The broken window fallacy is a classic hurricane-season misstep. “Hurricanes may do damage”, the reasoning goes, “but look on the bright side. Think of how many jobs will be created because of the destruction. Think about all the demand that will be stimulated. Things may look bleak, but this is actually good for the economy.”
Bastiat debunked this reasoning in his 1848 essay “That Which Is Seen and that Which Is Not Seen“, and countless economists since have echoed his remarks. In the essay, he tells the parable of a shopkeeper whose careless son breaks a window, and he asks the reader whether this is good for the economy. At first glance, it’s tempting to say yes. But as Bastiat shows in the story, this conclusion ignores the unseen effects of the broken window.
“If … you come to the conclusion,” he writes, “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.'”
What is not seen, briefly, is the lost opportunities, the things that could have been done with our resources had they not been needed to replace the broken window. Taking those into account, it becomes clear that the broken window is harmful to the economy. After all, there is now one less window in our stockpile of goods.
The same reasoning applies on a larger scale. There may be plenty of jobs and demand when a hurricane destroys a town, but saying this is “good” for the economy is simply wrong. If this logic were true, the more destruction we experience the better off we’d be! But economic reasoning — and plain common sense — tells us this can’t be right.
Patrick Carroll, “3 Economic Fallacies to Watch Out for during Hurrican Season”, Foundation for Economic Education, 2022-09-30.
January 5, 2023
QotD: The Broken Window Fallacy
February 9, 2020
Bastiat’s parking meters
At the Continental Telegraph, Esteban explains why nineteenth century French writer Frédéric Bastiat would be able to fully explain Atlanta’s parking meter woes even though Bastiat never saw an automobile in his life:
“Parking meter FAIL” by kingdesmond1337 is licensed under CC BY-NC-SA 2.0
One of Frédéric Bastiat’s most famous observations was the importance of recognizing “That which is seen and that which is not seen”. A government agency builds a road, some people get jobs working on the road, voila, look at all the benefits the government has brought us. What is unseen is what would have happened if the government hadn’t taken our resources to build the road, perhaps we would have spent them on something of greater value?
That people often (perhaps usually) overlook the unseen isn’t too surprising, but the inability to see is sometimes striking. A couple of years ago the City of Atlanta decided to get rid of its parking meter enforcement staff and outsource this work to a private sector company (let’s call it NewCo). Some time after the transition there were discussions at the City Council that perhaps they should reverse this decision, or at least find another provider.
What was the source of these complaints? Was NewCo inefficient? Was the City getting less revenue from the meters? No, meter revenues were actually up as were parking ticket revenues. Some misbehavior by NewCo’s employees, bribery, favoritism, kickbacks? No, no, no and no. The problem was that NewCo was doing a better job. Seriously, the City Council was inundated with complaints such as “I was, like, 2 minutes late getting back to my car and they had already ticketed me”. People who had been ticketed as well as many businesses complained about NewCo’s efficiency.
[…]
What really stood out is that no one involved in these discussions – aggrieved parkers or Council members – seemed to think about why we have meters, time limits and tickets. If enforcement is lax, more people overstay their allotted time, one consequence of which is that you have to drive around longer to find a parking space. People notice their parking ticket or the inconvenience of having to run out and feed the meter (that which is seen) but were oblivious to the shortage of parking spaces that is exacerbated by lax enforcement (that which is not seen, or perhaps not identified as connected?).
One wonders how people who live in a City where finding a parking spot is very difficult could “not see” the value of good enforcement. The time spent circling the block, rushing to turn around and grab the space that just opened up before somebody else snagged it, then just missing out and starting the dance over – nobody thought of that? Bueller, anyone?
Emphasis added.
September 29, 2019
QotD: Crony capitalists and corrupt politicians love tariffs
Many who agree with me here will nevertheless scold me for using, à la Bastiat, the provocative word “plunderers.” But I stick to my choice of words.
“Plunderers” is descriptive, for plunder is in fact what trade restrictions are all about. For two and a half centuries now we proponents of free trade have played mostly on the rhetorical turf of protectionists. On this turf there are language biases galore, such as “trade deficit,” a lowering of home-country tariffs described as “concessions” to foreign countries, the arrival in the home country of especially low-priced imports condemned as “dumping,” and, indeed, the word “protection” itself. Also, don’t forget the constant, clanking parade of inapposite military and sports metaphors.
