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Parable of the broken window

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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 Not Seen) 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.[1]

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[2] – 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?[1]

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 take into account only the consequences of breaking the window for one group but for all groups, for society as a whole.[3]

Austrian theorists cite this fallacy, saying it is a common element of popular thinking (e.g., the "Cash for Clunkers" program,[4] etc.). The 20th century American economist Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.[5]

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 cause some people 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, or other industries. 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."[6]

Criticisms and defenses

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.[7] Others argue that the broken window may not result in reduction of 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."[who said this?] The reductio ad absurdum of breaking 100 windows, then, applies only when underutilised resources have been used, and the tailor is forced to divert resources from more productive means.

It has been argued that the parable, while intuitive, may not correspond to actual evidence. For instance, some economists argue that natural disasters can often result in improved growth in both the short and long term.[8]

Defenses

Bastiat and Austrian theorists argue 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 wished it broken. If the proverbial window was 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 was the difference between the value of the old and new window. Bastiat and Austrian economists also believe that depreciation and other losses of the value of goods reduce the net value in the economy by the amount of the reduction in value of the goods.[citation needed]

These theorists further argue that 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 decrease 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) the economy could be bettered. 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 determined that his savings were 'excess' and that by breaking his window the economy would be better off. Without free exchange there are 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.[9]

See also

References

  1. ^ a b Bastiat 1850.
  2. ^ Le Moniteur Industriel was a famous protectionist journal.
  3. ^ Hazlitt 1946, chapter 2: "The Broken Window".
  4. ^ "Cash for Clunkers Is Just a Broken Windshield", Caroline Baum, Bloomberg.com, August 4, 2009
  5. ^ Hazlitt 1946, "Preface".
  6. ^ Hazlitt 1946, chapter 3: "The Blessings of Destruction".
  7. ^ Hazlitt 1946, p. 30 (1988 ed.).
  8. ^ Skidmore, Mark; Toya, Hideki (2002). "Do Natural Disasters Promote Long-Run Growth?". Economic Inquiry. 40 (4): 664–87. doi:10.1093/ei/40.4.664.
  9. ^ "Economic Calculation In The Socialist Commonwealth". Mises Institute.

Bibliography

Further reading

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