# Reverse of broken window fallacy for file sharing/piracy

Adult Swim roughly brings forward the following argument in the video 'film piracy feeds babies':

While jobs may be lost in the movie or music industry, they might be created in another. Money that a pirate doesn’t spend on movies and songs is almost certain to be spent elsewhere. Let’s say it gets spent on skateboards — the same dollar lost by Sony Pictures may be gained by Alien Workshop, a company that makes skateboards. - Source

Is this the opposite of the broken window fallacy?

• If so, is it correct or still a fallacy (much like survivorship bias and its reverse)?
• If not...is it right or wrong? (I guess its relationship to the broken window fallacy doesn't affect my second question)

I discovered such from answer in related question.

• Hi could you please summarise the arguement in your question, rather than getting us to follow the link to read it? Still include the link, but the question here should be a complete question in itself. – dwjohnston Jul 16 '15 at 22:31
• @dwjohnston Similar to edit below – BCLC Jul 17 '15 at 10:32
• Please try to keep the question in a nicely formatted shape. This is not a message board where it is optimal to add Edit tags and offload information to the end. This way, it is cleaner for users who haven't seen the question yet. Users who have seen the question before and look for additional information, can easily use the edit history to see what you have added. – FooBar Jul 18 '15 at 14:26
• I've reformated the question, I hope you agree it's more clear now. – FooBar Jul 18 '15 at 14:26

If I understand correctly, the claim is is:

Proposition: Take a budget as given, and consider a world with two goods, $A$ and $B$. In the first scenario, the price of $A$ is positive, and the household spends $E_A$ on $A$, and nothing on $B$. In a second scenario, the price of $A$ is zero.The household will now spend the same amount $E_A$ on $B$.

How did this abstraction work? A represents the copyrighted work, B contains all other consumption goods. I don't think there is strong empirical evidence for or against the claim. So then, what does the theory say?

## Neoclassical Theory

The rational agent under a general class of preferences does first decide his optimal consumption level given (permanent) income, and then decides how to allocate that consumption expenditure between different goods. For him, the answer would be Yes.

## Caveats

However, what happens if we depart from the rationality assumption? Many weird things can happen. For example, instead of optimally choosing how much to save, the consumer could first decide, what he wants to consume, and then save the remainder. In this case, since he already has A "for free" he might be contempt with that, think that "having some B" is sufficient, and then save the remainder. In that case, it may very well be that the answer is No (or at least, not necessarily). Not all the money not spend on copyrighted material will be used for consumption on other goods.

There are many reasons to believe why the rationality assumption is not always giving us the full story, especially when you look at life-cycle consumption, saving rates and divergence of savings at retirement ages.

• (+1) for pointing out the underlying rationality assumption, but as is always the case with departures from rationality, "many weird things can happen" as you write. But then any behavior can be observed.-and ex post "rationalized" as a specific departure from rationality... which is not very useful, or interesting. Would a non-rational behavior be the dominant one, so that it would influence the macro-outcome? – Alecos Papadopoulos Jul 18 '15 at 20:33
• @AlecosPapadopoulos It depends in what you're looking at. With retirement savings, surely does. In this case? I guess we dont have good empirical evidence. Maybe. – FooBar Jul 18 '15 at 20:36
• Also, I dont have the references right now, but iirc, many of the Euler Equation tests failed for when the US government handed out tax rebates. – FooBar Jul 19 '15 at 7:49

The argument relayed in the question is trivially true and also, irrelevant as regards the debate over piracy.

At the micro-economic level, piracy has to do with violation of property rights, and so with distribution of output, not with its level (to which the argument in the question alludes). It has to do with the principle

"This is mine, and if you don't pay for it, you have no right to consume it."

While in... principle, this is a principle that is accepted by most humans on earth, it has been observed that when the entity saying this is perceived as rich/wealthy etc, people start to question (even if indirectly) whether the principle should be upheld to the maximum: art piracy is "felt" by many as a rightful redistribution (and this is why, strategically, the Entertainment Industry tries to shift the focus of the debate to the negative effects as regards loss of jobs etc, against which an approach like the one relayed in the question is a valid counter-argument).

At the macro-economic level, a widespread disrespect of, and the failure to protect the, property rights, leads to increased uncertainty and reduced output, because economic agents will start spending considerable and disproportionate resources to protect their property rights (on wealth and on production), and hence withdraw these resources from the production of output itself. The fact that in National Accounting these protection services will turn up like production themselves, does not change the fact that the other forms of output will be lower. Such protection services are already widespread: most of the legal system and the military expenses are about protecting property rights at one level or the other, as are private security services.

In an economy where property rights are more or less adequately protected, piracy can be said to also affect the composition of output. Who, and through which means, gets to influence how many films and how many skateboards will be produced? And when these influences come partly through the violation of such a fundamental social principle as rights to property, do they have a detrimental effect?

• I have become cautious of many arguments when the words "trivially" or "obviously" are being used. – FooBar Jul 18 '15 at 14:08
• @FooBar, In this case, I don't see what is not trivially true with the argument "if I don't spend it here, I will spend it there, so no problem". It uses an almost analytical assertion to evade the actual issues at stake. – Alecos Papadopoulos Jul 18 '15 at 18:48
• Perhaps you're interested in my answer then. – FooBar Jul 18 '15 at 19:11