For two and a half centuries now we proponents of free trade have typically treated the efforts of rent-seekers and rent-dispensers to portray their use of the state to enrich themselves at the expense of others with intellectual and moral respect. Why?
No one attempts to intellectually rationalize the theft and violence committed by street gangs. No one attempts to rationalize shoplifting, vandalism, armed robbery, arson, or rape. (It would, do note, be child’s play for a competent economics graduate student to develop a coherent theory of “optimal gang violence” that shows that, under just the right set of circumstances, there is an “optimal” amount of gang violence that improves the national welfare.) We call these destructive exercises of theft, coercion, and violence “theft,” “coercion,” and “violence.” We call these predatory activities what they really are.
By calling protectionism what it really is – the plunder of the many by the politically powerful few – we more vividly and widely expose protectionism’s ugly and cruel reality.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2019-08-04.
October 2, 2018
QotD: Legal plunder
Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame and danger that their acts would otherwise involve … But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to the other persons to whom it doesn’t belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Then abolish that law without delay — No legal plunder; this is the principle of justice, peace, order, stability, harmony and logic.
Frédéric Bastiat, The Law, 1850.
September 26, 2018
QotD: Offensive and defensive use of the law
As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.
Frédéric Bastiat, The Law, 1850.
September 10, 2018
QotD: Perversion of the law
The law perverted! The law — and, in its wake, all the collective forces of the nation — the law, I say, not only diverted from its proper direction, but made to pursue one entirely contrary! The law become the tool of every kind of avarice, instead of being its check! The law guilty of that very iniquity which it was its mission to punish! Truly, this is a serious fact, if it exists, and one to which I feel bound to call the attention of my fellow citizens.
Frédéric Bastiat, The Law, 1850.
September 4, 2018
QotD: Law and morality
In the first place, it would efface from everybody’s conscience the distinction between justice and injustice. No society can exist unless the laws are respected to a certain degree, but the safest way to make them respected is to make them respectable. When law and morality are in contradiction to each other, the citizen finds himself in the cruel alternative of either losing his moral sense, or of losing his respect for the law — two evils of equal magnitude, between which it would be difficult to choose.
Frédéric Bastiat, The Law, 1850.
December 3, 2017
Alberta debates marijuana legalization … oddly
Colby Cosh’s most recent column is a real-life illustration of the old Bastiat saying that “The worst thing that can happen to a good cause is not to be skillfully attacked, but to be ineptly defended”:
I will leave better informed people to discuss Mr. Orr’s creative interpretation of the Cultural Revolution as being a proto-Reaganite anti-drug crusade. Actually, I am just informed enough to discuss it, briefly. Here’s the discussion: it’s bananas.
And yet! — the nonsense about China might not even have been the silliest part of the speech. Orr has concerns that legalized marijuana might not serve to suppress illegal production. This could, in itself, be a legitimate point. There is a genuine fear that the licensed vendors will set the price too high to compete with existing dealers. But it is not quite the point Orr chose to make. He seems to be convinced that licensed growers cannot compete with the black market at any price.
Why is it that criminals grow pot? Orr’s answer is not “because growing pot has, until now, been a crime.” That would be too easy. “Let’s look at it from a business point of view,” he suggests…
“The black market doesn’t have to pay taxes. They don’t have to pay (worker’s compensation). In most cases they don’t have to pay for any capital expenditures on land or buildings. They don’t have to buy business licences. In many cases they don’t pay for power… Anybody who tries to do this legally is going to have to pay all of these expenses, and you think you can compete financially on that level with them?”
This, of course, explains why, when we want furniture or shoes or chicken, we all invariably buy them in back alleys from underground businesses. But if Orr were to actually look around Alberta — even his own part of Alberta — he would see that lawful businesses do have some advantages.
Legal growers can raise hundreds of millions of dollars in capital markets not run by guys named Lefty or Snake. They can recruit scientists, professional marketers, and horticultural experts without having to hope Walter White shows up. They can exploit economies of scale. They can buy or rent acres of land without having to hide from helicopters. They can do business in broad daylight: they can rent billboards.
