Monday, August 18, 2008

The Broken Window Fallacy

I've been in university for two years now, however not one of my lecturers have ever discussed the Broken Window Fallacy, one of the most important and most simple tid-bits of economics.

The idea was developed by Frederic Bastiat and elucidated in Henry Hazlitt's timeless Economics in One Lesson. In fact, the broken window fallacy is the One Lesson.

THE LESSON:

"A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor."

Therein lies the fallacy. What we see is all the economic activity derived from the destruction of property. But we do not see all the useful products that would have been produced had it not occured. The baker could have bought a new machine that makes bread more easily. The glazier could have made a window for a new home owner. But we don't see this happening...because it was never allowed to happen.

This is why there is always at least one economist who stupidly points out that natural disaters or
terrorist attacks have positive effects on the economy, as the rebuilding effort will put people into employment. The logical conclusion is that we should tear down existing buildings, flood our cities and wage wars to cure any economic ills.

Peculiar thinking indeed.

4 comments:

20000miles said...

I'm doing my degree in Ireland, where there is 'free education', and only a handful of private colleges exist.

Graham said...

Maybe not for much longer...! nice post btw. Maybe you were watching this video:

Economics in One Lesson (with Walter Block)

20000miles said...

Cheers! I wasn't actully, but I have seen other of his lectures and read 'Defending the Undefendable'.

The whole crew at mises.org are great aren't they?

Graham said...

Yes, they are! And not just smart either: the Institute is unbelievably generous to visiting students. Hope you got my email! You'd be very welcome at our meetings.