that knocks her house down also more or less forces her hand and allows a public good (access to transportation) to be provided for the improvement of the entire local economy.

Heck - don't even hire someone. Just burn down that stubborn irrational old ladies house down yourself.

[drkitten]

Heck - don't even hire someone. Just burn down that stubborn irrational old ladies house down yourself.

Society creates an artificial economic penalty specifically to discourage that sort of action. You can think of fines and jail sentences as an anti-arson tax, if you like.

... or you could risk it yourself, if you like. Oddly enough, the public and the economy would still benefit if you burned down her house and the railroad terminal went up, even if you spend the next decade or so in the state pen.

[kevinquinnyo]

The house has a market value. Any appraiser will give her that market value upon request (including the value premium from having the railroad terminal by the balls).

As usual, you're wrong.

Yes, the house has a market value. And the old lady is a part of the market.

OOPS! I guess I'm not wrong.

As usual, you're snarky and condescending

[drkitten]

Yes, the house has a market value. And the old lady is a part of the market.

Yes, she's a part of the market. That's different from being able to set the market value.


OOPS! I guess I'm not wrong.

And as usual, even your guess that you're not wrong is wrong.


As usual, you're snarky and condescending

I think this is the first correct statement you have written in your entire posting history. Well done. You have correctly identified me as snarky and condescending. On the other hand, I'm also correct.

[HansMustermann]

Or what WWII did to German economy? Or British economy for that matter?

To be fair, though, look at what WW1 did to the economies of everyone except the USA who was getting interest on the loans the main combatants had taken from US banks.

What happened and was positive after WW2 was really just the Marshall Plan. If you look at the economies of the countries which didn't get it, well, it turns out that all the opportunities resulting from the destruction didn't actually help all that much.

[themusicteacher]

Similar reasoning I guess. The GDP doesn't distinguish between a $1 munition and a $1 vegetable, so higher GDP doesn't always mean a higher standard of living. If a war puts people to work, it may indeed "help the economy" and lower the unemployment rate although its destructive effects are not reflected in most economic statistics.

It is once the war is over. That's why you have people out there advocating for ever larger expenditures on the military and wanting to go to war: it helps prop up the economy. If we slashed the military budget by a third or half (you know, where it should be), we'd be in big trouble economically. It's one of the biggest reasons why we have such a large national debt and don't have a balanced budget. Do you hear any politicians talking seriously about reducing military spending?

[HansMustermann]

Also to be entirely fair, the doctrine of creative destruction was only rationalized for innovation, not for cheering for a broken window or for an earthquake leaving an old lady in the street. (And really, the proponents of the Austrian School of wild-west unregulated capitalism have enough trouble making it palatable as it is, without also sounding like complete psychopaths cheering that an old lady lost her home.)

At any rate the "creative" in "creative destruction" is really as in "destruction by creatively coming up with a better value", not as in "random destruction creates the opportunity to be creative."

What the Austrian School was trying to rationalize was why it's good when, say, a new mechanized weaving mill puts the less efficient one next door out of business. And it's good because the destruction happened via effectively replacing it with something more efficient.

What makes _that_ scenario easy to rationalize isn't just that it destructively frees resources, but that essentially you're getting the same _and_ the extra resources. In the weaving mill example above, essentially you're still getting the cloth (and probably even cheaper) _and_ have a bunch of extra resources to be used for something else. Or if you look at WalMart replacing mom-and-pop shops, you're still getting your groceries (and presumably even cheaper) _and_ a bunch of people available for other jobs. Or if you look at a DVD factory putting a VHS casette factory out of business, you're still getting your movies (and even in higher quality) _and_ the resources freed by the old factory.

Just an earthquake levelling that factory or an old lady's home, well, that's at the very least not the scenario they were addressing.

And it's a lot harder to rationalize, as now essentially you have the resources and a loss. Does it compensate? Is it a net win? Is it a net loss? It's a lot less clear a case to make that it's a good total result.

But at any rate, that's not the scenario that "creative destruction" is about. Handwaving "creative destruction" to cheer at an earthquake is as gross mis-application of the term as you can possibly get.

[HansMustermann]

Yes, she's a part of the market. That's different from being able to set the market value.

Actually, while that is technically true in the sense that she can't force anyone to actually pay a certain price, the reverse is _also_ true: it's bizarre to hear that basically she's a villain if she doesn't sell at the price someone else set. I thought we left such notions behind when we got out of the middle ages.

[kevinquinnyo]

Yes, she's a part of the market. That's different from being able to set the market value.


Why of course. If you'll notice though, I never said that. I said she can "value it" at any price she wants. Not "set the value to."

