Debunking The Broken Window Fallacy

One day a boy was playing football when he accidently broke a window. Rather than get mad, the people shrugged their shoulders and said breaking windows is good for the economy. After all, if no windows were broken, then all the glaziers would be out of a job. By breaking the window, the boy ensured money would be spent on repairs, thereby ensuring someone kept their job and giving the window making business a boost. However, at this point Bastist in his seminal essay “That Which Is Seen And That Which Is Not Seen” jumps in to point out why this is a fallacy. While we see the money spent on repairing the window, we don’t see what would have happened had the window not been broken. Instead of repairing the window, the money could have been spent on a new pair of shoes. So while the glazier is better off, we don’t see the people who are worse off as a result.

The first time I heard this, I thought it was a nice little parable from long ago and not much more. It is obvious that destructive activity is not productive and this was a nice way of saying it that didn’t quite re-invent the wheel. After all broken windows and natural disasters are rare even in America (and almost non-existent here in Europe) and have very little economic effect. However, to my surprise, some people thought this was a hugely important lesson. Libertarian blogs such as Mises and Cafe Hayek extolled the virtues of the parable as of huge importance for understanding economic policy making today. Probably the most famous libertarian economic book called “Economics In One Lesson” is dedicated to explaining this very fallacy. In fact it is widely seen as a silver bullet that completely defeats Keynesian economics altogether. How?

It is argued that when we see the government spending money on a public works scheme and think we see jobs being created, we are just like the people who think that broken windows boost economic activity. We are ignoring the unseen effect. While we see the new road and the workers employed on it, we do not see what would have happened had the road not been built. It is argued that the government no more creates jobs than breaking windows creates jobs. In order to get the money to pay for the road, the government must impose a tax which takes money that consumers would have spent elsewhere. It also takes employees who would have worked elsewhere and materials that could have been used on other jobs. In other words any increase in government activity is offset by a decrease in private sector activity.

This is an interesting argument as it assumes that 1) Say’s Law holds and 2) the economy is at full capacity, which means that there is 100% crowding out. What is interesting about these theories is that they were dominant in the 19th century (when this essay was written) but were debunked during the Great Depression. Not even mainstream neo-classical economics textbooks teach Say’s Law anymore and it is rarely heard of. So in a sense the Broken Window Fallacy is like rereading arguments over Irish independence or speeches from the Civil War or the battle lines of World War One. It is offering an insight in a historical period long past and a glimpse at how people used to think. Unfortunately some people go a bit too far in their historical re-enactment and think the Broken Window Fallacy has some relevance for today.

The strange thing about assuming full capacity as the Broken Window Fallacy is that you end up in a strangely paralytic nihilistic world. If any action by the government is automatically offset, then surely the same can be said for the private sector? If I set up a restaurant, some might praise me for being an innovative entrepreneur, but am I not depriving the rest of the private sector my rental space? Is there not one less chef for other restaurants to hire? If I am praised solely on the money I spend, are we not forgetting about what is unseen? After all, my money didn’t come from nowhere, my business may be richer, but are my customers not equally poorer? For every customer I gain, does that not mean all other restaurants have one less customer? Is all investment, public or private, not futile?

The perverse conclusions from 100% crowding out do not end there. If there is full capacity then government intervention can be justified.  A friend once told me that the economy needs people to smoke due to the boost that cigarettes give in terms of employment and taxes. But if there is full capacity then even if cigarettes were banned tomorrow people would have extra money in their pocket. Other businesses would get a boost equal to the decrease of the tobacco industry and the unemployed workers could be rehired. Thus if the government strongly discourages one industry this does no overall damage to the economy but merely shifts resources from one area to another. So if economic output is the same regardless, then the government can easily intervene to pick the right industry and discourage others like alcohol and tobacco.

The problem of course is that we are in a time of recession when we are far below full capacity and there are idle resources. So if someone spends money now, there is no guarantee that they would have spent it anyway. When a person is put to work this does not mean they would worked somewhere else otherwise, there is a good chance they would be have been unemployed. So the choice is not always between government spending or private spending, but government spending or no spending. But some would argue, if people don’t spend, they save which means the money will eventually get spent in the long run. But that is little good to us now (this was the key point of Keynes most famous and most misunderstood quote). When people are trapped in unemployment, it is not much good to tell them that in three years time there will probably be jobs. We are in a crisis now and we need a solution now before the recession does long term damage to potential output. The point of a stimulus is to speed up the process and to borrow from the sunny future to pay for a rainy today.

