The Broken Window Fallacy

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The Broken Window Fallacy is a fundamental concept of economics (and logic) about seen advantages versus unseen costs.

Frederic Bastiat wrote a allegory it into his book, "That Which Is Seen, and That Which Is Not Seen” in 1850 (but the principal is broader and older than that), and unsurprisingly the point of the allegory was illustrate how humans naturally see a benefit to a policy/action and think that’s all there is, but they often miss the far bigger (and harmful) unseen results. Learning to get past the seen-benefit/unseen-cost fallacy is the foundation of economics as a science. Without doing that, it’s just opinion and politics. And don’t just take my word for it, Henry Hazlitt summed up economics as:

“The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

What is the Broken Window Fallacy?

It all started with a thought experiment or allegory. You can read the original in an old/formal style (linked below). The modernized version is as follows:

A vandal breaks a Baker's window with a brick and runs off.

A crowd is drawn to the noise, sees the broken glass on the bread and pies, and start to comment on the tragedy.

But one person in the crowd, let’s call him, "Paul Krugman” says, “Hold on there, this isn’t all bad: look at the upside! The baker is going to have to pay the Glazier $100 for a new Window, who will then use that money to buy new shoes from the cobbler, and a meal from restauranteur (pointing them out in the crowd). They will spend those profits around the town as well. (He offers examples how it helps each of them). That one smashed window will go on providing money and employment in ever-widening circles, these are called Keynesian multipliers — thus that that little brick throwing hoodlum, far from being a public menace, was a public benefactor! The only problem with what he did, was he didn’t break more windows! Then we could have the prosperity of FDR’s New Deal. or Johnson’s Great Society!” (I might be ad-libbing a little bit).

The crowd murmurs and starts to see the wisdom of Krugman's insights, saying he should write for the local Newspaper! Maybe the crowd should start breaking all the windows to help the towns economy?!

Another in the crowd, let’s call him, F. A. Hayek says, “Hold on there. You’ll falling prey to the biggest fallacy in economics: looking at only the seen and not the unseen."

Hayek goes on, "Yes, the Baker will spend that money on a new Window (the seen benefit), but if he didn’t have a broken the window, the Baker would have had the window AND the $100, AND all of those baked goods to sell. The damaged goods would have benefited all the buyers that wanted to buy/eat he goods (for $50), the baker still would have spent the $100 on that new suit he wanted (so the Tailor would have gotten the money), and he would have spent the baked goods profits on hiring a helper (who would spend that money too). So if the window wasn’t broken the economy would have gotten $150 + delicious baked goods and another worker employed — now all the economy gets is $100 to replace a Window that shouldn’t have been broken in the first place!"

As the crowd ponders that, the Nobel Committee gives Paul Krugman the economics prize, and then the crowd divides up into the two camps: those who can do math and economics, and those who support Keynesianism. (a little epilog not in the original version).

The whole point of the allegory is that the economy doesn’t win by destroying something of value, no matter how much the flim-flammers (Keynesians) try to convince the gullible otherwise. This has been known for hundreds of years, but there’s still a large contingent who can convince the gullible that destroying perfectly working cars (Cash for Clunkers), or burning down city blocks in Detroit, will some how leave you more rich than you started out. But anyone who understands logic gets that you had something, you destroyed it, and not you must live without it, or pay to replace it. There was no net win there, unless someone ignored the costs to you.

More information

Milton Friedman goes to China

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Milton Friedman popularized this allegory that explains the perils of the Broken Window Fallacy, in an amusing and more socratic way. Some refer to this by Shovels vs. Spoons.

References