Wednesday, April 23, 2008

The Broken Window Fallacy

The parable of the broken window was created by Frédéric Bastiat in his 1850 essay Ce qu'on voit et ce qu'on ne voit pas (That Which Is Seen and That Which Is Unseen)

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

excerpts from ECONOMICS IN ONE LESSON by Henry Hazlitt (Chapter II, "The Broken Window")...

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it.

How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.

The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.*

the extract below is from (link)

In a real life example, scientist and environmental activist David Suzuki has often claimed that a corporation polluting a river adds to a country's GDP. If the river has become polluted, an expensive program will be required to clean up the river. Residents may choose to buy more expensive bottled water rather than cheaper tap water. Suzuki points to this new economic activity, which will raise GDP, and claim that the GDP has risen overall in the community although the quality of life surely has decreased. Dr. Suzuki, however, forgot to take into account all the decreases in GDP that will be caused by the water pollution precisely because the economic losers are far more difficult to identify than the economic winners. We do not know what the government or the taxpayers would have done with the money had they not needed to clean up the river. We know from the Broken Window Fallacy that there will be an overall decline in GDP, not a rise. One has to wonder if politicians and activists are arguing in good faith or if they realize the logical fallacies in their arguments but hope the voters will not.

Now on to wars.

From the Broken Window Fallacy it is quite easy to see why war will not benefit the economy. The extra money spent on war is money that will not be spent elsewhere. The war can be funded in a combination of three ways:

1. Increasing taxes
2. Decrease spending in other areas
3. Increasing the debt

Increasing taxes reduces consumer spending, which does not help the economy improve at all. Suppose we decrease government spending on social programs. Firstly we've lost the benefits those social programs provide. The recipients of those programs will now have less money to spend on other items, so the economy will decline as a whole. Increasing the debt means that we'll either have to decrease spending or increase taxes in the future; it's a way to delay the inevitable. Plus there's all those interest payments in the meantime.

If you're not convinced yet, imagine that instead of dropping bombs on Baghdad, the army was dropping refrigerators in the ocean.

Next time you hear someone discuss the economic benefits of the war, please tell them a little story about a windowbreaker and a shopkeeper.


Anonymous Mike said...

It's funny, I was just reading the exact same story here. It's econ in one lesson, I'm not sure how brief/comprehensive the lesson can be, but it may be worth a try.

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