Seen and unseen is an interesting point and one that can be applied to libertarians too. When a libertarian decries the minimum wage, they are only focusing on the costs the employers’ face, that is what is seen. However, they fail to notice the unseen, namely that as employees wages are higher, they spend more, hence sales and revenues of a business rises. This is why “minimum wage= unemployment” is a statement asserted rather than a fact proven.

The fallacy assumes that  the displaced private sector activity was of equal or greater value to the new public investment. But what if the activity had a negative effect on society? For example what if the government taxed pollution or alcohol to pay for the public works? In this case a reduction in private sector activity caused by crowding out is actually a good thing. A Pigouvian tax on tobacco, alcohol, carbon etc would still be beneficial to the economy even if the Broken Window Fallacy holds. It is also incorrect to assume that private and public sector spending are the same. So even if a new public hospital built by a tax on luxury cars does not increase GDP, it can still be argued that society is better off. Wealth can still be redistributed even if output is not increased.

Keynesian do not claim that breaking windows creates wealth, rather they show that even something as destructive as breaking windows can increase employment and boost economic growth. Critics go wrong by taking Keynesians too literally. The point of broken windows is not that this is a great idea we should all implement, but that if even destructive activities can boost the economy, imagine how could can come from investments that are desirable in their own right such as schools and hospitals. If breaking windows can boost the economy and building wind turbines can prevent climate change imagine what happens when you combine the two? Breaking windows isn’t the core teaching of Keynesians, but rather an example of even in the worst case scenario, the economy gets a boost, so imagine what would happen in the best case.

50 thoughts on “Debunking The Broken Window Fallacy”

  1. I don’t normally read your economic posts, sorry – but this has caught my interest and given me something to think about.

    Please feel free to edit this part – there are a couple typos and missed words in the very last paragraph, thought you might like to know.

  2. In today’s economy, if you break a window in a house of a poor person, there is a good chance that this person will replace it with a piece of plywood and some duct tape, instead of paying anyone to fix it. So, no useful outcome for anyone.
    But if you break a rich man’s window, he will pay to replace it (and maybe even to remodel the whole room), instead of buying another share of Apple. And buying shares on the secondary market produces nearly zero investment to the company, and only marginally contributes to financial services industry by way of fees and commissions.

    1. You forgot that the rich man buying that share of Apple means that the seller now has the cash and what does he do with the money? Back to the seen and unseen. Unless the seller buries the proceeds of the sale in his backyard, one way or another it ends up benefiting the economy.

  3. The purpose of all human action is the satisfaction of our desires. These desires can be selfish or altruistic, but nevertheless that is the purpose all action. We directly consume, or we engage in productive activity so that we can consume at a later point.

    The savage might be considered fully employed, since almost every waking minute is spent looking for food. He is operating at full capacity. Would we swap places with him? No. He has no capital. His consumption possibilities are greatly inferior to ours.

    The Irish were fully employed during the Celtic Tiger. Would we wish to have another boom like that? No. We were wasting capital on housing and other debt-financed activities which destroyed our consumption possibilities in the years to come.

    There is no point in having full employment or full capacity or what is commonly called “economic growth” (i.e. spending), since none of those things are directly related to the accumulation of capital, and trying to achieve them at the expense of capital means jeopardising society’s future.

    1. Full employment is an ideal state in any economy, including the ones that you laid out above, and to imply that it somehow impedes the accumulation of capital just isn’t true.

      And for the record, no Keynesian thinks that “economic growth” is spending. Any intro Macro textbook (yes even the one written by Keynesians e.g. Krugman) will tell you that growth in physical capital (investment), human capital, and technological progress are key factors in long run economic growth. So I’m not sure where your comment above was going because no Keynesian would disagree with it.

      1. Define full employment. I bet you will have difficulty.

        You didn’t tackle my point regarding the Celtic Tiger. Economists thought Ireland was wonderful, because it had “full employment” (according to them, unemployment c. 2%). Their theories were incapable of understanding that the capital stock was being distorted into a structure which could not be sustained and which would sooner or later lead to a catastrophe. So we can see that full employment is perfectly consistent with the destruction of capital and society’s long-term economic prospects with it.

        On point number two, I would not let you wriggle away from the Keynesian (and general mainstream economist) obsession with GDP numbers as a shorthand for economic growth. When the government borrows money and spends it, that goes directly into GDP. When the consumers borrows money and goes on a spending binge, that goes into GDP. It doesn’t matter if the money has been wasted and the future is grim, the Keynesians will celebrate.

        Krugman, 2002: “The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

        Bernanke, 2010: “The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

        This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

        1. Full employment is essentially when there is no cyclical un-employment or unemployment because of deficient demand. That of course doesn’t include structural or frictional unemployment.

