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Economics in One Lesson Video Series #2: The Broken Window Fallacy
Understanding Bastiat’s Broken Window Fallacy – originally composed in 1850 – is the first step to recognizing the root of countless economic fallacies. The Broken Window Fallacy in the year 2016 would sound something like this:
A young boy, practicing his fastball in the front yard, throws an errant baseball through the window of his home. The boy’s mother is furious, but as the neighbors gather around they point out that this seemingly unfortunate accident actually has a happy ending. “You see” the neighbors proclaim, “this accident will provide a much needed economic stimulus to the community since the glazier will be benefitted with $500 extra dollars of revenue to replace the window.”
The neighbors continue their fallacious logic by pointing out that the stimulus will continue when the glazier hires new workers, who will then spend money at the local stores, and the money will circulate through the economy and benefit many different industries, all because of the errant baseball throw!
Of course, this analysis ignores the most important conclusion by focusing only on the “seen” effects while ignoring those that are “unseen” – the hallmark of poor economic thinking. Everybody can see the increased revenue of the glazier and they wrongfully conclude the story ends there. But economic logic insists that you must also search for the secondary effects and see that which is “unseen.”
The boy’s mother was planning on purchasing $500 worth of baseball equipment for her son, equipment that she can no longer afford. Since this equipment will never be produced, it is an “unseen” factor. Were the window not destroyed, the family would have had a window AND baseball equipment. Now they only have a window.
Society as a whole is made worse off and poorer from this accident, and no new jobs (on net) were created. Labor was simply rerouted towards ends that have already been satisfied (windows) rather than working towards new and better ends such as baseball equipment.
Don’t be fooled because the new window will be seen in a few days time; remember to account for the opportunity cost – the baseball equipment which will never be seen.
Understanding this basic point is a great start to good economic reasoning. Hazlitt notes that we must always be on the lookout for the broken window fallacy, because it has “a hundred disguises” and is “the most persistent in the history of economics.”
The same people who are deceived by the broken window fallacy are the ones deceived by the “destruction brings prosperity” myth. Whether the destruction is a war or from a natural disaster, these people see “miracles of production” while waging war or from rebuilding cities after hurricanes and believe this production was made possible only by the destruction.
This ignores the opportunity cost of waging war or rebuilding a city. Individuals can see labor and resources shift into these productive areas, forgetting that this leaves less labor and resources to be devoted to other unseen ends.
But the more important, subtler point is that “production” alone cannot “cure” an ailing economy. It matters what is produced and it what quantities, as decided voluntarily by consumers on the market.
If production of anything could cure an economy, then the solution to any economic slump would be produce a bunch of tanks, planes, weapons, bullets, increasing GDP in the process, and then to destroy the very products that were just created in order to start the process over again. Who would be helped by this ridiculous process, that is besides weapons manufacturers?
For this reason, it is obvious that the highly destructive WWII could not have “cured” the Great Depression through production “miracles” and the modern Keynesian policy of governmental deficit spending to arbitrarily boost GDP miss the point, or as Hazlitt would say it’s “merely our old friend, the broken-window fallacy in new clothing.”
Any war, or bureaucratic production decree, will only change the structure of production. These changes alter the “balance of industries” and leave “that much less manpower and productive capacity for everything else.” – in other words an opportunity cost that society cannot afford.
This “blessing of destruction” fallacy comes from “thinking about the abstraction – society – and forgetting the individuals who give the term meaning.” It should be obvious that “no man burns down his own house on the theory that the need to rebuild it will stimulate his energies.”