What is the broken window fallacy?

The broken window fallacy was first expressed by the great French economist, Frederic Bastiat. Bastiat used the parable of a broken window to point out why destruction doesn’t benefit the economy. In Bastiat’s tale, a man’s son breaks a pane of glass, meaning the man will have to pay to replace it.  The onlookers consider the situation and decide that the boy has actually done the community a service because his father will have to pay the glazier (window repair man) to replace the broken pane.  The glazier will then presumably spend the extra money on something else, jump-starting the local economy. (For related reading, see Economics Basics.)

The onlookers come to believe that breaking windows stimulates the economy, but Bastiat points out that further analysis exposes the fallacy.  By breaking the window, the man’s son has reduced his father’s disposable income, meaning his father will not be able purchase new shoes or some other luxury good.  Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount being spent on other goods.  Moreover, replacing something that has already been purchased is a maintenance cost, rather than a purchase of truly new goods, and maintenance doesn’t stimulate production. In short, Bastiat suggests that destruction – and its costs – don’t pay in an economic sense.

The broken window fallacy is often used to discredit the idea that going to war stimulates a country’s economy.  As with the broken window, war causes resources and capital to be funneled out of industries that produce goods to industries that destroy things, leading to even more costs.  According to this line of reasoning, the rebuilding that occurs after war is primarily maintenance costs, meaning that countries would be much better off not fighting at all.

The broken window fallacy also demonstrates the faulty conclusions of the onlookers; by only taking into consideration the man with the broken window and the glazier who must replace it, the crowd forgets about the missing third party (such as the shoe maker).  In this sense, the fallacy comes from making a decision by looking only at the parties directly involved in the short term, rather than looking at all parties (directly and indirectly) involved in the short and long term.

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12 thoughts on “What is the broken window fallacy?

  1. I’ve thought a lot about the effects of dollars as they circulate throughout an economy. But even maintenance is a positive in a society. Demolition as in war can be good if it clears the obsolete old and clears the way for new infrastructure like water and sewer lines, new streets and traffic planning, and even new zoning with coordinated commercial, business and residential areas in harmony.

    The only place that money doesn’t benefit an economy is when it’s in storage – such as gold or silver stashed away in hordes. It is not circulating and not of benefit to those who must earn and spend. One man’s expense is another’s income.

  2. Hear Hear! As I scour the net trying to make sense of both sides of the argument I repeatedly arrive at your Conclusion as well. Money is at it’s best whilst circulating. The danger is that your money can shrink while it’s in play. So I visualize board rooms full of suits just watching waiting to make a move in order to get in on the upside action. But we have consolidated wealth to the degree that everyone knows who every one is and they all say “we won”. If you don’t make any moves we won’t and it will be great as long as we live!

    Trying to stay true to my red blooded capitalist roots and lean away from the commie invasion rhetoric, I can understand that markets are best free. But who are we kidding? Can someone really compete freely in any market? We need free market regulations to safeguard from mega corporations paying to maintain monopolies. Our laws and understanding of what is really happening is a handicap to true free market capitalism. Whatever version of revolution Americans decide to take, it will be non violent but rest assured those who are found to be the hoarding cash won’t be viewed favorably. Why are these bloggers espousing Austrian economics anyway? I read every post BTW. Wouldn’t Keynesian benefit the shopping malls and apt buildings?

    One last question, I still can’t understand who benefits from a Gold Standard? Can that be answered clearly?

    • Mike, to make sense of the two opposing economic systems one’s knowledge would be best served through reading books written about the subjects. Opinions read on the internet are merely starting points of learning. In other words, I read on something which is of interest to me and then I get curious enough to want to invest my time and money on buying the books. Then, based on the new knowledge I acquired through reading BOOKS I can make my own opinion on which side is more logical and which one I favor.

      Now let me address some of your points. Money is at its best while circulating. I agree however you do not specify how should it be circulated. If you’re referring to consumer spending then you’re endorsing the Keynesian system. If you’re referring to saving and investing in the production of capital then you’re endorsing the Austrian philosophy.

      As far as the true free market capitalism you and I have not experienced it in our lifetimes. That is because if you go back to FDR and the infamous Great Depression of the 1930’s the government and the central bank tried to solve the crises via expansion of the money supply. When the market is not allowed to act freely due to govt intervention we cannot claim we had free markets. The mainstream media is notorious for blaming capitalism for the economic crises that we’ve had on and off for about a century. So, now I can see a frightening number of people looking at even more govt intervention. Little do these folks know that there is a direct correctional between economic freedom and individual liberty. The more we ask from the govt to do for us the more we relinquish our individual liberties. Check out the economic history of the Weimer Republic before the rise of Hitler. Just about any totalitarian system originated from economic instability or crises. So, I would be very cautious to repeat what the mainstream media had propagandized.