          The Celtic Tiger point is a Red Herring, which is why I didn’t address it. It has nothing to do with the central question at hand which is, Does Full Employment impede capital accumulation IN THE LONG RUN? It’s the long run that matters. You conveniently never answered that question.

          You are looking through a narrow Austrian lens when you say “Their theories were incapable of understanding….”. Any Keynesian will tell you that an unstable boom/bubble, which was exactly what was happening in Ireland, isn’t good for the economy in the long run.

          The Irish economic crisis was primarily causes by a speculative bubble in property that yes, resulted in a misallocation is capital resources, but this bubble was caused by a surge in bank lending and run up in private debt (which is why Ireland has incredibly high levels of private debt http://www.businessinsider.com/portugal-irelands-household-and-corporate-debt-levels-are-far-worse-than-ever-greece-2010-11). When the party was over and creditors realized what was happening, the lending stopped and the loans had to be paid. Unfortunately, they couldn’t be payed, price on property plummeted resulting in debt deflation, and the financial system collapses. The financial sector and financial instability must also be looked at. None of this is inconsistent with a Keynesian narrative on the crisis.

          The problem here is that

          1. You assume that economists think that GDP is the end all be all measure of economic growth. It’s a useful proxy and variable, which is why every single intro to macro textbooks has a section on “What Real GDP Doesn’t Measure”:

          “Every once in a while economists are accused of believing that growth in real GDP per capital is the only thing that matters – that is, thinking that increasing real GDP per capital is a goal in itself. In fact, economists rarely make that mistake; the idea that economists care only about real GDP per capital is a sort of urban legend.” Paul Krugman’s Macroeconomics Textbook

          This is basic intro stuff.

          You also don’t understand accounting identities when you say “When the government borrows money and spends it, that goes directly into GDP. When the consumers borrows money and goes on a spending binge, that goes into GDP.”

          Here is the Gross Domestic Product:
          Y = C + I + G + (X − M)

          You’re essentially saying that Keynesian think that if G goes up, then so does Y. But Keynesians specifically say you cannot do this (http://krugman.blogs.nytimes.com/2012/01/16/mistaken-identities-wonkish/), you need a behavioral equation in there. Again, more basic stuff.

          So, you entire point on Keynesians celebrating any type of spending just doesn’t fit with reality or basic economic theory. (also Krugman never advocated a housing bubble http://krugman.blogs.nytimes.com/2010/04/05/me-and-the-bubble/)

          2. Don’t understand the role of QE.

          QE is essentially an asset swap that lowers interests to promote investment during a recession. It’s dealing with investment (the source of capital accumulation), not consumption. I don’t know why you keep harkening back to this.

          1. I would be delighted if Keynesians stopped caring about GDP (I certainly don’t care about it). It would be wonderful if proposals which might cause or deepen an official recession weren’t met with such horror from these mighty minds. Sadly, this is is not the case.

            I would also be delighted if Keynesians allowed more behavioural uncertainty to invade and to cast doubt on their models.

            This behavioural uncertainty, however, doesn’t stop them from advocating government spending for the precise reason that it will prevent a recession.

            Krugman: “I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea.”

            He certainly didn’t say it was a bad idea. He sounds very friendly towards it. In any case, it is consistent with his admitted call for low interest rates and with everything he has done to generate short-term economic activity at the expense of everything else.

            The Bernanke quote was longer than I wanted it to be, but I thought all of it was needed to show the context. The money quote was at the end: “…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

            You will continue to deny the Keynesian celebration of spending, when it is written there in black and white?

            Though to be fair, Keynesians don’t just celebrate unsustainable consumer spending. They also celebrate unsustainable investment, which Bernanke and his colleagues in the Fed, Bank of England, etc. have been doing for years.

            1. “I would be delighted if Keynesians stopped caring about GDP”

              You seem to be confusing Keynesians with every non-Austrian economist (believe me they are not the same thing).

              “I would also be delighted if Keynesians allowed more behavioural uncertainty to invade and to cast doubt on their models.”

              Actually one of Keynes’s main points in the General Theory is the role uncertainty plays.

              “This behavioural uncertainty, however, doesn’t stop them from advocating government spending for the precise reason that it will prevent a recession.”

              You seem to misunderstand both uncertainty and the effect a stimulus would have.

              I’m not sure why you are quoting Bernanke. He was appointed by Bush and lavishly praised Freidman. Not sure why you think this makes him a Keynesian. I suggest you look up what Post Keynesianism actually is and some of their main theorists, because at the moment you call everyone you don’t agree with a Keynesian.

              “You will continue to deny the Keynesian celebration of spending, when it is written there in black and white?”

