Why on earth would the situation be bad for a family and good for many families all at one time? If we break a thousand windows all over the city, or 10,000 how does that change the situation?

If we break the windows of the rich and hire unemployed poor people to fix them, you think that is a good thing for society?

You are not considering the unseen; what the world would have been like had the war not destroyed so much wealth and killed so many people. We and all of the nations involved would be much richer today had the war been avoided.

If you take one family. They break their window and repair it themselves. It's obviously not good for them.

If instead you take one family, they break their window and hire someone else to repair it for them. Now it's still bad for that family, but it's good for the the guy who got hired, especially if there was no other job available to him.

When I say we're not discussing micro-economics here, but macro, I obviously don't mean that we just multiply the number of broken windows. I mean that we consider both sides of the problem, both the families with broken windows and the people who get hired to fix them.

For the economy as a whole, the net result of this breaking and repairing of windows will be 4-fold:

1. No change whatsoever in the overall wealth in terms of the amount of windows.
2. A loss of raw material resources, but that may be negligible if you replace broken windows with the also popular digging holes and filling them back.
3. A loss of manpower as the people busy repairing windows are not doing anything else. But once again that may be negligible if those people were unemployed anyway.
4. A redistribution of wealth from (rich) people who got their windows broken to (poor) people who got hired to fix them.

In the specific case where the primary problem in the economy is a lack of demand, this redistribution of wealth is beneficial to the economy as poor people spend a higher percentage of their income, so overall demand will rise as a result of the redistribution. And since the other 3 factors are either null or negligible, this 4th factor is the predominant effect, and the broken window fallacy isn't a fallacy after all.

There's a lot of caveats in the above, obviously, but all those caveats happen to be met in the current situation.


Also, breaking windows and repairing them (or waging wars) isn't exactly the most efficient way to achieve wealth redistribution. A purely fiscal redistribution would work equally well without the hurdle of having to deal with all those windows. Useful infrastructure building programs financed either through taxation or deficit spending would be even better. But when none of those options are politically feasible, hoping for a storm that breaks a bunch of windows in the richest neighborhoods or government buildings may be your best hope.

You're not considering the seen. Countries that win wars get wealthier and countries that lose wars get poorer. Egypt, Greece, Persia, Rome, Mongolia, Spain, England, United States are good examples.

"Wealth, War, and Wisdom" by Barton Biggs.

Wealthier compared to what?

If a two twin brothers set out in the world and one is forced to spend all of his money defending his home against intruders, and eventually has his home and car destroyed, spends 10k on bullets, and half his family dies, but he wins the war against the invaders... is he better off than his brother, who began farming and had no conflicts with invaders?

You really need to stop using your micro-economics wisdom when considering macro-economics issues.

Often times, he is, yes. As was the case with the United States against Germany, Japan and Italy.

Let's see if we can agree on some basic facts before we really start arguing. Do you agree that the United States was much wealthier 5 years after WWII than it was 5 years prior to WWII? Let's start with that question.

So if I own a farm that makes apples and wine, and you take some of my wine and give it to a poor man, who comes to my farm and trades the wine for some apples, which he consumes, how did that help the economy?

Would it not be better for me to hire the poor man to work on my farm, and pay him in wine, increasing the output of our two-man economy?

I don't see any reason that events than happen on a small scale don't apply on a larger scale. How many people need to be involved before the rules of small transactions no longer apply? How many people must be involved before smashing windows is somehow good for everyone?

Is a town of 10,000 big enough? I'm serious; I really don't see any reason that small economies cannot show us how large economies function, and redistribution of wealth and unemployed carpenters can be analyzed with just two people. There is no need to confuse the issue.

1. How could the brother who did not go to war with invaders possibly be worse off than his brother who lost half his family, and a lot of his assets, while is brother did not lose any assets, created more wealth by farming, and did not lose half his family?

2. How are you measuring the wealth of the United States?

3. If the citizens of the united states, in total, held more wealth after the war than before the war, how are you certain that they would not hold even more had the war not existed?

I am measuring wealth like this:

So, let's say you have two poor farmer brothers. Let's call one, Roberto. Let's call the other one Pablo. And let's say their last name is - I don't know - Escobar. You're telling me that if Roberto decides to stay in the family business, while his brother Pablo decides to arm himself and go into the cocaine business and wipe out all of his competition, then Pablo must certainly be the poorer of the two because he must certainly have lost significant assets and failed to create all that farming wealth and has lost friends and family to violence?

Do I understand you correctly? Is that what you are claiming?

If I killed 10% of the United States' workforce you'd get a huge rise in GDP per worker overnight.

Okay, then you name the right measure. I'm not going to play the game where I keep proposing descriptive statistics and you keep telling me their various flaws.

The only time the USA lost a significant part of it's population in a war was the civil war. World war 2 casualties were only 0.3% of the population. That's a lot of personal tragedies, but it's insignificant when computing GDP/capita.

Nominal GDP would be more accurate, but even that is a big fat giant guess at how wealthy we are. And we need to agree on a definition of "wealth" as well.

