Libyan Riots
Romney’s Entitlements

iPhones and Keynesianism

Jonathan B. Wight

Frederick Bastiat's wonderful essay, "That Which is Seen, and That Which is Not Seen" (1850), relates the story of a shopkeeper's son who accidentally breaks a window. While the shopkeeper laments his loss, the surrounding public consoles him, saying, "What would become of the glacier if windows were never broken?" Bastiat replies that although the glacier is richer by the six-franc cost of the window, the shopkeeper is poorer by that exact amount. The shopkeeper replaces the window but now can't afford new shoes, which he would have preferred to new glass if the old hadn't broken.

There's no free lunch in this moral tale. I love this story and always teach it in Principles of Micro.

But in Macro the moral might be different. In a Keynesian world of high unemployment, getting people to buy new windows can produce a positive multiplier effect on spending that raises overall incomes—even to the shopkeeper.

Here's a perfect example of the broken window set in modern times: JPMorgan predicts that the new iPhone5 could raise GDP growth by up to one-half percent by the end of 2012. This time it is not a broken window, it is a broken cell-phone; old phones are "broken" because they have become obsolete.

Krugman notes that the economic model used was necessarily Keynesian:

We don't have high unemployment because Americans don't want to work, and we don't have high unemployment because workers lack the right skills. Instead, willing and able workers can't find jobs because employers can't sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work.

So where can more spending come from? Businesses are sitting on lots of cash but, for the most part, have seen little reason to do a lot of investment. Why expand your capacity when you don't have enough sales to make full use of the capacity you already have? And because businesses aren't spending a lot, incomes are low, so consumer demand is low, which perpetuates those low sales.

Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was "use, decay, and obsolescence": even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that's what Apple is doing. It's bringing on the obsolescence. Good.

But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don't say that the government can't add to total spending, or that government spending can't create jobs. If you believe that the iPhone 5 can give the economy a lift, you've already conceded both that the total amount of spending in the economy isn't a fixed number and that more spending is what we need. And there's no reason this spending has to be private.

Interestingly, Mitt Romney says he would boost military spending to create jobs. Mr. Romney, are you a closet Keynesian?


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