              You seem to greatly enjoy debating with Kenesians in your head and hope you are winning. However, you need to adjust your arguments to what Keynesians in the real world think. There ere a large number of Post Keynsians who were very critical of policy during the 2000s. Steve Keen in particular criticised the build up of debt.

              You need to realise that Keynesians support government spending during a recession. They do not support blanket spending on anything by anyone at anytime. You seem to be believe that anytime money is spent, that’s Keynesianism. Please open your mind and hear what the other side is actually saying.

              1. Unfortunately, you seem to have run out of road. It’s irrelevant that Bernanke is a Republican. His Friedman influences are also irrelevant. My intented target, rather ambitious though it is, has clearly been the entire edifice of modern central banking and mainstream economics. I’m not interested in post-Keynesianism, because I have read enough of Keynes to form the belief that his economics was ridiculous, and there is little point in trying to salvage anything from it.

                If distancing yourself from Bernanke and from the implementation of modern monetary policy is how you react to my criticisms, I suppose I have achieved something. Although I predict that in the end, your criticism of them will amount to little more than that they “didn’t do enough”.

                1. Yet again you miss the point and tilt at windmills rather debate actual Keynesians. Bernanke is not a Keynesian in any way shape or form. You fail to realise that this blog is more or less dedicated to criticising and reforming the way we view mainstream economics. So criticising the establishment is not criticising me.

                  I always disagree with Bernanke and Greenspan and there is a huge gap between them and Post Keynesians. So I wouldn’t get too excited over your “victory”.

    2. GM I enjoy your comments and debating with you, but sometimes you say something completely ridiculous and I lose all respect for you. This comment is one of them. I saw someone else make a similar argument when I was researching this post, but I ignored as I felt I would be attacking a straw man.

      “The savage might be considered fully employed, since almost every waking minute is spent looking for food. He is operating at full capacity.”

      Wow. Firstly, what is this, the 18th century? When was the last time anyone used a “savage” in an argument? Secondly, do you have any idea what full employment is? It is not spending everyone waking hour working but rather that everyone who wants a job has one. You regularly complain that I fail to understand Austrian economics. In my defence I try my best and read Austrian sources directly. You have no clue about what you are arguing against.

      “The Irish were fully employed during the Celtic Tiger. Would we wish to have another boom like that? No.”

      You draw two seperate points together and try and make them seem linked. We had low unemployment and a housing bubble therefore the two go hand in hand. This is the kind of spurious amateur correlation that even those with basic knowledge of statistics would not commit. The housing bubble was not due to full employment, but rather a massive market failure (a point you will undoubtedly try to ignore).

      “There is no point in having full employment or full capacity or what is commonly called “economic growth” (i.e. spending), since none of those things are directly related to the accumulation of capital”

      And how do you think we will be able to accumulate capital? Surely this is easiest done when the country is prosperous and has money? Surely a country that is using all its resources is more prosperous and productive than one that is not? Or would you prefer a world where factories lie empty, machinery rusts, workers are left unemployed, but there is plenty of saving?

      1. “It is not spending everyone waking hour working but rather that everyone who wants a job has one.”

        Thank you very much for your efforts to understand. I will sharpen up my understanding of the opposing points of view where I can.

        In this case, though, you are making a point which no Austrian economist would ever make, and which comes back to a point which I have made repeatedly in recent comments and which you evidently still need to grasp.

        The purpose of all economic activity is to satisfy consumer desires.

        Simple, right?

        Why do people have jobs? In the most blunt and direct way possible, leaving minor considerations aside, we can say that people work because they want the stuff that they can buy with their wages.

        Nobody “wants” a job. They want the stuff that they can buy with the wages that they get from a job.

        You need to understand this before the broken window fallacy will make sense to you.

        ———————-

        Secondly, about the Celtic Tiger.

        I understand correlation. I merely showed you that very high employment is consistent with (does not necessarily cause!) economic devastation. Which I hope will cast some doubt in your mind on how important employment really is.

        And as for the accumulation of capital: again, there was a lot of economic activity during the Celtic Tiger. There was a lot of construction, lots of people working, it was brilliant. But the collapse was inevitable, because the capital was not being used in a sustainable way.

        It would be better if people had saved their money or invested it in extremely conservative ways, rather than putting it into bubble activities. This would have led to less short-term, visible economic activity, but it would have increased the prosperity of these later years.

        Unfortunately, people were misled by the investment opportunities made available to them, and the rest is history.

        But I hope this also helps to illustrates that short-term inactivity can be far more conducive to long-term prosperity than short-term activity.

        1. “The purpose of all economic activity is to satisfy consumer desires.”

          A rather narrow view hat completely ignores social and cultural factors.

          “a point which I have made repeatedly in recent comments and which you evidently still need to grasp.”