      You’re saying “But who are we kidding? Can someone really compete freely in any market? We need free market regulations to safeguard from mega corporations paying to maintain monopolies.”

      The answer is without special favors which are coming from the power of the govt. there would be no monopolies. The mega corporations buy their special favor status from the govt. And are you saying that it is the same govt we should look up to to save us from these powerful corporations via regulations? Tell me how much sense does this make to you?

      • Carmen Carmen Carmen! You rock! I guess I deserve the condescending tone since I looked at the comments and thought no one would ever read this 🙂 so I slammed it out. Anyway, I read and listen and question my paradigm constantly so I can see some of yours through mine. How is the flow of money better in the private banking system than the governmental system? I am trying to understand how we are going to move from the consumer based economy and transition into what? What do you do to grow capital? So what I am understanding is that the government supports monopolies? How so and why? Perhaps larger corporations are easier to tax thank small individual ones. Please don’t mention Hilter it is a huge turn off that smacks of illegitimacy. You had me at hello. I would read more about the gold standard but it always seems to end in some kind of strange doomsday thing that I just can’t take seriously. Please come from a “this is just a much better system” than it’s the end of the world as you know if type deal.

        I am a saver. I’d like to know and understand clearly if I am not operating in my best interests. I just get the feeling that the gold standard people are not addressing that society has a cost. Every man for himself is the way to go?

        Why Keynesian is better for malls? because of what we are looking at today. Corporations and super wealthy took the marbles off the table by firing a ludicrous amount of labor. More than they needed. Hurting the middle class and poor. Freaking people out and changing the consumer psyche. Simultaneously, they hoard the cash and blame no demand on the lack of action.

        Need to sleep. Thanks again for the banter.

    • Mike, you’re also saying “Why are these bloggers espousing Austrian economics anyway? I read every post BTW. Wouldn’t Keynesian benefit the shopping malls and apt buildings?”

      Austrian Economics must be exposed because it is the system that would lead to the best economic prosperity and individual freedoms. The mainstream does not endorse it, the schools don’t endorse it, Hollywood does not endorse it. It is a threat to the powerful elite agenda.

      Can you explain HOW the Keynesian benefit the shopping malls and apt buildings? Explain the logic behind it, please.

    • Mike, last question you posed “One last question, I still can’t understand who benefits from a Gold Standard? Can that be answered clearly?”

      For the Gold Standard to work it must be used in conjunction with a full reserve banking system. A gold standard keeps the govt on tight leash from creating new money without limits. A gold standard keeps the govt small and prevents it from expanding. A big govt is also a very powerful govt. A gold standard BENEFITS the middle class and the poor, it benefits the savers. Everyone should be a saver and be able to save enough to provide for himself during the old age, instead of being a burden on the system and asking for a handout from the govt. The Keynesian system benefits the govt, the banks, the politicians, and some investors/speculators. For a more elaborate explanation please read Murray Rothbard’s book “What has the govt done to our money”. Peace!

  3. Hi Mike, thank you for your cute comments. I love cuteness;-).

    OK, now on some serious subjects. Before I address some of your dilemma, there is one excellent book that comes to mind. I mention this because I believe anyone that has the desire to achieve enlightenment on subjects that are of importance to him/her would benefit from this book. It’s an old book written back in 1940 and revised sometimes during the 1970’s. It’s called “How to read a Book”. it sounds simple, doesn’t it? Well, it is the author’s desire to share with his reader how to read for UNDERSTANDING. In a nutshell, there are 3 types of reading: reading for ENTERTAINMENT or PLEASURE (which is what you get when you read a fiction, or a Star magazine to find out the latest gossip in Hollywood, for example); reading for KNOWLEDGE (which is typically associated with reading newspapers or history books – usually facts or statistics); and reading for UNDERSTANDING (typically of books on subjects, economics, philosophy, praxeology, psychology, etc). Such type of reading goes above and beyond the reading for knowledge because the reader has to exhort brain effort to understand the why’s, how’s, when’s of the facts. The writer claims that our education system does not sufficiently teach this type of reading. Anyway, I thought I’d mention it to you because from my personal experience I found that Austrian Thought/Economics requires this type of reading in order to get the most out of the books on the subject.

