The Broken Window Fallacy

Does destruction create jobs? After natural disasters, terrorist attacks, and wars, some people argue that these disasters are good for the economy, because they create jobs and prosperity. As Prof. Art Carden of Rhodes College explains, this is an example of the "broken window fallacy," a term coined by Frederic Bastiat. When a shopkeeper's window is broken, he will spend money on a new window, which gives income and jobs for glaziers. This activity is "seen," but the "unseen" is just as important: the money spend on a new window could have been spent on other things. Wealth has not increase, but only reallocated from some people to others, and society is worse off by one window.

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[captainjack77]

What an asinine argument. Automation frees up labour, which allows people to do something else, something more productive. For example, you would argue that a backhoe has cost people jobs, since we could have employed 200 people to dig the same hole with shovels. But you would then argue, shovels have put people out of work, since we could have hired 20,000 to dig the same hole, with their hands.

Automation is in fact a good thing - it leads to increased living standards and MORE opportunity.

[tiki2188]

It is kinda sad that still, in 2013, the notion that "war can be a good thing" is still around. Besides the obvious moral issues with it, does it really need deep thought and economic knowledge and etc to get that "destruction destroys prosperity"?? LOL

Sure, a boom happens after an war/disaster/attack but its just rebuilding from a new low, NOT making new prosperity.

[mmann66666]

Except the US economy is growing along with spending. The recession ended in '09. Inflation is up as expected but more could have been done is the bailouts were more efficient and focused on government projects and low incomes which are good at spending quickly.

[mmann66666]

Austrian Economists have predicted 9 of the last 5 recessions.

[Mark D]

There were many Austrian thinkers that predicted the collapse of the housing industry and the future recession, including me.

Ben Bernanke is a Keynesian thinker, but he failed to see the housing bubble. Greenspan and Bernanke also reduced and/or held interest rates low during times of more than full employment and malinvestment within the USA. The Fed was practicing accommodative monetary policy due to large national debt and budget deficits.

[Mark D]

This irrational breaking of stuff (windows) and government stimulus programs only sends false signals to production within the economy. In this example: if enough windows are broken, the demand curve for window repair related goods and services shifts to the right, which increases employment and consumption. However, this is just a bubble economy that will collapse when people stop breaking windows. All of this effort should have gone into more productive and sustainable areas.

[Mark D]

(2/2) Austrian thinkers want to avoid this through tight monetary policies and stopping governments from encouraging malinvestment and irrational credit based booms.

The Fed’s QE1-3 had a detrimental effect within the economy. People have a perception of large future inflation; so consumer spending is down; inflation hedging is up; and personal savings rates are down again. The CPI and the consumer price deflator understate inflation within the economy, resulting in an overstatement of real GDP.

[Mark D]

(1/2)The irrational spending was created by malinvestment, lack of savings, high personal and governmental debt, loose credit, irrational increases in the monetary base, and low interest rates during a time of full employment. The recession was simply a needed correction to the debt crisis and the unsustainable credit based consumer economy. When the economy grows mainly through consumption financed from credit, the economy will contract when the credit runs out or must be paid back.

[stinkyskunkedmonkeys]

It is a good thing for the richest, and those in government who can invest in arms companies, and control the course of foreign policy.

[mmann66666]

It sounds like you are an Austrian economist. This receives little traction due to its continued inability to provide predictions. Recessions are repeatedly occur with out being preceded by increased monetary expansion such as in the 1990s and the downward demand spiral that occurs clearly responds to Keynesian predictions when spending is increased and that after the introduction of a central bank that the average length of recessions fell and didn't increase as Austrian economics predicted.

[mmann66666]

This only works if there is a downward demand spiral. If not and investment and consumption are already large enough. Otherwise there is no increase in consumption and investment and we all end up poorer because we have to pay for a new window.

[mmann66666]

If large concerted spending occurs, say by breaking windows, people are forced to spend and repare them. This spending assists in employment which inturn increases demand for goods. This makes investments seem more likely to be profitable and the savings are no longer idle. The small dip in total wealth from the window breaking is more than out weighed by the encouraging of investment.