Parable of the broken window

"Broken window fallacy" redirects here. For the unrelated "broken window theory", see Fixing Broken Windows

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 associated with destroying property of others.

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.

Theory

The parable describes a shopkeeper whose window is broken by his young son, and who has to pay for a glazier fixing his window. It conveys some thoughts on economy and money circulation. 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.

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 (thus enriching the baker and cobbler), but now cannot 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 or the cobbler as well. Moreover, the benefit to the glazier is relatively small, because most of what he charges is to compensate him for his tedious and strenuous labour, as well as the materials he uses.

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 School 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 argues that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him (specifically the burning of Paris):

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?

One of the problems with arbitrating between different interpretations of Bastiat is that Austrian economists and those who refer to Bastiat are making a statement about total wealth in society, whereas those they are criticizing are making a statement about a snapshot of production in a given year. 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

Limitations

Offsetting factors can reduce the cost of destruction. For example, new technologies developed during a war and forced modernization during postwar reconstruction can increase individual and national productivity at some points.

Application

Economists of the Austrian School frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.

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

War

See also: Military Keynesianism

Some believe 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":

It is the same with a people as it is with a man. If it wishes to give itself some gratification, it naturally considers whether it is worth what it costs. To a nation, security is the greatest of advantages. If, in order to obtain it, it is necessary to have an army of a hundred thousand men, I have nothing to say against it. It is an enjoyment bought by a sacrifice. Let me not be misunderstood upon the extent of my position. A member of the assembly proposes to disband a hundred thousand men, for the sake of relieving the tax-payers of a hundred millions.

If we confine ourselves to this answer - "The hundred millions of men, and these hundred millions of money, are indispensable to the national security: it is a sacrifice; but without this sacrifice, France would be torn by factions, or invaded by some foreign power," - I have nothing to object to this argument, which may be true or false in fact, but which theoretically contains nothing which militates against economy. The error begins when the sacrifice itself is said to be an advantage because it profits somebody.

Now I am very much mistaken if, the moment the author of the proposal has taken his seat, some orator will not rise and say - "Disband a hundred thousand men! do you know what you are saying? What will become of them? Where will they get a living? Don't you know that work is scarce everywhere? That every field is overstocked? Would you turn them out of doors to increase competition, and weigh upon the rate of wages? Just now, when it is a hard matter to live at all, it would be a pretty thing if the State must find bread for a hundred thousand individuals? Consider, besides, that the army consumes wine, clothing, arms - that it promotes the activity of manufactures in garrison towns - that it is, in short, the god-send of innumerable purveyors. Why, any one must tremble at the bare idea of doing away with this immense industrial movement."

This discourse, it is evident, concludes by voting the maintenance of a hundred thousand soldiers, for reasons drawn from the necessity of the service, and from economical considerations. It is these considerations only that I have to refute.

A hundred thousand men, costing the tax-payers a hundred millions of money, live and bring to the purveyors as much as a hundred millions can supply. This is that which is seen.

But, a hundred millions taken from the pockets of the tax-payers, cease to maintain these taxpayers and the purveyors, as far as a hundred millions reach. This is that which is not seen. Now make your calculations. Cast up, and tell me what profit there is for the masses?

In addition, war destroys property and lives. The economic stimulus to one nation's defense sector is offset not only by immediate opportunity costs, but also by the costs of the damage and devastation of war to the country it attacks. 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 improve and enlarge the city or build a second one.

While neither example of the fallacy necessarily supports any form of pacifism, the point made in each case is that war is inherently destructive rather than productive; the only way war can bring any country involved in it any economic benefit is through the destruction of lives and property that are having a negative effect on a nation's economy, such as the lives of an oppressive totalitarian dictator and his enforcers and any records these oppressors may have been keeping on their subjects in order to blackmail them. War brings no other kind of net economic benefit to a nation, and therefore any argument in favor of having a war based on the premise that war will stimulate productivity is fallacious because the premise is false; going to war will invariably decrease that nation's net productivity.

One example of the costs of war sometimes given 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 the American people for their direct benefit; neither did the war enrich any of these other nations.

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."

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 for public works projects as a way to reduce unemployment. The hidden cost here is of course the tax payer's money, and the special interests are the jobs created by the public works.
• 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
• Arguments for instituting a minimum wage, or raising the minimum wage.
• Arguments for wind farms and other renewable energy. While the more expensive sources have environmental benefits, the increased "green jobs" are offset by others in the economy. It might be said that this argument ignores the cost of environmental devastation.
• Cash for Clunkers was a program in which the U.S. government paid consumers to trade in low gas mileage cars for newer, higher gas mileage cars, and the trade-ins were subsequently destroyed.
• Depreciation as a means to increase exports by making goods less expensive to foreigners, and to decrease the demand for imports—which are made more expensive—in order to stimulate the domestic economy. What is not seen is the fact that domestic workers must do more work for less pay, and can purchase less with the proceeds. Essentially, the entire nation takes a pay cut.
• Inflation as a means to stimulate economic activity by making savings worth less and goods worth more, creating an imperative to purchase sooner rather than waiting. What is not seen is the increased risk of no cushion of savings, the stimulation of large amounts of consumer debt, and the loss of purchasing power due to salaries lagging inflation.

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, 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 totaling up any such "net benefit."

In popular culture

• In Le Corbusier's The Radiant City (1935) this sentiment is shared by 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."

• In the sci-fi film The Fifth Element (1997), villain Jean-Baptiste Emanuel 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 (1999), part of the parable is used to explain how Wakko stimulates his hometown's economy with only two half-pennies.

• Shortly after the Docklands bombing, the presenter of Have I Got News for You, referring to a recent complaint by a newsreader that there wasn't enough good news on television, said "Good news for glaziers, another big bomb's gone off in The City".

See also

• Jevons paradox
• Opportunity cost
• Spending multiplier
• Creative destruction

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)