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Parable of the broken window

From Academic Kids

The parable of the broken window was created by Frederic Bastiat in his 1850 essay That Which is Seen and That Which is Not Seen to illuminate the notion of hidden costs (a.k.a. opportunity costs).

This idea is not to be confused with the supposed sociological and criminological effects of Broken Windows, a theory associated with Rudolph W. Giuliani and discussed here: [1] (http://c2.com/cgi/wiki?FixBrokenWindows).

Bastiat uses this story to introduce a concept he calls the broken window fallacy, which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian school of economics frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.

Contents

Parable story

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefitting the baker, who will then buy shoes, benefitting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

Bastiat's original parable of the broken window went like this:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square 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. <p> 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. <p> 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." <p> 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. </blockquote> The fallacy of the onlookers' argument is that they considered the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefitting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefitting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt. The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window.

Differing interpretations

Note that the Austrian interpretation stems from the assumption that all resources are initially fully and appropriately employed. Another school, the Keynesians, argues that in some circumstances the little boy may actually be a benefactor, though not the best possible one. Facing severely underutilized resources (as in the Great Depression), John Maynard Keynes argued (in a somewhat joking way) that it may make economic sense to build totally useless pyramids in order to stimulate the economy, raise aggregate demand, and encourage full employment.

Austrian economists, and Bastiat himself, apply the parable of the broken window in a more subtle way. If we consider the parable again, we notice that the little boy is seen as a public benefactor. Suppose it was discovered that the little boy was actually hired by the glazier, and paid a dollar for every window he broke. Suddenly the same act would be regarded as theft: the glazier was breaking windows in order to force people to hire his services. Yet the facts observed by the onlookers remain true: the glazier benefits from the business, and so does the baker, the cobbler, and so on. Bastiat suggested that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him.

Application

Economists of the Austrian School and libertarians argue that the "broken window fallacy" is extremely common in popular thinking. Examples include:

War

Some claim that war is a benefactor, which historically often has focussed the use of resources and triggered advances in technology and other areas. Heraclitus said: "War is the father and king of all". Others point out that war is extremely destructive. Instead, demand could have been stimulated in more beneficial ways, such as government investment in education, basic research, public health, and infrastructure.

Terrorist Attack

After September 11, 2001, some economists suggested that the rebuilding in New York would stimulate billions of dollars of economic activity, which would provide a net benefit to the United States economy, which was in recession at the time. But others argue that this was an example of the broken window fallacy, since it ignored the billions of dollars in assets which were a net loss as a result of the attack. If the World Trade Center should be rebuilt exactly as it was before, the world would have a World Trade Center, whereas without the September 11, 2001 attack, the world would have not only the World Trade Center, but also all the good things that could have been done with the resources now spent on rebuilding it (not to talk about all the lives and assets lost with the WTC).

Special interests and government

Bastiat, Hazlitt and others equated the glazier with special interests, and the little boy with government. Special interests request money from the government (in the form of subsidies, grants, etc), and the government then forces the taxpayer to provide the funds. The recipients certainly do benefit, so the government action is often regarded by the people as benefitting everyone. But the people are failing to consider the hidden costs: the taxpayers are now poorer by exactly that much money. The food, clothing or other items they might have purchased with that money will now not be purchased--but since there is no way to count "non-purchases," this is a hidden cost, sometimes called opportunity cost. Bastiat referred to this in his essay as "what is not seen". Because the costs are hidden, there is an illusion that the benefits cost nothing. Hazlitt summarized the principle by saying, "Everything we get, outside the free gifts of nature, must in some way be paid for." Robert Heinlein popularized a summarization/ancronym of the concept called "TANSTAAFL".

Common examples of special interest groups practicing the broken window fallacy might be:

  • Arguments on the grounds of maintaining or providing employment:
    • Arguments against reduction of ineffective tax-paid positions, such as in government administration;
    • Arguments for protectionist measures such as tariffs, subsidies and/or other regulations at the tax payers' and/or other businesses' expense;
    • Arguments for overriding public opposition to industry projects and enterprises, such as nuclear power plants and casinos;
  • Theaters etc. supporting arts subsidies, on the grounds that while people go to the theater or to a concert they also go to restaurants etc. and stimulate the economy.

To the Keynesians and social liberalism in general, on the other hand, the government can play a constructive role; for example, dealing with issues such as market failure and the provision of public goods such as full employment. (Of course, none of these economists see the government as always doing a good job.) As well as the stimulation of aggregate demand, they argue that redistributing spending patterns can have desirable social effects; for instance, arts subsidies might make a city a more pleasant place to live, even if there is no direct economic benefit.

It should not, however, be forgotten that no one measure of wealth ever applies uniformly, and that aiding one industry at the expense of another is often justified thus. Further, it may be necessary to keep an industry alive that is unnecessary except in times of emergency. There are certainly better ways to do this: if you need a glazier in town to fix the occasional broken window, you could employ him making stained-glass instead of breaking windows for him to fix. This is just the broken window fallacy reversed, for the hidden cost of losing the glazier is that you cannot repair windows when you must. Likewise, if you lose the arts, you may incur psychological and social losses (but then, you may not.)

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