By: Joe Jarvis
Whether it be hurricanes, floods, or even war, academics and Keynesian economists are quick to dust off the long-debunked Broken Window Fallacy. To these short-sighted intellects, destruction is somehow good for the economy. They will argue that these tragedies actually help the economy by stimulating spending.
However, if you want to really help the economy, break the window of your Keynesian economics professor’s car. He’ll have to spend money on a new window, so maybe he won’t be able to afford gas to get to class. Then he will be unable to perpetuate the absurd Broken Window Fallacy. The economy will benefit by breaking the myth that destruction of property stimulates the market.
See, the professor has to spend his limited resources on the new window instead of on gas, and that is why broken windows are of no net benefit to the economy. If the professor has to drain his bank account to pay for a new window, he has to make up the difference somewhere.
The professor will likely prioritize his resources, so he’ll scrape the cash together to drive to work.
In class, he’ll point to the balance sheet of the window factory and say, “Look, they sold one more window than they would have otherwise! That’s $100 to stimulate the economy.” Then the window manufacturer used his extra profits to purchase 20 pounds of veal. More stimulation!
But what the professor didn’t tell you is that he had to forgo a meal at the new vegan restaurant that sells sustainably raised algae that tastes like bacon. The vegan restaurant lost $80 it was going to spend on a new solar panel. Then they had to send a server home early, who lost out on a $20 tip. On her way home, she was confronted by advocates of a baby cow rights group, but did not have the money to donate to their anti-veal cause.
You just can’t tell how the economy will be affected by belief in the Broken Window Fallacy.
A broken window certainly helps window makers, that is true. But resources are limited, despite what the federal reserve would have you think. If you have to buy a new window, it means you cannot buy something else you might want or need.
Frederic Bastiat was a 19th century French economist who laid the groundwork for the free market values adopted by the Austrian School economics. He coined the Broken Window Fallacy to demonstrate why destruction of property is a net economic loss. An intact window is an economic resource. If it is broken, productive value goes into getting the economy back to square one — having an intact window.
If the window does not need replacing, economic production is used on something else. The end result is an intact window plus a potted basil plant to sit beside it. If the economic resources must be used to replace the window, they cannot be used to create the potted basil plant.
If the broken window fallacy were true, shouldn’t we be thrilled by destructive hurricanes, wildfires, and earthquakes? After all, the damage will have to be repaired. And think of what a booming economy a nuclear war would create!
But repairing the damage only gets us back to the same place we were before. Yet it still costs resources, manpower, supplies, and money to clean up the destruction. That means the economy stagnates. Value that could have gone into creating something new instead goes into repairing something broken.
The Broken Window Fallacy is the argument used by Keynesians to claim World War II supposedly boosted the economy. Well it is certainly true that there were plenty of jobs, but all the products made by those workers were blown up. That means consumers went with less. They were buying tanks and bombs instead of cars and refrigerators. Food was rationed. People tightened their belts and went without because there was a war going on.
People had to sacrifice other things they wanted and needed in order to pay for the war. Entire sectors of manufacturing were drained of resources. Instead, that value went into replacing blown up tanks and bombs, repairing shot up airplanes and tanks, and resurrecting destroyed buildings. Overall, the American economy had less because the products being made were quickly broken, just like the window.
We understand the fallacy when our cars break down, and we have to save and sacrifice for months to afford the repairs. Don’t be tricked by the Broken Window Fallacy when it comes to the larger economy.
Creation helps the economy; destruction does not. Repairing something that has been broken only wastes limited resources and gets us back to where we were before. Without that destruction, those resources can instead be used to build something new.
So be careful with those windows. Preserving them leads to economic growth. Destroying them means stagnation.