          You seem convinced that you have a really important point to make, but you don’t seem to quite around to making it. So far you keep saying things are scare and people want to buy things. I’m sorry if I am grasping the enormous significance of these broad generalities.

          “I merely showed you that very high employment is consistent with (does not necessarily cause!) economic devastation. Which I hope will cast some doubt in your mind on how important employment really is.”

          Imagine if I told you about a rich guy who developed a drug addiction. Would this cast some doubt in your mind over the importance of wealth? Or would it simply be an example of how wealth can be misused? The Celtic Tiger has lessons for us, but they are about the misuse of wealth rather than he questioning of wealth itself.

          1. It’s not a narrow view at all. It’s an undeniable fact that we do things for the purpose of the satisfaction of our desires. All action is motivated by consumer desire. It’s only narrow if one takes a narrow definition of “consumption”, which I don’t.

            The reason you don’t understand the Broken Window fallacy is because you don’t grasp this.

            In the context of your metaphor, by putting full employment as a primary economic objective, you are making wealth the objective. And in response, I have pointed out that wealth can also be accompanied by addiction and ill health. I have pointed out that if a happy life is the objective, wealth should not necessarily be the objective (at least not at the expense of addiction or ill health).

  4. Government spending is indeed a good example of the “Broken window” fallacy. But only in some respects. When the gov’t taxes us to build a road then that benefits the entire society. The cost for the taxpayer may go up but the costs of driving from A to B goes down. for everyone.

    1. Yes, but the point Austrian economists make with Bastiat’s illustration is that government spending, even on things which benefit society, regularly (though they can get lucky) has opportunity cost which exceeds the value produced. Private sector spending regularly (though private spenders and investors can make mistakes) has opportunity cost lower than the value created.

      Also, most Austrian economists reject the idea that there is a class of “public goods,” such as roads, which are fundamentally different from any other goods and services.

      1. “Also, most Austrian economists reject the idea that there is a class of “public goods,” such as roads, which are fundamentally different from any other goods and services.”

        Really? I knew they were rigid ideologues, but I never thought they were that bad.

        1. Perhaps you misunderstood. What I meant was that Austrian economists (and earlier classical economists), such as Molinari, Rothbard, Block, and many others have theoretically worked through issues like roads, security, and dispute resolution and figured out that their production, provision, and maintenance can be provided without government spending, given that property rights are well-defined.

      1. Actual quote from Keynes:

        “The government should pay people to dig holes in the ground and then fill them up.”
        People would reply. “that’s stupid, why not pay people to build roads and schools”
        Keynes would respond saying “Fine, pay them to build schools. The point is it doesn’t matter what they do as long as the government is creating jobs”.
        http://econ.economicshelp.org/2008/07/john-maynard-keynes-great-economists.html

        All you big government types have the most perfunctory and disingenuous denials. The BWF allegory is a PERFECT riposte to inane Statist regulations. You just have too much disdain for Dead White Men to see it.
        “a nice little parable from long ago ” oh the quaint little darlings, bless their hearts how rustic.

  5. head banging on the desk. real hard.

    “If I set up a restaurant, some might praise me for being an innovative entrepreneur, but am I not depriving the rest of the private sector my rental space? Is there not one less chef for other restaurants to hire? If I am praised solely on the money I spend, are we not forgetting about what is unseen? ”

    If it’s done PRIVATELY, then it’s (most probably) the most efficient way since you (supposedly) use your own money. Now, something you’ve totally missed is that PUBLIC projects are done with others’ money. Therefore, 1$ spent by government is 1$ less spent by private citizens.

    “even something as destructive as breaking windows can increase employment and boost economic growth.”

    Thank you for proving Bastiat right with this “argument”,

    1. Taxes lead to a demand in currency and give it value.
      Then the govt spends money to give the non government sector the ability to extinguish its tax liabilities.
      Change in private savings = deficit – current account deficit.

  6. “If any action by the government is automatically offset, then surely the same can be said for the private sector? If I set up a restaurant, some might praise me for being an innovative entrepreneur, but am I not depriving the rest of the private sector my rental space? Is there not one less chef for other restaurants to hire? If I am praised solely on the money I spend, are we not forgetting about what is unseen?”

    It’s all about opportunity cost.

    The difference is that private individuals who spend or invest their money do so according to what they believe is most profitable and using money which they (or their parents or other willing benefactor) ostensibly earned through some benefit they provided to someone else previously. Therefore, it is safe to assume that private individuals make the choice with the lowest opportunity cost, so the crowding out effect is lower than 100%.

    Governments don’t get most of their money according to what good they have done, but through force, so they are less sensitive to the market signals that should determine how money is invested. Their tax funded (and inflation and debt funded) spending and investment regularly have opportunity costs that are higher than the actual value of the benefit of their spending and investment, so the crowding out effect is greater than 100%.

