Archive for April, 2010

GDP and the broken window fallacy

Friday, April 2nd, 2010

In How Not to Argue for IP, Kevin Carson invokes the broken window fallacy, the idea that breaking a window will increase the GDP because of the money spent on repairing the window and the string of payments that results, but not actually improve the standard of life for people.

In the article, Kevin claims that

Anything anyone can do to make it more costly to produce anything, to increase the amount of money you have to pay to receive a given good or service, or in general to increase the cost of living our daily lives, will show up as an increase in the GDP.

An increase in voluntary non-coerced transactions leads to an increase in both the GDP and the standard of living; the situation depicted above is different because it applies to an increase in coerced spending.

1) This raises a more general question around whether government spending to increase GDP can be considered an increase in coercion. After all, any increase in government spending has to be made up by an increase in taxation, which is redistribution of income under coercion.

2) Consider the case of the mother who starts working and hires a nanny. The amount she makes from work must exceed the amount paid to the nanny, enough to compensate her for unhappiness (let’s say $X) from now being able to spend less time with her children. In this case, the GDP goes up by the amount of the two wages (nanny + working mother) combined, but the actual increase in net benefit is actually the difference in the wages minus some amount X corresponding to the unhappiness.

Edit: case (2) is wrong. I will figure out a way to fix it later.

NPV logic for social entrepreneurship

Friday, April 2nd, 2010

Suppose you have a $100 investment that made $10 a year (i.e., 10% APY). If it suddenly started making $5 a year instead, you can think of it in two ways

  • As an immediate loss of $50, followed by the same APY
  • As a fall in the APY from 10% to 5%

Given the choice between donating $50 and investing to get half the prevailing rate of return on $100 instead, I feel like many people are more willing to do the latter — hence social entrepreneurship.

Although the two options may look identical NPV-wise, in actuality investing $100 and getting half the prevailing rate of return is more flexible, as it allows someone to recall the money in the future if they feel like they need it. This flexibility implies that the social entrepreneurship initiative has to have liquidity management capabilities…