GDP and the broken window fallacy

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.

One Response to “GDP and the broken window fallacy”

  1. Erik L says:

    (2) is at least incomplete – going to work will probably result in unhappiness from being able to spend less time with the children, but can also result in increased happiness from having a job

    Additionally, the nanny has higher disposable income and can spend it elsewhere, increasing GDP further