The Broken Window Fallacy

[ShackledNation]

It appears our minds today are infected by the broken window fallacy more than ever before. Bastiat tried to put this fallacy to rest centuries ago, but we failed to remember his warning. Today, many people try to counter the fallacy with Keynes's theory of Idle Resources. His theory was incorrect, but that is for another topic. For now let us take a look at the biggest fallacy in modern economic thought. Here is an excerpt explaining the broken window fallacy from the book Economics In One Lesson by Henry Hazlitt.

A young hoodlum, say, heaves a brick through the window of a banker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the banker that, after all, the misfortune has its bright side. It will make business for some glazier. As they being to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with still other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Hazlitt continues to explain why such a conclusion is false. The reasoning behind the above false conclusions is the fallacy of the broken window.

The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incidient than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy a suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the banker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

And there you have it. This fallacy is what caused people to claim that World War II grew the economy because destroyed houses had to be rebuilt. Because purchasing power was directed at rebuilding what was destroyed, it could not be directed at creating new wealth that did not exist before. The destruction of anything of real value is always a net loss to the community. And curing an economy by taxing and spending is precisely such destruction.