Parable of the broken window

Template:Distinguish2 The parable of the broken window was created 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 illuminate the notion of hidden costs (a.k.a. opportunity 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 square 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 positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper. As the shopkeeper was forced to spend his money on a new window, he obviously could not have spent it on something else. For example, the shopkeeper may have intended to replenish his inventory, but now cannot do so for he must fix his window. The lack of inventory may drive customers to a competing shopkeeper, who gains at the other's loss.

Further, the extent of the damage may have required the shopkeeper to close his business until the damage was repaired, costing him revenue while still having expenses for rent and utilities.

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.

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 wouldn't go to the carpenter or the cobbler, if the shopkeeper was doing well enough for that money to go into a vault that wouldn't 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. 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 people 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 can't be spent on food, clothing, health care or other needs. The stimulus felt in one sector of the economy comes at a direct—but hidden—cost to other sectors.

More importantly, however, war literally destroys property, buildings, 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 then becomes the basis of a second application of the broken window fallacy: it is claimed that the rebuilding that follows war and its destruction provides a further stimulus to the economy, this time mainly in the construction sector. However, immense resources are spent merely to restore things to the condition they already were before the war began. After the war, the nation has a rebuilt city; before the war, it had a city and time in which its labour could have been used for more fruitful purposes. An example of this in America is that many highway and bridge projects that were planned in the late '30s had to be put off until after the end of the Second World War, and the pent-up demand for not only roads, but houses, cars, and even radios led to massive inflation in the late '40s. The war also 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.

Terrorist attacks

Similar arguments have been used for terrorist attacks. After the September 11, 2001 attacks, economist Paul 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."

Others have criticized this as an example of the broken window fallacy, including economist Walter E. Williams, who 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."

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 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 on the grounds of maintaining or providing employment:
  • Arguments against reduction of ineffective tax-paid positions, such as in government administration;
  • Arguments for protectionist measures such as tariffs, subsidies and/or other regulations at the tax payers' and/or other businesses' expense;
  • Arguments for overriding public opposition to industry practices and enterprises, such as environmental pollution and casinos;
• Theaters etc. supporting arts subsidies, on the grounds that while people go to the theater or to a concert they also go to restaurants etc. and stimulate the economy.

In popular culture

In The Fifth Element, villain Jean-Baptiste Zorg (Gary Oldman) retells the parable (without recognizing the fallacy) after claiming his violent, self-centered actions actually benefit society as a whole.

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 ha'pennies.

See also

• Multiplier (economics)

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)