Several hundred years ago, economist Frederic Bastiat told the story of a village shop owner who had his window broken by a young vandal. The town’s people all assembled to survey the damage and philosophize about the event.
One man in the crowd said that the broken window was actually a good thing because of the economic activity it promoted. The glazier could take the money from fixing the window and buy a new suit, new shoes or food. The tailor, cobbler and grocer could then turn around and spend their new money and so on.
The man had the crowd convinced that the broken window was actually a good thing until someone else pointed out that they were looking at things from only one angle. If you look at it from the standpoint of the shopkeeper, he could have bought a new suit, new shoes or food just like the glazier if he didn’t have to replace his window.
The net effect of the broken window over the whole village was simply the loss of the window. The central point of the story is that you must look at all sides of an economic event before you can decide on what its real effect is.
Good economics demands that all aspects of an event or policy be included in any analysis before valid conclusions can be drawn.
The broken window fallacy is alive and well.
Politicians rely on it for many of the bad programs they try to sell to the public. People use it in their every day considerations.
Here are some examples:
- The cash for clunkers program in which the main net effect has been the loss of the serviceable life left in the cars traded in and destroyed.
- The minimum wage laws in which the advocates point to the low skilled workers who have their incomes raised while ignoring the low skilled workers who either can’t get jobs or lose jobs because of minimum wage laws.
- The stimulus program in which the proponents point to jobs created while ignoring the jobs that could have resulted from the alternate expenditure of resources.
- Some people actually think that wars are economically beneficial. I’ll leave that one for the reader to analyze.
- Light rail is promoted by extolling its’ few benefits while ignoring better and cheaper solutions to the problem.
- Electric cars are promoted while ignoring the pollution at the electric power plant and the high cost of production, safety factors and other things.
- The ethanol program has been sold by ignoring all of the negative effects of ethanol. Analysis of ethanol indicates that it has a negative effect on the environment since it takes about a gallon of gasoline on the farm to generate a gallon of ethanol. The taxpayers have to subsidize it. Using corn for ethanol has contributed to world hunger. It is even doubtful that Archer Daniels Midland will really benefit in the long run because of the efforts and resources they have squandered in “political rent seeking” rather than developing real market based business.
- Trade barriers are promoted on the basis of the jobs they save while ignoring the jobs they lose and the added costs to the economy. When analyzed it usually turns out that the cost per job saved by trade barriers is exorbitant. For example, the cost of each job saved by the steel tariffs has been estimated by noted economist ,Alan Binder, to be approximately $750,000.00 .
Many if not most of the government economic programs are supported by broken window fallacy type thinking.
The social security system is maybe the biggest example of this. There is no way this system can survive any type of analysis of its averall cost and benefit.
As the political season comes into high gear our readers can amuse themselves by observing the number of times the broken window fallacy is brought into use.