Once upon a time there was a shop owner in a small town. He sold basic general goods to the locals and business was good. One day a group of kids were up to no good and found a rather large rock in front of his business. The leader of these little turds picked up the rock and instantly grew the most devious smile across his face. “I know!” he said. “Let’s throw this rock through that shop’s window!”
The other kids in the group, being turds themselves because their parents expected the State to raise their kids rather than themselves raise them, all agreed that this idea was brilliant. The leader of the turd children cocked his arm back and let the rock fly. It crashed through the window, shattering it into shards of broken glass. The shop owner ran the kids off but was unable to apprehend the rascals. After some time the local townsfolk gathered around the shattered mess of a window and began to discuss it among themselves.
“There is a bright side to this!” declared one. “The window is broken, but at least my friend, the window installer, has business now. This is going to cost at least $500 so that means my friend will have $500 dollars extra to spend on other businesses here in town. This, in the long run, is good for our economy my friends! the money will be distributed in ever widening circles to us all!”
The other towns folk agreed with this sentiment and dispersed. Happy to know that business just received a boost in town thanks to those annoying kids.
This is a parable that explains the idea of the broken window fallacy. The broken window fallacy, as the towns-person stated, argues that disastrous events can be good for an economy. You might think that this is a bogus argument, and it is, but this does not stop our political leaders and “economic experts” from using some form of this argument to justify government spending, the raising of taxes, going to war, or the subsidizing of a particular group or class.
In fact, back in 2011, Paul Krugman (the progressive economic hero) said on CNN that WWII helped to end the depression (which it did not and I proved here) and that something like that would be needed now in order to get us out of our economic slump. He says that if we faked an alien invasion, the economy would probably recover. He said “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.” Can you see the broken window? No? Lets dig a little deeper here.
Let us use the original story of the broken shop keepers window. One has to ask the question “Does this broken window really mean a net gain in wealth and prosperity for everyone?” The answer is no. This is a case of the seen and the unseen. We can see the window repair guy fix the window. We can see him get paid by the shop keeper for fixing it. So we think we see a gain in prosperity, that of $500 extra dollars that the window repair guy just earned. But what we don’t see is how that $500 dollars would have been spent had the window never been broken. Yes the window repair guy would not have had business with the shop owner, but maybe the shop owner was planning on using the $500 dollars towards expanding his business. This too would have increased prosperity. Maybe the shop owner was planning on hiring a high school kid to help him around the shop but now he can’t because he has to spend the money on repairing his property. Maybe the shop keeper was going to go buy a new reclining chair after work and give the furniture shop some business, but he can’t do that now either because he has to spend $500 dollars on the window. So yes, the broken window created a job, but at the expense of many other jobs that could have come about. We don’t see this increase in the economy so we don’t miss it. But the loss is still there and there is a waste of capital and resources.
Likewise, this example of an alien invasion Krugman talks about is the same thing. Yes, we would see employment rise as more people were hired in defending against this fake alien invasion. We would see enough to maybe convince some people, even if it turned out to be a hoax, that it wasn’t so bad because we had full employment and our economy was booming. But what about how all of those resources and the labor involved was used for a real need that the market would dictate? We wouldn’t have that. What about if a new piece of technology could have been developed but wasn’t because resources and capital were being diverted towards an alien invasion hoax? What about all the businesses that couldn’t start because of this? As you can see, it is indeed a case of the seen verses the unseen. The unseen is harder to to track and measure, but it does provide a more stable, natural and sustainable form of economic growth. So the next time you here a politician saying that they need to increase taxes to invest in “x” or subsidize one group because of “y” or say that war is good for our economy, just think about the broken window. These people don’t know what they are talking about, but you do now.