Parable of the broken window

This article is about the economic parable. For the criminological theory, see Broken windows theory.

The parable of the broken window was introduced by Frédéric Bastiat in his 1850 essay Ce qu'on voit et ce qu'on ne voit pas (That Which Is Seen and That Which Is Unseen) to illustrate why destruction, and the money spent to recover from destruction, is not actually a net benefit to society. The parable, also known as the broken window fallacy or glazier's fallacy, seeks to show how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are "unseen" or ignored.

The parable

Bastiat's original parable of the broken window from Ce qu'on voit et ce qu'on ne voit pas (1850):

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has 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.

Differing interpretations

Bastiat's argument

Austrian School theorists, and Bastiat himself, apply the parable of the broken window in a different way. 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 tailor, and so on.

Bastiat argues that society endorses activities that are morally equivalent to the glazier hiring a boy to break windows for him:

Whence we arrive at this unexpected conclusion: "Society loses the value of things which are uselessly destroyed;" and we must assent to a maxim which will make the hair of protectionists stand on end – To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit."

What will you say, Moniteur Industriel – what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

Bastiat is not addressing production – he is addressing the stock of wealth. In other words, Bastiat does not merely look at the immediate but at the longer effects of breaking the window. Moreover, Bastiat does not only take into account the consequences of breaking the window for one group but for all groups, for society as a whole.

Austrian theorists cite this fallacy, saying it is a common element of popular thinking (e.g., the "Cash for Clunkers" program, etc.). The 20th century American economist Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.

The opportunity cost of war

See also: Military Keynesianism

The argument can be made that war is a benefactor, since historically it often has focused the use of resources and triggered advances in technology and other areas while reducing unemployment. The increased production and employment associated with war often leads some to claim that "war is good for the economy." However, this belief is often given as 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.

Bastiat himself argued against the claim that hiring men to be soldiers was inherently beneficial to the economy in the second chapter of That Which is Seen, and That Which is Not Seen, "The Disbanding of Troops".

According to Hazlitt:

"It is never an advantage to have one’s plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence. ... Plants and equipment cannot be replaced by an individual (or a socialist government) unless he or it has acquired or can acquire the savings, the capital accumulation, to make the replacement. But war destroys accumulated capital. ... Complications should not divert us from recognizing the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing."

The cost of special 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 benefiting 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. The hidden cost here is said to be the tax payer's money, and the special interests are the jobs created by the public works. This is analogous to the fallacy only if in fact the taxation induces opportunity costs and a net social loss, yet public works are not inherently destructive and need not involve demolition for the sake of superfluous rebuilding (i.e., intentionally breaking windows). Public works often are genuinely new and additive to shared societal value, independent of any benefits of maintaining a pool of skilled glaziers or other workers.
• Cash for Clunkers, which was a program in which the U.S. government paid consumers to trade in antiquated low gas mileage cars for newer, more efficient higher gas mileage cars, and the trade-ins were subsequently destroyed. A similar program allows for trade-ins of old energy inefficient appliances for more energy efficient appliances. Such programs may be viewed as imposing a net cost only if failing to account for the benefits of expending fewer units of fuel per mile, and the potential added value of decreased pollution. However, the pollution from, and the costs of, the yearly manufacturing of a new fleet of vehicles may outweigh any perceived gains from the improvements in gas mileage.
• Planned obsolescence, an item designed to break or become undesirable after some period of time.
• Advertisements promoting the replacement of old items with new items; for example, replacing last year's fashions with this year's.
• Agricultural Adjustment Act, which caused the slaughter of millions of pigs in order to drive up the price of pork during the Great Depression.

With all of these examples, care must be taken that every factor is taken into account, just as happened in the parable of the broken window: does one know all the costs and benefits? E.g. hiring people to do nothing or to break things and repair them is probably a bad idea. This is the case in the military spending and government employment examples. But if the hired people or the spent money actually result in useful work (however, the term "useful work" is a fallacy in itself – it is not the work that is useful but only the product or result produced by the work), things are less clear. It depends on the amount of useful work delivered compared to the amount of money spent if the spending was a good idea. This is the case in the cash for clunkers, the public works, and the renewable energy examples. This analysis is only necessary, however, when the accomplished result has a future benefit beyond the simple fact of delivering work. As Bastiat shows, the simple accomplishment of useful work can never make such projects a net positive; the glazier also performed useful work. But if a project improves the efficiency of future work, there can be a net benefit. For example, a public works program to build roads creates no wealth simply by virtue of building the road. But in the future, that road may increase trade by improving the efficiency of moving goods and reducing future costs. In such a case, the road may be a net benefit – it is an investment, rather than destruction followed by redistribution. The point of the broken window parable is to show that one cannot ignore the hidden costs of taking wealth to build the road when totalling up any such "net benefit."

Criticisms

The interpretations assume that the "window" has positive value and that replacing it is not a good investment. In the broader scope, offsetting factors can reduce or even negate the cost of destruction. For example, new technologies developed during a war and forced modernization during postwar reconstruction can cause old technologies to become valueless. Also, if two shopkeepers keep their "window" beyond the point where it would maximize their profit, the shopkeeper whose window is broken is forced to make a good investment – increasing his comparative profit, or rather, reducing his comparative loss. Regardless, while wanton destruction of real value may not be a net loss, it is of course still a misfortune, not a blessing. Others argue that the broken window may not lead to reduction in spending by the victim, but rather, a reduction in excessive savings. "The logic of limited resources only applies when the economy is using most of those limited resources. If there are slack resources, we need merely mobilize some of the slack resources." The reductio ad absurdum of breaking 100 windows, then, only applies once underutilised resources have run out, and the tailor is forced to divert resources from more productive means.