    “But some would argue, if people don’t spend, they save which means the money will eventually get spent in the long run. But that is little good to us now (this was the key point of Keynes most famous and most misunderstood quote). When people are trapped in unemployment, it is not much good to tell them that in three years time there will probably be jobs. We are in a crisis now and we need a solution now before the recession does long term damage to potential output. The point of a stimulus is to speed up the process and to borrow from the sunny future to pay for a rainy today.”

    I’m actually not opposed to using government spending to keep people alive and in decent condition, but large-scale monetary and fiscal stimulus programs do much more than that. You mentioned idle resources earlier, but you failed to really explain that. I assume that would include resources which are owned but are sitting in a warehouse or shed, but here you have a problem. This goes back to the opportunity cost issue.

    We can assume that people who own resources but do not use them or sell them have some reason for doing so. Perhaps the owner expects a valuable future use for them and is holding them until then. Any premature use for these machines due to a government stimulus would most likely create less value than the anticipated future use would have.

    Also, it isn’t simply borrowing from a sunny future because, as I hit on with the opportunity cost stuff, it will never be fully paid back. The crowding out effect of government spending is, in the long run, regularly greater than 100%.

  7. I’m amazed at your ability to so eloquently and accurately explain the broken window fallacy in your first few paragraphs, then completely fail to actually understand it in the rest of your article.

      1. My guess is that Dan (as I in my long comment above) is noting your glossing over of relative opportunity costs. For example, when you said “The point of a stimulus is to speed up the process and to borrow from the sunny future to pay for a rainy today,” you ignored the common Austrian/classical argument that the opportunity cost of government spending (that is, what that money would have been used for if not spent by the government) tends to be greater than the value created. So the borrowing from the sunny future is never fully paid back.

        W. H. Hutt wrote a great, and really short, book called “The Theory of Idle Resources, which explains this well. The gist is that owned resources that are idle in a market economy are usually idle for a reason (i.e. The owner of the resource believes that the resource will be able to produce more value in the future if left idle today).

        1. Robert, about your comparison of the minimum wage and what is seen and what is unseen: Giving more money to people for the same amount of work is not beneficial to society, it actually is what the broken window fallacy is all about.

          By forcing employers to pay more for the same amount of work and to produce the same amount of goods or services will “benefit” the employees, that is what is seen. What is unseen is that the extra money used to pay minimum wages will come from the consumers’ pockets, who will pay more for the goods and services that use to be produced by these employees instead of being able to spend that money on something else. As a whole, the community will have spent more money without getting anything extra.

          You did not debunk the broken window, you actually demonstrated that some people are still having trouble understanding it.

  8. They really are saying that Say’s law doesn’t hold.

    But it does.

    You’re assuming that the resources you use are precisely the ones that weren’t being used.

    Also as with all Keynesian stories, you bring the reader in for Chapter 4 in which the crash happens and everyone wonders how to respond, omitting Chapters 1-3 in which the last round of “stimulus” caused the bubble the bursting of which caused the crash (e.g., housing).

    You’re also assuming that there’s no demand for conservation. Who are you, and who is anyone else, to decide what resources ought to be used, and when, or for what? The consumers ought to decide that. And the only reason they’re consuming less than you expected or hoped is that you torpedoes their savings in the last bubble, and yesterday’s savings are today’s consumption.

    The 2001-4 efforts to “promote full employment” simply created a bubble in housing, creating jobs in residential construction – many of those jobs in the Sun Belt. Public works can’t be the answer because you can’t keep doing that on borrowed dollars forever – – G can be made to not come at the expense of present C and I if you borrow from another G, but ultimately you have to repay it so that comes out of future C and I. And if private sector wages and jobs are sticky, public sector wages and jobs are far stickier. Nor can you “promote full employment” via another credit bubble. Even the temporary boost in employment doesn’t help the people who lost the last round of bubble-jobs. We went from a bubble in Sun Belt construction jobs that ended in 2008 (in which the number of construction jobs lost was more than the total jobs lost, so Bob Murphy is right and Paul Krugman is wrong on that question). Then QE created an oil bubble and oil jobs in TX and ND. Different jobs, different skills, different states. Some states still have high single digit unemployment rates while ND had 2 or 3 percent. But that’s hidden in the aggregates. And it doesn’t matter now because the oil jobs are going the same place the construction jobs did – the toilet.

    Say’s Law does hold – we’re discovering that now like we’ve discovered it time and time again.

