What is the broken window fallacy?
The broken window fallacy is a parable that is sometimes used to illustrate the problem with the idea that waging war is good for a nation’s economy. Its broader message is that an event that appears to be beneficial for those immediately involved may have negative economic consequences for many others.
The broken window fallacy was first voiced by the 19th century French economist Frederic Bastiat.
Key points to remember
- The heart of the broken window error argues that spending money on items that have been destroyed does not lead to economic gain.
- The broken window fallacy suggests that an event can have unintended negative ripple effects if money is redirected to fixing broken objects rather than new goods and services.
- The theory suggests that a boost to one part of the economy can lead to losses in other sectors of the economy.
- The parable used in the broken window fallacy illustrates the negative economic effects of war: money is diverted from the creation of consumer goods and services to the creation of weapons, and money is further spent on repair the damage caused by war.
Understanding the Broken Window Fallacy
In Bastiat’s tale, a boy breaks a window. The townspeople watching decide that the boy has in fact done a service to the community as his father will have to pay the town glazier to replace the broken window. The glazier will then spend the extra money on something else, which will boost the local economy. Onlookers come to believe that breaking windows stimulates the economy.
Bastiat points out that further analysis exposes the error. By forcing his father to pay for a window, the boy reduced the disposable income. His father will not be able to buy new shoes or other luxury products. Productivity also went down, as the time the father spent tending to the broken window could have been put to better use. So the broken window can help the glazier, but at the same time it deprives other industries and reduces the amount spent on other goods.
Bastiat also noted that the townspeople should have viewed the broken window as a loss of some of the real value of the town. Also, replacing something that has already been purchased is a maintenance cost, not a purchase of new goods, and maintenance does not stimulate production. In short, Bastiat suggests that destruction does not pay in an economic sense.
The war economy
The broken window fallacy is often used to discredit the idea that war stimulates a country’s economy. As with the broken window, war generates resources and Capital city be redirected from the production of consumer goods and services to the manufacture of weapons of war.
Moreover, post-war reconstruction will mainly involve maintenance costs and will further depress the production of consumer goods and services. The bottom line is that countries would be better off not fighting at all.
Lost Sales Opportunities
The broken window fallacy also demonstrates the viewers’ flawed conclusions. Considering the lucky glazier who will earn money by fixing the window, they forgot others who will be harmed, such as the cobbler who lost a sale because the money the father could have spent on new shows is now spent on repairing a product that has already been paid for.
Behavioral economists believe that consumers gain in satisfaction, this is called utility, by spending money on new goods rather than maintaining existing ones, even if the cost is higher. This is called loss aversion or prospect theory.
In this sense, the fallacy comes from making a decision looking only at the parties directly involved in the process. short term. On the contrary, Bastiat argues, we need to look at everyone whose businesses will be affected by the broken window.
The essential
The broken window fallacy holds that there is no economic gain in undoing the destruction caused by a certain event. Even though the capital will be spent to repair the damage, it is only a maintenance cost that does not stimulate the economy in the long run, because it is not a real increase in production economic. The money and time spent repairing the damage could be spent on more productive goods and services. In times of war, resources are diverted to the creation of weapons instead of using those resources to invest in areas that could increase real economic output.
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