The Broken Window Fallacy

"Broken. Pt. 2" by Max Noisa is licensed under CC BY-ND 2.0 

There are many different activities and transactions that occur in an economy.  Each day millions of people participate in voluntary exchanges of money for goods and services.  Typically businesses create goods and services based on demand expressed from consumers.  However, sometimes production occurs for another reason; in reaction to tragedy

Tragedy can come in many forms.  Natural or man made disasters are an example.  Let's say a tornado rips through the heart of a city or a hurricane rolls right through a state.  The devastation left behind creates an opportunity for rebuilding and reinvestment in a community.  This is seen by some as an economic benefit.  Others, however, call this The Broken Window Fallacy.

The Broken Window Fallacy is a parable story told by French economist and philosopher Fredric Bastiat.  In the original telling of the story, Bastiat uses the scenario of a boy that has broken a window and it must now be fixed.  He states the townspeople see this as a positive, as the father will have to employ the services of a local repairman to fix the broken window.  As Bastiat explains though, this is flawed logic.  How?  It would seem as though this is a benefit, as the repairman will now have business he did not have before.  

There are two main issues that Bastiat points out here.  First, there is the opportunity cost associated with this scenario.  The repairman will have to dedicate resources to repair something as opposed to creating something. This is a zero sum game so there is no growth, thereby not helping the economy.  Second, the family of the boy will have to dedicate money to the repair of the window, shrinking the amount of disposable income available to spend on items to stimulate the economy.  In this situation other business owners lose out.

If this sounds like common sense; it is!  However, there are many prominent people that still buy in to the idea that physical destruction helps stimulate the economy.  In fact, Nobel Prize winning Economist and N.Y. Times columnist Paul Krugman is among those who ascribe to this theory.  

This same thinking is also applied to war.  Since the U.S. is in perpetual wars nowadays, we don't hear this as much.  Ask someone what pulled the U.S. out of the Great Depression and dollars to donuts I bet you hear "World War II".  

In sum, it may seem like optimistic thinking to see something positive in a time of tragedy, but we must be careful to view this as economic growth.  If this seems like parsing words or splitting hairs, it isn't.  Many people advocate for or cheer when devastation occurs.  Moreover, and more harming is the use of calling for war to jump start the economy.  We must resist this line of thinking and see it as what it is; petty and simple minded thinking.