The Broken Window Fallacy

Also known as opportunity costs-

A boy throws a rock through a bakery window.  A crowd gathers and shake their heads.  In time, one person speaks up, "At least the glazier will be happy!"  He owes Jackie for some shoes.  Now Jackie can by a new mattress.  How wonderful for our economy!

The crowd forgets that previous to the broken window, the baker had two hundred fifty dollar and a window.  Now he just has a window.  He had planned to purchase a suit that afternoon, therefore he would have had a window and a suit, but now he just has a window.  

The crowd forgets the unseen tailor who would have sold a suit.  They only see the baker and the glazier.  "No new employment has been added...  They only see what is immediately visible to the eye" (Economics in One Lesson, pg. 24).  

Sounds simple enough, right?  


It's amazing how often politics turns a disaster into an opportunity.  Every national disaster is presented as "good" for the economy.  Hurricane destroys homes?  It will stimulate the economy!!!  


But this is FALSE.  Destruction does NOT stimulate the economy any more than the rock breaking the window stimulated the economy.  It just forces one to spend money on rebuilding instead of on other things.  


It is a common belief that World War II ended the Great Depression. Think of all the people employed- soldiers abroad and women back home!  When it ended, think of all the things people were able to buy and build that were not available during the war: the houses, the cars, the nylon stockings and radios...   This is simply a more complex version of the broken window.  "The more war destroys, the more it impoverishes, the greater the postwar need.  Indubitably.  But need is not demand"  (Economics in One Lesson, pg. 26).  


If it were true that destruction stimulated the economy, we could be heroes by breaking the windshield of every car on the street!  Our government should encourage us to destroy our current cars so that we will purchase a new one! 


Oh wait..."CASH FOR CLUNKERS" sound familiar?  


"The simple truth is that there is an optimum rate of replacement, a bet time for replacement...  The wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing" (Economics in One Lesson, pps. 28-29).  




NOTE:
I loved watching this second video tutorial because both the interviewer and the interviewee are both very serious Catholics!  Jeffery Tucker (interviewer) wrote Sing like a Catholic on Gregorian chant and Dr. Thomas DiLorenzo is an economics professor at Loyola University.  I find that many Austrian economists are serious Catholics- such as Judge Andrew Napolitano, Thomas E. Woods, Lew Rockwell and more.  I have been so pleased to find these wonderful Catholic leaders as I learn more and more about Austrian Economics!