  9. There’s a bit of a problem with your argument. The entrepreneur who opens a restaurant does impose costs on society, as you say. But a modern Utilitarian economist would tell us that an entrepreneur would not go into business if he didn’t think he could organize his capital into creating more value than it cost. In other words, the entrepreneur organizes and arranges an economic machine that makes value by combining inputs (such a chef, a rental space, etc.)

    But look at the broken window fallacy from the restaurateur’s perspective: if somebody breaks his window, he has to divert some of the value he has created into getting it fixed. He has to spend just to be where he was before the window was broken. Breaking the window clearly has negative utility to the restaurateur. If the cost is large enough, it could even put him into a position where he is unprofitable. Which is bad for the economy, because he already imposed the costs on society and neither he nor society will get anything out of it.

    Broken windows are like heat: they lower the efficiency of the economic machine.

    That said, you make good points about government spending. It always comes down to utility and welfare: if government spending on infrastructure, for example, lowers the cost of doing business, then it can have huge returns for society.

  10. Your logic is wrong. The problem with government spending is that there is no natural mechanism to minimize costs and maximize value in government. Government programs often persist even when they lose money and can’t show that they’re providing more value than their costs. In the private sector, not only does a business have to make a positive profit, but a private business usually doesn’t persist if its ROI is far below average.

    The problem with government spending isn’t that they’re creating only broken-window make-work jobs, but that average government ROI is near 0 or even below 0, while in the private sector there is always an average RIO above 0. This loss is the loss government imposes on the economy when it chooses to expand into areas where private businesses can operate.

    1. This doesn’t require Say’s law, and doesn’t require the economy to be at “full capacity”. You also assume that any unspent money is lost productivity or lost potential – but that’s simply not the case. If tons of people stuff their money under their mattress for 10 years, in that time, everyone else’s money is worth an equal amount more. Its smarter for that person to invest their money, but their action doesn’t reduce the overall efficiency of the market. And thus you don’t need a government trying to get people to spend their money – especially by taking it and spending it for them.

    2. This misses the obvious point that most government programs don’t aim to make a profit. State education aims to educate the next generation, not make a profit. It is impossible to estimate its ROI. Likewise poverty reducing programs don’t have an ROI because that’s not their aim.

      1. Robert Nielsen, even if most government programs don’t aim to make a profit (not in the strict sense of funds to be allocated to shareholders, though many do aim to have surplus *revenue*), this doesn’t blunt the point about ROI, or rather efficiency or wealth creation. Their intent isn’t important to ROI. What matters is the comparison, between two potential uses of wealth, of how that wealth could be turned into goods and services (as well as more wealth). That can, and should, be done on any project. And it can be performed regardless of whether the intent of the project renders it a non-profit.

  11. In the fine “liberal” tradition, this author focuses on one of the few things with which most Libertarians have little or no problem . . . namely, Roads. Why is it that so many people think Libertarians hate roads?? A rhetorical question, I must point out. One of the few legitimate functions of government, federal government in particular, is the maintenance of our infrastructure. The author of this article did not just randomly happen upon “roads” in determining his primary example. No, this was a deliberate decision to choose that which would make the Libertarian seem most ridiculous and illogical. There is a reason I have heard this same accusation hundreds (if not thousands) of times in my many discussions and debates with people from all over the political spectrum.

    You will note that the author roundly extols the “many” positive things upon which the benevolent government wishes to spend our money on (I must put “many” in quotes, as I don’t hold this to be true), but conveniently leaves out those things upon which they actually spend the bulk of the money they take from us, by force, via the income tax. Shall we take a look at a few of these things? I say yes!

    War. Well damn . . . I hate to lead with the climax, but I’m afraid that by the time I reach the end of this comment, there won’t be any readers left! So, I will address the most damnable and destructive of government expenditures first. It is war and the government spending of our money on the machine of war (namely, the Military Industrial Complex, or, as it should be known, the Military-Industrial-Congressional Complex), more than anything else, that the true Libertarian despises most. It is here the broken window fallacy is every bit as relevant today, as it was when Bastiat first put it to paper. This author speaks of money as though it were a zero sum game . . . this simply is not true. If Bill Gates were to lose his entire fortune tomorrow, not one of us would be enriched by this by even a thousandth of a penny. If I were to invent something that suddenly made me into a billionaire, not one of you would have even a thousandth of a cent less in your bank account.

