Parable of the broken window

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

Bastiat uses this story to introduce a concept he calls the broken window fallacy, which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian School frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book "Economics in One Lesson".

Parable story

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 pane 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."

Fallacy of the argument

The fallacy of the onlookers' argument is that they considered only the 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 could not spend it on something else. For example, the shopkeeper might have preferred to spend 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. His actions benefited the glazier, but at the expense not only of the shopkeeper, but the baker and cobbler as well.

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 would not go to the baker or the cobbler, if the shopkeeper was doing well enough for that money to go into a vault that would not 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.

Application

Economists of the Austrian School and libertarians argue that the "broken window fallacy" is extremely common in popular thinking. Examples include:

War

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 cannot 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 have been used to build a second city or add improvements.

An example of the costs of war is the many projects postponed or not started until after the end of World War II in the United States. 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.

pecial 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:
* Arguments for public works projects as a way to reduce unemployment
* Arguments for increasing the number of government employees, in order to provide employment
* Arguments for protectionist measures such as tariffs, subsidies and/or other regulations in order to protect local industries
* Theaters, etc. supporting arts subsidies, in order to provide employment for artists and on the grounds that while people go to the theater or to a concert they also go to restaurants etc. and stimulate the economy

Terrorism

Economist Walter E. Williams, and commentators Jonah Goldberg [ [http://www.nationalreview.com/goldberg/goldberg091902.asp "Broken Window Gone Iraqi"] , Jonah Goldberg, "National Review Online", September 19 2002] and Robert Tracinski, [ [http://www.aynrand.org/site/News2?page=NewsArticle&id=7396&news_iv_ctrl=1063 "The Economics of War"] , Robert Tracinski, October 22 2001] 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." [ [http://query.nytimes.com/gst/fullpage.html?res=940DE7DC1138F937A2575AC0A9679C8B63&n=Top/Reference/Times%20Topics/Subjects/S/Sept.%2011,%202001 "After The Horror"] , Paul Krugman, "The New York Times", September 14 2001]

While there is no direct claim in the editorial 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." [ [http://www.jewishworldreview.com/cols/williams100401.asp "There's no free lunch"] , Walter E. Williams, Creators Syndicate, October 4 2001]

In popular culture

In "The Fifth Element", villain Jean-Baptiste Zorg (Gary Oldman) justifies his violent, destructive actions in terms of the increased economic activity in fixing them.

In "Wakko's Wish", a direct-to-video Animaniacs movie, part of the parable is used to explain how Wakko stimulates his hometown's economy with only two half-pennies.

in Le Corbusier's The Radiant City (1967) you find this sentiment when it comes to those that supported road projects that led to today's suburban sprawl "...The cities will be part of the country; I shall live 30 miles from my office in one direction, under a pine tree; my secretary will live 30 miles away from it too, in the other direction, under another pine tree. We shall both have our own car. We shall use up tires, wear out road surfaces and gears, consume oil and gasoline. All of which will necessitate a great deal of work ... enough for all."

ee also

*Multiplier (economics)
*Opportunity cost

References

External links

* " [http://bastiat.org/fr/cqovecqonvp.html Ce qu'on voit et ce qu'on ne voit pas] " (original essay)
* " [http://bastiat.org/en/twisatwins.html That Which is Seen and That Which is Not Seen] " (English translation)