Today I suddenly realized that, unlike on my old blog, I had never included Andrew Sullivan’s Daily Dish among my links in the rail at right.
I corrected that, and immediately ran across this item by Tim Harford, which Mr. Sullivan had thoughtfully brought to his readers’ attention:
Dear Economist,
Whenever I go to the gentlemen’s toilet in a pub, I’m unsure how to behave. The question is: Should I urinate on the urinal cakes or not? At first, I think that if I urinate on them I’ll help to finish them earlier, thus making the publican purchase more of them, and helping the economy.
But then I think, while I’m urinating, that if the publican has to buy more tablets, eventually he will probably have to raise the price of the beer, to my huge disappointment. So the question is, where should I urinate in the gentlemen’s toilets in the pub?…
It’s having the occasion to think deeply about such things as this that causes men’s minds to be so much more nimble and profound than women’s, right guys?
And the answer? Well, read the post. But he basically cites Bastiat’s “broken window fallacy” on the way to saying that not all economic activity grows the economy.
Related Posts
I don’t believe the original example is accurate. The broken window will stimulate the economy under certain circumstances. It is the same logic as replacing a perfectly good bridge. Of course it would do not good to replace a perfectly good window or bridge if there are other pressing needs. But if the broken window is unexpected and replacement will require a loan or draw-down of savings that would not have otherwise occurred then the economy is, in fact, stimulated since there is more net spending than would otherwise have occurred.
It’s unlikely that businesses will spend money on things that are not needed, such as an unbroken window, but government can do that. And when government borrows to spend it does stimulate the economy.
The downside occurs when the economy is running at capacity with near full employment. In that case the extra spending only fuel inflation. The situation as it exists in the 2011 U.S. economy is such that borrowing and spending will help the economy. Our political leadership in Washington has it completely wrong right now.