    Genius, however . . . is a zero sum game. There are only so many geniuses alive world wide. Since World War II, at any given time, approximately 73% of those considered geniuses are employed by the U.S. military. This means that 73% of the geniuses of the world, who could be focusing their energies and creativity on things like cures for all forms of cancer, Alzheimer’s Disease, AIDS, and so on, are instead focused on building faster, more powerful, more efficient killing machines. The advantage the government has is that there is little to no accountability when it comes to spending . . . after all . . . it is we, the common people, who are footing the bill . . . Oh . . . and of course, our children . . . and their children . . . and so on. A government contract or job is a hard thing at which to turn up one’s nose, particularly if that nose has been programmed to toe the establishment line (as all of our sore little noses have) . . . There is almost never fear that funding might be cut off . . . so long as the workers in this country continue to comply with having large percentages of their income stolen from them.

    I could go on for hours on war alone, but I think I’ve gotten my point across there.

    There are many ways in which the government employs the broken window concept outside of feeding the bloated Military Industrial Complex: Corporate bailouts (AIG, General Motors, Goldman Sachs, Bear Stearns, and many more deemed “too large to let fail”), government sponsored monopolies, government subsidies (the most notable, perhaps, being big oil) . . . These are the things to which this broken window concept applies (among many more).

    But it wouldn’t really do, would it, for this author to point out these truths? What sympathy would he gain by revealing the truly peaceful nature of the Libertarian ideology? How could he persuade his readers that Libertarians are kooks and fringe lunatics who want to create a world without rules, if he provides an accurate picture of what Libertarianism actually is?

    When one cannot “disarm” their foe on the merits of their own philosophy, or on the weakness of their foes philosophy, they typically resort to such tactics as this . . . the telling of partial truths and outright lies . . . the spreading of misinformation, knowing full well that the majority of people hear what they want to hear, and (not to get too Simonian or Garfunkelian on you here, but) disregard the rest. He is counting on this, and his tactic will prove to be quite effective.

    I’ve gone on long enough. If I were to give this article a proper treatment, I would still be typing several hours from now.

    For any truly interested in learning what Libertarianism actually is, you should start at http://www.libertarianism.org. Then listen to men like Tom Woods, Andrew Napolitano, Milton Friedman (he wasn’t actually a Libertarian, I don’t think, but he held to many of the Libertarian principles). And be mindful when you speak with someone who says they are a Libertarian . . . As with any philosophy, political or otherwise, the younger/newer the follower, the more likely they are to misrepresent the actual philosophy (which is likely why so many confuse Libertarianism with anarchism or with Ayn Rand’s Objectivism . . . these are not one and the same).

    I hope somebody gets this far . . . but if the did not, I enjoyed writing this, so it was not a loss!

    Peace!

    1. I also noted the assumption of a zero-sum game in the post (or was it the comments?), but decided not to mention it lest my comment would be even longer than it was. But good point.

  12. The moral of the broken window fallacy is, as you say, that destruction doesn’t create wealth. But more than that, the moral includes the fact that such activity shunts off wealth that would otherwise have been used for things that ceteris paribus rational actors would have found to be of greater value. What you seem to overlook is that government spending is in many ways similar to broken-window spending, and thus, to that degree, the broken window fallacy teaches in vivid terms how the government is inferior than private individuals (except in limited cases, like national defense) at allocating resources. The similarity of wealth spent on repairing broken windows to wealth spent in (most) government activity is this; such wealth is thereby removed from control of those who know, ceteris paribus, more efficient uses for that wealth–more efficient because private individuals, being at lower levels of subsidiarity than the various levels of government, will generally know better, more efficient, more value-creating uses for this wealth. So, it seems what you’ve ignored in “debunking” the use of the fallacy as a lesson about spending is the principle of subsidiarity. If subsidiarity is right, then the criticism sticks.

    Now, consider your conclusion “If breaking windows can boost the economy and building wind turbines can prevent climate change imagine what happens when you combine the two? Breaking windows isn’t the core teaching of Keynesians, but rather an example of even in the worst case scenario, the economy gets a boost, so imagine what would happen in the best case.”

    Note that Bastiat, von Mises, Hayek, Hazlitt, et al. would happily agree with the Keynesian that “even in the worst case scenario, the economy gets a boost.” But this is not what divides them from the Keynesian. Indeed, they would point out that while perhaps true, this is, at best, only considering the short term, and fails to take into consideration the long term and aggregate effects of such activity. Moreover, if the Keynesian view is as your quote says, then it confuses correlation with causation. Why? Because to say, “even in the worst case scenario, the economy gets a boost, so imagine what would happen in the best case,” implies a causal or at least logical connection. But that’s precisely the objection of someone like Bastiat, et al., who could always say, “true, in the short term, the economy may get a boost. But this is *despite* the deleterious (i.e. wealth-destroying) affects such activity would have if taken in the long term and aggregate. They’d just perform a Moorean shift on that reasoning and say, “If this is as good as it gets, can you imagine how destructive it would be in the worst case (i.e. implemented wide scale, as it were)?”

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