But feel free to correct me on any number of other things I've never said. You can start with this one:

I have never stated that Wesley Snipes was the actor that played the character "A.C. Slater," in the popular teen sitcom, Saved By the Bell during the 1994 season.

[lomiller]

Actually, while that is technically true in the sense that she can't force anyone to actually pay a certain price, the reverse is _also_ true: it's bizarre to hear that basically she's a villain if she doesn't sell at the price someone else set. I thought we left such notions behind when we got out of the middle ages.

Since she is the only seller of the only suitable property she is effectively a monopoly and by asking a much higher price then a similar property a few streets over she’s effectively exploiting monopoly pricing. I don’t know if that makes her a villain, but it’s certainly something government can be reasonably expected to put a stop to. Free markets do not work if you allow monopolies to set pricing.

[A Christian Sceptic]

Since she is the only seller of the only suitable property she is effectively a monopoly and by asking a much higher price then a similar property a few streets over she’s effectively exploiting monopoly pricing. I don’t know if that makes her a villain, but it’s certainly something government can be reasonably expected to put a stop to. Free markets do not work if you allow monopolies to set pricing.

That's just a silly argument.

[lomiller]

That's just a silly argument.

Which part do you find "silly" that she can exert monopoly pricing in this scenario or that monopolies must be constrained for the proper operation of a free market?

[A Christian Sceptic]

Which part do you find "silly" that she can exert monopoly pricing in this scenario or that monopolies must be constrained for the proper operation of a free market?

Negative. Try again.

[lomiller]

Negative. Try again.

I thought so... :rolleyes:

[HansMustermann]

Since she is the only seller of the only suitable property she is effectively a monopoly and by asking a much higher price then a similar property a few streets over she’s effectively exploiting monopoly pricing. I don’t know if that makes her a villain, but it’s certainly something government can be reasonably expected to put a stop to. Free markets do not work if you allow monopolies to set pricing.

Except you don't really know that. Maybe for her the house actually simply is more valuable, even for sentimental reasons, than the offer that was made to her. In fact in kitten's scenario, that seems to be actually the case and what is called "irrational".

You can't really discount that kind of value, since really it's an integral part of why half the things are more valuable than the other part. If you apply Vulcan logic to it, there is no real reason to value a Rolex more than a cheap Cassio electronic watch, or a fur coat more than just wearing some foam padding, or a bottle of Dom Perignon more than a sixpack of beer. But in the real world such things are an integral part.

And from the start the apology of free market was based on the idea that it helps match resources to what people _want_. No, really, it's even in Adam Smith.

Proclaiming someone irrational (or an evil monopolist) because she values something different than what someone else wants to prescribe, is turning the whole thing on its head.

And actually you seem to approach it more rationally than kitten anyway. Because you at least notice that she probably would sell it for a higher price, as opposed to being some kind of irrational act. But if the railway company isn't willing to pay that price, then for them it's not worth that much. Whatever public benefit there may be there, the public isn't actually paying enough to make it worth more for the railway company.

(And for why one should look at how much the public pays instead of misguided notions of altruism for the public good, I'll refer you to Adam Smith again.)

What remains is that we have a piece of property which is worth X dollars for person A, and Y dollars for person B. Where X > Y. Yet apparently person A should sell it to person B. That goes against every economic theory from the last couple of centuries straight.

Heck, probably the best way to illustrate what's wrong with that is this: http://www.cantrip.org/stupidity.html

It's not as much an economic theory per se, but it is written by a professor of economics and from an economics angle. (To the extent that he even calls any kind of altruism "being a victim.")

The kind of transaction where the old lady has to take a loss for the railway company to make a gain is what he calls a bandit transaction. That's not the kind which is actually beneficial for society.

But there's a more perverse reason I picked that text. What if the railway company mis-judged and actually makes a loss with that train station? It can happen. Heck, it does happen lots. Then we have a transaction where A took a loss so B can take a loss too. That's the kind of transaction he called _stupid_, and frankly for good reason.

Without the kind of free market checks that go into actual creative destruction, how do you know if forcing the old lady to sell isn't really going to end up that kind of transaction?

And finally the notion that someone's house can be a monopoly there is silly too. A train station has to have enough people in a certain radius around it. That old lady's house isn't going to be the only spot there. There _have_ to be more houses there, or a railway terminal makes no sense to build in the first place. They can buy the house across the road instead, so really it's more akin to fungible goods than a monopoly.

The only conceivable scenario where that old lady's property really is the only choice, would be if we're talking a farm house owning all the land in a mile radius. In which case, really, why is anyone building a railway terminal there anyway? I mean, we're not even talking building a station for one house, we're talking demolishing that house and building a railway station for nobody at all.