Here is nominal GDP. Looks like we became richer during the war and all of that wealth was blown up, and things returned to normal afterwards. In 1945 our GDP was $2 billion. In 1950 it was also $2 billion.

Before the war, in 1935 our nominal GDP was $900 million and in 1940 it was $1.2 billion. I would say that we were doing well before the war and that it got in the way, and that productivity rose during the war only because everyone thought they had to work or die (and millions did in fact die).

In the end, people working their ass off to make bombs created a temporary blip in production and wealth and after the war GDP carried on as if nothing had happened.

Additionally, GDP is calculated by including government spending. We don't know how much of that spending was borrowed money and how much was a real increase in productivity. I suspect that if you look at a graph of US government debt during WW2 you will see a huge increase that corresponds directly with the increase in GDP.



http://www.measuringworth.com/usgdp/

Good point.

We should also remember that GDP may have gone up because women joined the workforce.

First, you confuse the starting point. In your two men economy, the poor man is unable to buy wine or apple from the farmer, so he's both unemployed and starving. Meanwhile, the farmer sees no market for apples and wine beyond those he can consume himself, so he's not producing more than that amount even though his vines and apple trees could, but there's no point in doing the extra work if he can't sell his products anyway.

Obviously the optimal solution is to get the poor man to work in the farm and use his wage to pay for the farming products. The problem is how do we get there?

One obvious solution is for both men to discuss the issue and realize they can both gain in this arrangement. That works really well when your whole economy is made of two people since it's immediately obvious for the farmer that the wages he'll pay will come back to him as the poor man spends it back to buy apples and wines.

The problem is that once the economy becomes bigger, this kind of direct negotiation becomes impossible. The sum of all wages will still be equal to the total amount that is spent to buy products, but that equality is lost when an individual farmer has to decide whether he should hire an individual unemployed worker, or when a worker has to decide whether he should buy a product from the farmer.

Since direct negotiation doesn't work anymore, you need another mechanism to signal to the economic agents that they are stuck in a sub-optimal allocation of resources. Taking some wine away from the farmers to give it to the workers is one way to jump start a virtuous circle where the workers start buying stuff from the farmers, who realise there's a market for their products after all, so they hire some workers, who now have extra income to spend, ....

The alternative is to wait until something happens to kick you out of the suboptimal state of the economy. You'd expect prices adjustments to do the trick, but since both the price of apples and wages will decrease at roughly the same rate, that won't do. What actually drives you out of your recession if you do nothing about it is this: at some point, a farmer becomes too old to harvest his apples himself, so he has to hire someone to do it for him. In the real economy, you wait until business needs to replace its equipment because they broke or became obsolete. That's a painfully slow and inefficient way to get out of recessions.

There are two things:

It matters a lot if an economy if opened or closed. When it's closed, like the whole world economy obviously is, and as a decent approximation for national economies, the fact that the total revenues = total spending + total saving becomes crucially important. It's entirely irrelevant for a single individual or single business.

Size also matters. Small groups don't actually need money to function, they can just rely on barter and direct negotiations to get to the optimum allocation of resources. That's entirely lost once the economy gets larger.

Can he not trade the apples and wine that he manufactures for the labor of the unemployed and starving man? Can he not buy the man's labor? Can the man not sell his time and effort?

The farmer buys the man's labor. The man sells his time. It's a trade. All actions in a free market are trades. The man is trading his time for apples. And the farmer is making the trade because he thinks he can manufacture and store more wine by trading some apples for the man's labor. Both men benefit, and there is no need for anyone to expect that the laborer will return to trade his apples for wine. That is a separate issue unrelated to the trade of apples for labor.

You lost me here. How does direct negotiation become impossible between two men when an economy is large?

The sum of wages is equal to the amount spent to buy products? Huh? If the laborer is paid in wine and keeps half of the wine and trades the rest for food, all of his wages (paid in wine) have not been spent to buy products.

The guy with no job who is starving has no trouble deciding that it is in his best interest to sell his labor for wine and apples. The farmer, similarly, has no trouble deciding to hire the man (or not) based on his expected productivity. How are these two men affected by the greater economy if they are trading wine for labor?

You're going to have to show your work here.

In our two-man economy where wine is used as money, the farmer paid 10 bottles of wine for the man's labor, and the laborer traded (paid) half of them back to the farmer a few days later for apples. In that case the farmer's "revenue" would be 5 bottles of wine and the man's spending would be 5; savings also 5.

Revenue across the entire economy would be no different and would not always equal spending+savings.

Considering money to be the only wealth or measure of benefit to individuals in an economy is a serious error.

The farmer does not need to hire a worker if he thinks there is no market for his products

The worker can not buy the products if he has no wage.

The only way the transaction will take place is when the farmer realises that when he hires the worker, the worker will have revenue that he can spend on his products.

In a two persons economy, this is all irrelevant since they can both figure this out, and they don't even need to use money for the trade as bartering work against food will be enough. In a much larger economy this does not work. You need keyneisian stimulus to start the virtuous circle.

You may have some valid points but there is a hole I recognize.

This is untrue, the farmer can be his own "market." He can hire the worker to help him produce more for himself.