And meanwhile, it is not really as though illegal pot growers don’t have labour costs, or overhead, or capital and land requirements. Underground businesses that don’t pay “tax” still have to spend money, often more money, on the basic protective services that taxes buy the rest of us. Any economist could have told Mr. Orr as much. But I am afraid he got his economics out of the same Cracker Jack box his Chinese history came from.
September 11, 2017
Harvey, Irma, and Frédéric – the “Broken Window Fallacy” returns
Jon Gabriel tries to set the record straight on what a natural disaster means for the economy (hint, ignore anyone who says the GDP will rise due to the recovery efforts):
Ever since Hurricane Harvey slammed into Texas two weeks ago, we’ve seen countless images of heroic rescues, flooded interstates and damaged buildings.
As awful as the human toll was, it was not as bad as many of us feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.
The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.
The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that Harvey “could be a slight negative for U.S. growth in the third quarter, but economists say it may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area.”
Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, “reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane.”
Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.
And what about all those windows broken by the high winds? This will be the Golden Age of Texas Glaziery!
Not so fast.
All of this is based on a misunderstanding of what the GDP actually measures. It’s a statistic that often gets mentioned in the newspapers and on TV, but it is almost always used in a way that misleads people about what is happening in the economy. GDP — Gross Domestic Product — is intended to show the approximate total of goods and services produced in a national economy. Thus, when the GDP goes up, it means that the current period being measured recorded more goods and services produced than in the previous period.
When a natural disaster like a hurricane, earthquake, flood, or tornado strikes a city, state or region, all the work required to fix the damage will artificially boost the recorded GDP for that year. But the affected area isn’t that much richer than it was before, despite the GDP going up, because the GDP does not measure the losses suffered during the natural disaster.
This is where Frédéric comes in. I’m referring to the French economist and author Frédéric Bastiat, who brilliantly illustrated the GDP misunderstanding in his essay “What Is Seen and What Is Not Seen“:
In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.
The GDP problem I identified at the start of this post is a general case of what Bastiat called the “Broken Window Fallacy”:
Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”
Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.
Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.
But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.
It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.
If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.
And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.
Now let us consider James Goodfellow.
On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.
On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.
Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.
From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”
Related: Shared by Thomas Forsyth on Facebook:
December 8, 2016
QotD: The law
Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.
Frédéric Bastiat, The Law, 1850.
December 4, 2016
QotD: Human nature
If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?
Frédéric Bastiat, The Law, 1850.
December 2, 2016
November 26, 2016
QotD: State-run education
You say: “There are persons who lack education” and you turn to the law. But the law is not, in itself, a torch of learning which shines its light abroad. The law extends over a society where some persons have knowledge and others do not; where some citizens need to learn, and others can teach. In this matter of education, the law has only two alternatives: It can permit this transaction of teaching-and-learning to operate freely and without the use of force, or it can force human wills in this matter by taking from some of them enough to pay the teachers who are appointed by government to instruct others, without charge. But in the second case, the law commits legal plunder by violating liberty and property.
Frédéric Bastiat, The Law, 1850.
June 11, 2016
August 20, 2015
Frédéric Bastiat
Lawrence W. Reed makes the case for Frédéric Bastiat to be awarded a Nobel Prize … if they awarded them posthumously, anyway:
If a posthumous Nobel Prize was awarded for crystal-clear writing and masterful storytelling in economics, no one would be more deserving of it than Frédéric Bastiat (June 30, 1801–December 24, 1850). He set the standard over a century and a half ago.
This remarkable Frenchman was an economist in more than the traditional sense. He understood the way the economic world works, and he knew better than anybody how to explain it with an economy of words. He employed everyday language and a conversational tone, an innate clarity that flowed from his logical and orderly presentation. Nothing he wrote was stilted, artificial, or pompous. He was concise and devastatingly to the point. To this day, nobody can read Bastiat and wonder, “Now what was that all about?”
Economic writing these days can be dull and lifeless, larded with verbosity and presumptuous mathematics. Bastiat proved that economics doesn’t have to be that way: the core truths of the science can be made lively and unforgettable. In literature, we think of good storytelling as an art and stories as powerful tools for understanding. Bastiat could tell a story that stabbed you with its brilliance. If your misconceptions were his target, his stories could leave you utterly, embarrassingly disarmed.
If you aspire to be an economist or a policy maker or a teacher or just an influential communicator, take time to study at the feet of this 19th-century master.