Another problem with this being a "fallacy" is that the positive and negative results depend on the financial condition and disposition of the victim. At the low end, the victim simply can't afford to replace the window, or refuses to do so, resulting in almost no economic effect (except for the reduction in utility to the victim). In the medium range, it is a fallacy and the standard argument above applies. However, at the top end it is an economic benefit, especially if too much capital is trapped in high end savings and investment, because the funds used to replace the window will not change the victim's spending habits, but will simply be a minor reduction of his long term savings or investments, or that of his insurer.

It has been argued that the parable, while intuitive, does not correspond to actual evidence. For instance, some economists argue that natural disasters can often lead to improved growth in both the short and long term. Also, the opportunity cost argument (and the parable in general) is only true when the economy is at full employment and there is an absolute tradeoff between alternative spending. When there is excess capacity and savings, forced spending such as that caused by a broken window can be shown to increase overall economic activity by putting unused savings and productive capacity to work.

Defenses

Bastiat and Austrian theorists hold to a subjective theory of value, which holds that the value of a product is determined by its consumer or owner. Therefore, if the window had a negative value, it is because the owner already wishes it broken. If the proverbial window were old, and the newer proverbial window had a greater value (determined by the shopkeeper's own valuation), then the net increase in value in the economy is the difference between the value of the old and new window. Bastiat and Austrian economists also believe that depreciation and other losses in the value of goods reduces the net value in the economy by the amount of the reduction in value of the goods.

The very concept of excess savings is meaningless without the presumption of an authority which can define the proper amount of savings. Money saved represents demand for money which is a commodity like windows or suits. The result of spending saved money is to lower the demand for money relative to suits or glass and therefore contributes to general price inflation (or loss of purchasing power). Such an authority would suggest that by controlling prices (forcing the exchange of savings for consumer goods), that the economy could be better off. This concept when enforced by governments is known as price controls and results in shortages when prices are artificially reduced below market value. A shortage of savings results in a reduction of capital investment as more resources are diverted from future needs to present needs. The shop owner was saving so that he could grow his business, but an outside authority has determined that his savings were 'excess' and that by breaking his window the economy will be better off. Without free exchange there would be no prices, and without prices there can be no economic calculation, and without proper economic calculation there is no means to determine whether or not a particular action will be 'profitable'. Therefore any authority that suggests that there might be an 'excess of savings' presumes the ability to make economic calculations without prices established by free exchange. Ludwig von Mises argued that this was impossible.

If there was more profit to be made by destroying buildings, windows or leveling an entire community due to a natural disaster than pursuing other courses of action then participants in the market would pro-actively and voluntarily destroy property. It is quite clear that far more profit can be earned by recycling, selling, or repurposing an old window pane than could be achieved via random destruction by vandal or nature. Therefore, arguments that propose that destruction 'might' be good for the economy have to presume that actors in the economy were missing an opportunity to profit in excess of the value of the goods destroyed. The probability of random destruction being good for the economy is equal to the probability of random destruction being bad for the economy as both are equal to the probability that free exchange has not achieved the best allocation of resources.

It must be noted however that non-owners (individually and collectively) also have a value as to the presence of such good, which can be positive or negative. Presupposing rational behavior and a free market, one would expect a community and the good owner to agree to some transaction to improve the overall welfare of both parties. However, problems might arise depending on the nature of the good in the sense that a free market economy might not be able to produce or adjust the level of a good to the Pareto optimal quantity of a good. One prominent example are public goods which are prone to the free rider problem and hence are subject to their over or under production.

See also

• Cobra effect
• Creative destruction
• Disaster capitalism
• Jevons paradox
• Spending multiplier
• Tax choice
• Uneconomic growth
• Rent-seeking

References

Bibliography

• Bastiat, Frédéric (1850). That Which Is Seen, and That Which Is Not Seen . Translated by Patrick James Stirling – via Wikisource. {{citation}}: |access-date= requires |url= (help); External link in |trans_title= (help); Invalid |ref=harv (help); Unknown parameter |trans_title= ignored (|trans-title= suggested) (help); Unknown parameter |wsurl= ignored (help)
• Hazlitt, Henry (1946). Economics in One Lesson. Harper & Brothers. LCCN 46005937. {{cite book}}: Invalid |ref=harv (help) (PDF)

Further reading

• Abrams, Burton A; Parsons, George R (2009). "Is CARS a Clunker?". The Economists' Voice. 6 (8). doi:10.2202/1553-3832.1638.
• McGee, Robert W. (2010). "Financial Bailouts and the philosophy of Frédéric Bastiat". Aestimatio (1): 88–97. SSRN 2435748.
• Stringham, Edward P.; Snow, Nicholas A. (2008). "The broken trailer fallacy: Seeing the unseen effects of government policies in post-Katrina New Orleans". International Journal of Social Economics. 35 (7): 480–9. doi:10.1108/03068290810886885.
• Carabini, Louis (2007). "Bastiat's 'The Broken Window': A Critique" (PDF). Journal of Libertarian Studies. 21 (4): 151–5.
• Mian, Atif R.; Sufi, Amir (2010). "The Effects of Fiscal Stimulus: Evidence from the 2009 'Cash for Clunkers' Program". SSRN Electronic Journal. doi:10.2139/ssrn.1670759.
• Caplan, Bryan; Stringham, Edward (2005). "Mises, bastiat, public opinion, and public choice". Review of Political Economy. 17: 79–105. doi:10.1080/0953825042000313825.
• Stanfield, James (2010). "The Broken University: What is Seen and What is Not Seen in the Uk Higher Education Sector". Economic Affairs. 30 (3): 53–8. doi:10.1111/j.1468-0270.2010.02022.x.

External links

• "Ce qu'on voit et ce qu'on ne voit pas" (original essay)
• "That Which is Seen and That Which is Not Seen" (English translation)