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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.
Bastiat's original parable of the broken window went like this:
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow,
when his careless son happened to break a square of glass? If you have been
present at such a scene, you will most assuredly bear witness to the fact, that
every one of the spectators, were there even thirty of them, by common consent
apparently, offered the unfortunate owner this invariable consolation "It is an
ill wind that blows nobody good. Everybody must live, and what would become of
the glaziers if panes of glass were never broken?"
Now, this form of condolence contains an entire theory, which it will be well
to show up in this simple case, seeing that it is precisely the same as that
which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident
brings six francs to the glazier's trade that it encourages that trade to the
amount of six francs I grant it; I have not a word to say against it; you
reason justly. The glazier comes, performs his task, receives his six francs,
rubs his hands, and, in his heart, blesses the careless child. All this is that
which is seen.
But if, on the other hand, you come to the conclusion, as is too often the
case, that it is a good thing to break windows, that it causes money to
circulate, and that the encouragement of industry in general will be the result
of it, you will oblige me to call out, "Stop there! Your theory is confined to
that which is seen; it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon one thing, he
cannot spend them upon another. It is not seen that if he had not had a window
to replace, he would, perhaps, have replaced his old shoes, or added another
book to his library. In short, he would have employed his six francs in some
way, which this accident has prevented.
[edit] Fallacy of the argument
The fallacy of the onlookers' argument is that they considered only the
positive benefits of purchasing a new window, but they ignored the cost to the
shopkeeper. As the shopkeeper was forced to spend his money on a new window, he
obviously could not have spent it on something else. For example, the
shopkeeper may have spent the money on bread and shoes for himself, but now
cannot so enrich the baker and cobbler because he must fix his window.
Thus, the child did not bring any net benefit to the town. Instead, he made the
town poorer by at least the value of one window, if not more.
[edit] Differing interpretations
Keynesians argue that in some circumstances the little boy may actually be a
benefactor, though not the best possible one. Facing severely underutilized
resources (as in the Great Depression), John Maynard Keynes argued that it may
make economic sense to build totally useless pyramids in order to stimulate the
economy, raise aggregate demand, and encourage full employment.
Austrian economists, and Bastiat himself, apply the parable of the broken
window in a more subtle way. If we consider the parable again, we notice that
the little boy is seen as a public benefactor. Suppose it was discovered that
the little boy was actually hired by the glazier, and paid a franc for every
window he broke. Suddenly the same act would be regarded as theft: the glazier
was breaking windows in order to force people to hire his services. Yet the
facts observed by the onlookers remain true: the glazier benefits from the
business at the expense of the baker, the cobbler, and so on. Bastiat
demonstrates that people actually do endorse activities which are morally
equivalent to the glazier hiring a boy to break windows for him.
A common interpretation of the gross domestic product is that increased GDP
means the economy is healthier. Some would say that this interprets the
proverbial "broken window" as a positive, and that some form of Genuine
Progress Indicator would be a more realistic indicator of economic health.
Another interpretation is that (in a more modern society) the money wouldn't go
to the carpenter or the cobbler, if the shopkeeper was doing well enough for
that money to go into a vault that wouldn't be used for a long time.
Both of those interpretations can be seen as flawed: in a modern economy, the
window owner's money (if the window was still intact) would either be spent on
consumption, or saved for future consumption as an investment in the economy
(in today's world, perhaps via a bank or brokerage account). Both of these
options serve to increase GDP at a higher level of economic efficiency and
utility than if the window is broken.
[edit] Application
Economists of the Austrian School and libertarians argue that the "broken
window fallacy" is extremely common in popular thinking. Examples include:
[edit] War
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Some claim that war is a benefactor, since historically it often has focused
the use of resources and triggered advances in technology and other areas. The
increased production and employment associated with war often leads some to
claim that "war is good for the economy." Others claim that this is an example
of the broken window fallacy. The money spent on the war effort, for example,
is money that can't be spent on food, clothing, health care, consumer
electronics or other areas. The stimulus felt in one sector of the economy
comes at a direct but hidden cost to other sectors.
More importantly, war destroys property and lives. The economic stimulus to the
defense sector is offset not only by immediate opportunity costs, but also by
the costs of the damage and devastation of war. This forms the basis of a
second application of the broken window fallacy: rebuilding what war destroys
stimulates the economy, particularly the construction sector. However, immense
resources are spent merely to restore pre-war conditions. After a war, there is
only a rebuilt city. Without a war, there are opportunities for the same
resources to be applied to more fruitful purposes. Instead of rebuilding a
destroyed city, the resources could be used to build a second city or add
improvements.
Another set of costs of war are the many projects postponed or not started
until after the end of the Second World War in America. The pent-up demand for
roads, bridges, houses, cars, and even radios led to massive inflation in the
late 1940s. The war delayed the commercial introduction of television, among
other things, and the resources sent overseas to rebuild the rest of the world
after the war were not available to directly benefit the American people.
Destroying property is wasteful unless there is a compelling reason to replace
what exists. Destroying lives is never beneficial. War stimulates some portions
of the economy, but drains others, leading to stalled or wasteful work. On
balance, war is not a good economic stimulator.
[edit] Special interests and government
Bastiat, Hazlitt, and others equated the glazier with special interests, and
the little boy with government. Special interests request money from the
government (in the form of subsidies, grants, etc.), and the government then
forces the taxpayer to provide the funds. The recipients certainly do benefit,
so the government action is often regarded by the people as benefitting
everyone. But the people are failing to consider the hidden costs: the
taxpayers are now poorer by exactly that much money. The food, clothing or
other items they might have purchased with that money will now not be purchased
but since there is no way to count "non-purchases," this is a hidden cost,
sometimes called opportunity cost. Bastiat referred to this in his essay as
"what is not seen". Because the costs are hidden, there is an illusion that the
benefits cost nothing. Hazlitt summarized the principle by saying, "Everything
we get, outside the free gifts of nature, must in some way be paid for." Robert
A. Heinlein popularized a summarization/acronym of the concept called
"TANSTAAFL" (There Ain't No Such Thing As A Free Lunch).
Common examples of special interest groups practicing the broken window fallacy
might be:
o Arguments against reduction of ineffective tax-paid positions, such as in
government administration;
o Arguments for protectionist measures such as tariffs, subsidies and/or other
regulations at the tax payers' and/or other businesses' expense;
o Arguments for overriding public opposition to industry practices and
enterprises, such as environmental pollution and casinos;
to the theater or to a concert they also go to restaurants etc. and stimulate
the economy.
[edit] Terrorism
Economist Walter E. Williams, and commentators Jonah Goldberg[1] and Robert
Tracinski,[2] accused economist Paul Krugman of committing the broken-window
fallacy soon after the September 11, 2001 attacks. Krugman wrote:
"Ghastly as it may seem to say this, the terror attack like the original "day
of infamy" which brought an end to the Great Depression could even do some
economic good. [...] the driving force behind the economic slowdown has been a
plunge in business investment. Now, all of a sudden, we need some new office
buildings. As I've already indicated, the destruction isn't big compared with
the economy, but rebuilding will generate at least some increase in business
spending."[3]
While Krugman made no direct claim that the terrorist attacks would lead to
overall economic gain, Williams inferred that Krugman was talking about a net
economic good for the United States, and in response wrote:
"Would there have been even greater 'economic good' had the terrorists
succeeded in destroying buildings in Los Angeles, San Francisco, Chicago,
Philadelphia, Boston and all other major cities? Of course, you and I know that
is utter nonsense. Property destruction always lowers the wealth of a nation."
[4]