    • We can all use some cuteness every now and then. Try it Carmen. I try to read mainly for understanding. If you are trying to seduce me it’s not working. On the surface it all seems to do the same thing. As long as money is moving through the system (any system) it’s hunky dory. Wether it’s privately or publicly distributed. I hear England and Margaret Thatcher held up as like the Keynesians use the war and I really can’t see a dramatic difference in effect actually it would seem the US trounced on every one for a long time. Maybe the move is to say oh well Keynesian is wrong, we need major austerity and screw the social safety net and see what happens. What then? Only the most wealthy will survive that sort of disaster. Maybe that is the idea. For the middle class the money you “save” on taxes is spent on security. If your rich you move to a private island or maybe Austria? What are the taxes like in Austria?

  4. Mike, to address some of your questions:

    ” How is the flow of money better in the private banking system than the governmental system?”

    I am not understanding your question. What do you mean “the flow of money”. Do you mean to say the monetary policy? If that is your question, the short answer is the government has a monopoly on the currency and the Federal Reserve is in charge of the monetary policy. They work together, the govt creates bonds backed by the so called “full faith of the govt” and sells them to the central bank. The Fed creates new currency and buys the bonds from the govt. Perpetual transaction that debases the currency, at least from what we’ve seen so far. Do you think this system works well? And if so, why have we had stagflation after Nixon took us off the gold standard? Why did we have a dot.com bubble during the 1990’s? Why did we have the real estate bubble that burst this past decade? Why can’t the govt and the Fed pull us out of the economic crises? If the current system works why is it that we experienced all of the above? Now to get deeper into the subject the U.S. had a better system during the late 19th century. Indeed there were more banks failing and along with that there were bank runs. The banks which were taking on high risks would be allowed to fail back then, and while it was not good for the people who had money with those banks at least it was just a small percentage of people suffering due to losses incurred. Today, the system is based on moral hazard. The govt saves the big banks while allowing the smaller banks to fail (and be taken over by the bigger banks). The losses are socialized which means the entire nation suffers. Savers, wage earners, poor people lose because their money can’t buy the same to maintain the same standard of living. Please watch this video of Tom Woods and after that we can discuss the topic again. http://www.youtube.com/watch?v=TxcjT8T3EGU

  5. Mike,

    ” I am trying to understand how we are going to move from the consumer based economy and transition into what?”

    No one said about moving away from a consumer based economy. For the overall well-being of our nation we are better off with a consumer based economy. But the system has transitioned to a government based economy. We don’t have the private sector that we had only 2 decades ago. The govt expanded and still is and special groups get large govt contracts. HUD housing is a perfect example.

    “What do you do to grow capital?”

    To grow the capital sector we need a govt friendly to the small and medium size business. Just think about a moment and tell me what is it that we manufacture today beside military equipment and Hollywood movies? Why did we become during the 1980’s the largest creditor to the world? It was because we were the largest and most powerful manufacturing nation. We produced machinery, heavy equipment that the whole world wanted from us. We produced food to feed many countries in the world. We produce stuff that the world wanted to buy from us. Now, keep on thinking and compare where we are today. Here is a hint: the largest debtor nation.

    “So what I am understanding is that the government supports monopolies? How so and why”

    Excessive Rules, Regulations, Tariffs, Taxation, Special Favors, Lobbying. The rules, regulations, taxation eliminate competition

    “Perhaps larger corporations are easier to tax thank small individual ones.”

    What do you have in mind?

    “Please don’t mention Hilter it is a huge turn off that smacks of illegitimacy.”

    Fair enough. But I have to ask you what economic system do we have now? It is not free market capitalism as explained before. So what is it?

    “I would read more about the gold standard but it always seems to end in some kind of strange doomsday thing that I just can’t take seriously. Please come from a “this is just a much better system” than it’s the end of the world as you know if type deal”

    If you read Rothbard’s book that I recommended to you I can honestly say you’ll be happy. But just like a doctor tells his patient “don’t smoke, eat healthy, exercise” it is up the the patient to do it. If he chooses to put forth the effort he might find it rewarding and certainly beneficial.

    Mike, I can see why it’s hard to digest reality especially when it’s not as bright as we’d want it to be. I don’t believe there are many people alive today that lived during the 1930’s GD. Mike, this event did occur whether we like it or not. Now, just because we never lived to experience it it does not mean it did not happen. Peace!

  6. Mike, one more left:

    “Why Keynesian is better for malls? because of what we are looking at today. Corporations and super wealthy took the marbles off the table by firing a ludicrous amount of labor. More than they needed. Hurting the middle class and poor. Freaking people out and changing the consumer psyche. Simultaneously, they hoard the cash and blame no demand on the lack of action.”

    Your comments are confusing, they are not orderly, and I am trying to understand them. Who hoards cash and what makes you think so? Why are they firing people? What’s the logic behind it? How are corporations related to Keynesian-ism?

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