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… then at least break all of them equally. After having taught basic economic principles for 5 years now, and given the title of the post, I am finally starting to understand the difficulty students (and others) have with the concept of opportunity cost in its various manifestations.

The most recent example surrounds the heretical idea we teach in economics that tax financed (in one form or another) public works projects aimed at “creating jobs” do not necessarily create jobs. I always understood student objections to the lesson of economics here to be that if people just sit on their money, that money is doing no good, so that if we have a great big public works project, it is being spent, which in turn gets spent and so on. But when I explain how this is not exactly job creating when opportunity costs are properly understood (and savings and monetary issues), the students seem to me, to actually understand that.

A different bugaboo seems to be inside some folks’ head, and it is an interesting one. The argument goes something like this. In a world, even one in which equilibrium conditions prevail (I myself am not an equilibrium theorist, but that is not important here), transferring funds from some to others can be job creating, or a net positive. Why? Consider a world of 200 consumers, each holding a single dollar. Even if those consumers are each inclined to spend that dollar, at best each can buy a pack of gum, a roll of toilet paper, and other small trifles. However, if that dollar is taken from each of those individuals and given to a single consumer, now that consumer has $200 of purchasing power! And with $200 a single consumer can buy a small TV, an iPod, a bunch of new clothes – in other words, they can buy some “real job creating stuff!”

I never imagined that to be an idea that people held – which is a wonderful thing about teaching engaged students. The argument against this is the same as the argument against the idea of make-work projects anyway. I will not outline it here aside from reminding readers of a few things. First, jobs are a cost, not a benefit, but if you must think of jobs, then at least consider the following. If the individuals with the dollars choose not to spend them at all, the purchasing power of everyone else goes up, which is employment stimulating. Second, if all the individuals with the dollars save them, those savings are quickly transformed in the financial sector into larger chunks of purchasing power as they are loaned out to eager borrowers (i.e. consumers). In either of these two cases, we get the same spending effect as the “transfer” without all of the inefficiencies (and violations of rights and property) from taxing to do it.

There’s much more to say, but I am particularly interested in a different insight. I regularly urge folks who hold particular views of the world to ask themselves what such a view would be like if applied consistently and more broadly. What would the world look like if this particular view was applied consistently? Let’s summarize the view first – that a little bit of purchasing power in the hands of the many does not do nearly as much “good” as a lot of purchasing power in the hands of the few. Can you hold this view and at the same time believe that we ought to have a more egalitarian distribution of income? It would appear not, at least to me. In fact, it would seem to me that a reasonable policy preference for holders of the above view would be to exacerbate inequalities in income. And the view properly held seems to be pretty agnostic about whether the “poor” or the “rich” are the ones holding the concentration of purchasing power. Thus taking 50% of the income away from a professional athlete in the name of social justice and handing it out at government “charity” to lots of poor people would seem to be a real crusher for jobs and economic welfare aside from the actual economic arguments against that. So, would people who adhere to this broken window view of the world go so far as to apply a Nietzschean ethic to the world and transfer resources from those many “poor” with only a few dollars and to a few wealthier people who have more dollars to spend on bigger ticket items?

If you like to break windows, my recommendation is to break all of them. At least it will lower the transactions costs for the repairmen in figuring out just which windows were cracked and how much new glass to produce.

3 Responses to “If You Like to Break Windows …”

  1. Speedmaster says:

    A couple quick thoughts on this:

    1. I find that many of the misunderstandings come from the mistake of equating money with wealth.

    2. I also find that if we go back to the example of 1,2, and 3+ people on an island the ideas of opportunity cost are much more clear.

  2. Harry says:

    Good, Speedmaster and Wintercow.

    I hate to speak for Nietzche, but at the end he said you could do whatever you wanted, as in, if it feels good and you have the power, do it. Although his philosophical grunts were appealing to Hitler, there is also support there for any totalitarian. Nietzche was a champion of the powerful, and a believer in a valueless world, where he who grunts harder wins the argument, and more importantly, the right to be the one who decides who will bear arms. He is no friend of free classical liberals, as far as I can tell.
    Every progressive worries about what the other people are doing with their money, whether they are spending it or investing it in the right places, morally, of course. Their fantasy is that the rich spend their money on Maltese falcons, and that somehow Sidney Greenstreet takes the falcon and buries it under his sheets in the Hotel Belvedere.

    But, hey, the more broken windows the better. It’s all about jobs, right?

  3. Rochester Student says:

    Is there any chance for you to offer a behavioral economics class?

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