Bad ideas never die.

The latest relapse is:

For every dollar of Microsoft revenue from Windows Vista in 2007 in the U.S., the ecosystem beyond Microsoft will reap $18 in revenues. In 2007 this ecosystem should sell about $70 billion in products and services revolving around Windows Vista.

The source for this rosy forecast is the recent IDC whitepaper, The Economic Impact of Microsoft Windows in the United States.

They summarize this boon as:

The IDC research shows that the launch of Windows Vista will precipitate cascading economic benefits, from increased employment in the region to a stronger economic base for those 200,000 or so local firms that will be selling and servicing products that run on Windows Vista. Nearly two million IT professionals and industry employees will be working with Windows Vista in 2007. These direct benefits —157,000 new jobs and $70 billion in revenues to companies in the US IT Industry — will help local economies grow, improve the labor force, and support the formation of new companies. The indirect benefits of using newer software will help boost productivity, increase competitiveness, and support local innovation.

In the history of economic thought, this is Multiplier Effect, the belief that an increase in spending leads itself to more spending and even more spending, in a feedback loop that in the end amounts grows the entire economy. This bootstrap theory was popularized by John Maynard Keynes and became influential in some circles as a way to reduce underutilization in the economy. In other words, if unemployment is high and industrial capacity is underused, then it is worth while to have the government make work for people or spend money. Work, any work, will get the money flowing again. This lead to the various “alphabet agencies” of F.D.R.’s New Deal program.

Keynes, at his boldest, illustrated the magical properties of his multiplier effect like this:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course by tendering for leases of the note-bearing territory), there need be no more unemployment and with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. — from The General Theory of Employment, Interest and Money

The most cogent criticism of the Magic Multiplier goes back 50-years to Henry Hazlitt’s, Economics in One Easy Lesson, where he tells the tale of “The fallacy of the broken window”. It goes something like this:

Imagine the town baker’s shop window is broken by an errant baseball throw. A unfortunate expense to the baker, one might say. But that is a narrow parochial view. Look instead at the benefit to the whole community. The window will cost $300 to replace. That money will go to the glazier who will then use his profits to buy a new sofa from the furniture store, who will then use his profits to buy a new bicycle for his child from the toy store, and so on. The money will continue to circulate in over-widening circles, bringing joy to all. The original loss of $300 by the baker will more than be made up for by the aggregate increase in the amount of goods and services exchanged in the town. Instead of punishing the little boy who broke the window, he should be raised up and praised as a Universal Benefactor and Economic Sage of the First Order.

The problem with that argument is it fails to look at the poor baker and what he might have done with the $300 if his window had not broken. Maybe he would bought a new suit with that money. The tailor then might have bought a new sofa with his profits, and so on. The interconnectedness of the economy was not precipitated by the broken window. It was always there. The only thing that changed by the broken window is that the baker has no new suit, and the glazier has his money. Since you can never see the suit that was never made, it is easy to forget that the benefits to the glazier did not come from nothing.

So back to the IDC report, and this forecast of $70 billion dollars in Vista-related spending. The question to ask is, where is all this money coming from? And what might it have been used for if not spent on Vista-related purchases? Obviously this money was not created out of a vacuum. Is it coming from profits? From shareholders? From deferring other investments? Cutting back on training? Moving more jobs off-shore? Reducing quality? What companies and sectors of the economy are going to suffer for this shift in investment? What innovations will not occur because people are allocating resources to this upgrade?

In the end is $70 billion of new value really being produced? Or are we merely fixing broken Windows?