Monday, February 27, 2017
The Broken Window Fallacy
The parable of the broken window fallacy tells the story of a hooligan who throws a brick through a bakery’s window. This can only be a negative situation, right? Since the window is broken, the baker has to spend money to have the window repaired. But the story might not be so negative because the glazer makes a profit on fixing the window, which he then spends on something else, such as crops. In the end, the money helps the economy by circulating money through the system. An important piece of the puzzle though is to remember that the baker gains no profit from the situation.The baker could have spent the money on the window on something else, such as a new suit, or a fresh coat of paint for his shop, but instead, he’s out however much the window repair costs.
This fallacy does have some flaws. It doesn’t apply to all adverse situations because not all unfavorable situations are on the same scale as broken windows. Take 9/11. No positives came out of that situation. Some people may say the economy became more prosperous because of the terrorist attack, or that it possibly helped the economy in the long run. But in my opinion, there was no good to come out of it because people died, the economy tanked, and many people lost their jobs.
The broken window fallacy may work for smaller incidents, but for large scale situations, I don’t think it works as well. Another flaw is that even though the story tells that the money the baker spent on the window could have gone to buying a new suit, it doesn’t look at the whole picture. If the window wasn't broken, then the baker could have spent the money on the suit or somewhere else in the economy. The point is that the broken window deviates resources that could have been spent on wealth and welfare, as written by Unlearning Economics.
The last flaw that the parable doesn’t talk about is the economic circumstances. For the parable to be right, Bastiat needs to make sure that the benefit of rebuilding/repairing exceeds any cost of the actual repairs. For larger scale incidents however many millions of dollars that were spent on fixing the situation could have been spent somewhere else. It depends though on the circumstance. Of course, if a natural disaster occurred, whatever money spent will help, but in other cases, such as war, money could be better spent.