Saturday, February 21, 2015

Broken Window

The French economist Frederic Bastiat, first introduced the parable of the broken window fallacy in 1850, and it’s a good example to explain how some people think about unintended consequences. The parable is about a shopkeeper's boy who accidentally breaks a window at his father's store. A person who was present at the time of the event sympathized with the shopkeeper, but explains that the broken window is actually a good thing because now the window replacement company gets to earn money by replacing the pane. As a result, the window repairman would celebrate and go buy coffee for all his crew for the great work they did by replacing the window. This fallacy it’s mostly use or applied in business, economic, and government regulations. For example, many have heard that people in the media and politicians often refer to natural disasters, wars, and other destructive events as opportunities that can boost an economy's production because they create demand for rebuilding work.
The big flaw to this is that this parable only looks at one side of the picture. This only deals with what it is seen, but misses pretty much everything else of what happens because it’s unseen. For example what if the shopkeeper was planning to buy his mom a new dress of her birthday? Well, now he is not able to because he cant afford the dress after having to pay for the repair of the window, so now we have two people that are loosing in this situation, the mother of the shopkeeper and the person who makes the dress.
Another example of this is how Nobel prize winner Paul Krugman wrote a column in the New York Time's just a few days after the Sept. 11, 2001, terrorist attacks, wrote that "the terror attack could even do some economic good." How can people only see this and not think about the internal damage on the friends and families of the victims, also and some monetary repercussions some of the families affected may go through because of the attack.
Another example by Paul Krugman is when hurricane Katrina stroke New Orleans. He described this event as if it had created economic activity and growth, because of all the rebuilding all the destruction will add to the economy, but was Katrina really beneficial?

If you think about it, to a certain extent there is some sort of true to this. However, we have to be careful not to reach false conclusions based on this.  It is seen, and definitely true, that the destruction and rebuilding of the city creates economic activity. However, it is not seen what would have happened if there had not been a hurricanee. In the time the residents lost and rebuilt their city, they could have built a second city, or made improvements in around the city of New Orleans, any number of other things they value. Unfortunately, because of the hurricane, none of those happened. Even though hurricane Katrina created some economic activity (the seen), it does at the expense of other economic activity( the unseen).

Works cited

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