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Parable of the broken window

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The parable of the broken window, also known as the broken window fallacy, was originally given in Frédéric Bastiat's 1850 essay, Ce qu'on voit et ce qu'on ne voit pas ("That Which Is Seen, and That Which Is Not Seen"). It demonstrates the costs to society that occur when property is destroyed, and illustrates the law of unintended consequences with respect to economic activity.

The book Economics in One Lesson by Henry Hazlitt was inspired by this parable.

The Parable[edit]

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.

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.

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."

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.

Contemporary Examples[edit]

Paul Krugman, September 11, 2001 terror attacks:[1]
Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could even do some economic good.... First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending.
The Economist, "Cash For Clunkers" program:[2]
The boost in demand that the rebates have brought about is exactly the sort of stimulus that is urgently needed to escape what John Maynard Keynes called a “liquidity trap”. According to his theory, consumers may become so worried about the economy that they cling to as much liquid wealth as possible, cutting their spending sharply and thereby triggering precisely the slump they feared. Moreover, as stimulus policies go, cash-for-clunkers looks to be unusually effective.
C. Fred Bergsten, about the 2004 Indian Ocean earthquake and tsunami:
"Perverse as it seems, disasters of this type usually do have positive long-term effects. The reconstruction process itself requires a lot of new investment, some of it in this case financed by foreign assistance, but there will be new investment, that will create construction contracts, that will generate jobs, that will boost economic growth, in the short to medium run. Moreover, even for the longer run, the reconstruction may produce more efficient facilities and more extensive facilities ... when they put down new resort hotels, they'll be more more modern, they'll be more attractive, they'll probably bring in more people in the future. So again, though it seems perverse, the net effect of these things frequently is to boost economic activity, at least for the short to medium run, and to improve the underlying infrastructure and therefore the long-term prospects as well." He continues with examples like Germany and Japan after World War II, and other wars and disasters.[3]
Lawrence Summers, March 2011 Japan earthquake:[4]
Friday's massive earthquake is yet another challenge to Japan's recovery but it may provide a jolt to the economy over the short term, Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, told CNBC.

The biggest earthquake in 140 years hit Japan Friday, triggering 10-meter high tsunami waves.

"If you look, this is clearly going to add complexity to Japan's challenge of economic recovery," Summers said. "It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place."

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.
Brad DeLong, Hoover Dam construction:[5]
The total appropriations for the Hoover Dam were $50 million in nominal. With nominal GDP per worker of $1000 per year back in the 1930s, that means that the immediate employment impact of the Hoover dam was vastly more than 5000 workers. Figure that 50,000 employment-years of useful paid labor were generated by the dam: the people who worked on the dam, and the people who brought materials to the dam, and the people who made the machines that the people who worked on the dam used, and the people who made the materials that were brought to the dam, et cetera, et cetera.

And then there are the multiplier effects: The people who worked on the dam had higher incomes than they would otherwise have had, and they spent those extra incomes, and the businesses that sold them products hired more workers to meet the added demand and hired workers and boosted their incomes, and spent their incomes on extra goods, and businesses then hired more workers to produce those extra goods.

Figure a multiplier of 3, and thus an impact of the Hoover Dam during the Great Depression of 150,000 employment-years of useful work relative to what would have been the case had the appropriation been cancelled and the resources devoted to "deficit reduction."
Paul Krugman, on military buildups:[6]
PAUL KRUGMAN, NEW YORK TIMES: Think about World War II, right? That was actually negative social product spending, and yet it brought us out.

I mean, probably because you want to put these things together, if we say, "Look, we could use some inflation." Ken and I are both saying that, which is, of course, anathema to a lot of people in Washington but is, in fact, what the basic logic says.

It's very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal.

If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better –

ROGOFF: And we need Orson Welles, is what you're saying.

KRUGMAN: No, there was a "Twilight Zone" episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time, we don't need it, we need it in order to get some fiscal stimulus.

See also[edit]

References[edit]

  1. Paul Krugman. "Reckonings; After The Horror", September 14, 2001, The New York Times. Referenced 2011-01-05.
  2. "Clunky but effective: Why cash-for-clunkers schemes make sense right now," The Economist, accessed 2011-03-13, http://www.economist.com/node/14162193?story_id=14162193.
  3. "The Economic Costs of Natural Disasters " (story, audio), "Talk of the Nation", National Public Radio. Broadcasted December 29, 2004. Referenced 2012-11-27.
  4. "Earthquake May Boost Economy Short Term: Summers," CNBC, accessed 2011-03-13, http://www.cnbc.com/id/42002647.
  5. DeLong, J.Bradford. "infrastructure Investment: Fake Numbers About the Hoover Dam from Former Biden Chief of Staff Ron Klain..." Grasping Reality With Both Hands. June 14, 2011. Referenced 2011-06-16.
  6. Krugman, Paul. [1] CNN interview, August 14, 2011.

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