The Broken Window Fallacy
Last week I was substitute teaching a 7th grade Texas History class. The television automatically clicked on after the bell rang and tuned into Channel One News - a ten minute news program designed for junior high and high school students. Hurricane Sandy had just swept up the east coast and left utter devastation in its wake. The newscasters talked about the people without electricity, the food and gasoline shortages, and all the dangers of flooding. She ended her story with a statement about certain economists forecasting an economic net gain from the destruction. She said jobs will be created for clean-up crews and construction workers that would have never existed outside of Hurricane Sandy's ruination.
Keynesian economist, like Paul Krugman (pictured above), forecasted economic net gains from past events, such as 9/11, Hurricane Katrina, and the Fukushima meltdown. They argue that out of destruction comes prosperity. Wealth is created out of devastation, and, in the long run, we'll be better off after money is spent to repair the billions of dollars in damages.
These Keynesians would be well served by reading Frederic Bastiat's That Which is Seen, and That Which is Not Seen (here), or Henry Hazlitt's Economics in One Lesson (here). Bastiat puts forth a story about a kid breaking windows:
Have you ever witnessed the anger of the good shopkeeper, James B., 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.
Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier's trade is encouraged to the amount of six francs: this is that which is seen.
Now, watch this 3 minute video.If the window had not been broken, the shoemaker's trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.
And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.
Pretty good stuff, huh? Do you see the correlation between Hurricane Sandy and the Broken Window Fallacy? This economics stuff is easy!
But what about the part of the video about the government creating jobs? Infuriating, I know. In 2009, Obama and Congress drafted and passed a $787,000,000,000 stimulus plan (yes, that's 3/4 of a trillion dollars). That's an expensive window. But Obama, his advisors, and the majority of Congress are all Keynesians - whether they would admit it or not. This type of window smashing makes sense to them. It is the road out of economic depression and the answer for creating jobs. But if confiscating and spending tax-payers money in times of dire need will spark the economy, why not always spend money, creating jobs? If hurricanes bring economic prosperity, shouldn't we hail earthquakes and tornadoes too? Should we prosecute arsonists, or let them burn the whole country to the ground so we can rebuild and be richer and more prosperous? As Ludwig von Mises eloquently put it comparing War to natural disasters:
War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest.
When applied to a degree of absurdity, the answer seems clear. Of course, we should never burn the entire country to the ground or purposefully go around breaking windows to spur economic activity. The answer seems obvious, but Obama and his cronies (Republicans and Democrats) in congress fail to understand the implications of the simple Broken Window story.
Here is an article that lists all the best sources for learning about the Broken Window Fallacy and all its applications. In it, you can find this lecture by Lew Rockwell, which I highly recommend listening to. A transcript of the lecture can be found here if you would rather read it than listen to him. Either way, educate yourself on this important principle, so you can take a stand against Keynesians and Big Government.
