May 17, 2010

Usually, when something seems too good to be true, that’s just what it is. However, it seems to be part of human nature to want to believe in magic, myth, and the happy ending. So we have many versions of “something for nothing” in our economic mythology.
One of these fallacies which never seems to go away, even among modern economists, is the “broken window” fallacy. It goes like this:
A shop window is broken. Accident? Vandalism? It doesn’t matter. In either case, the broken window is a benefit to mankind! Here’s why; the owner pays a glazier to replace the window. The glazier spends his pay to buy the glass for the window, and to buy shoes for himself from the cobbler. The cobbler (This is a very old story) spends his pay to buy the leather for the shoes and a coat for himself from the tailor. The tailor spends his pay to buy… well, you get the idea. Even the people who make glass and tan leather and weave cloth are a bit more prosperous, and even the shop owner has a new window. In fact, everybody is a bit better off, just because a window was broken!
Well, not really. After all, each of these people had to work for the money they earned, and for the things they bought with that money. Even the shop owner had to work for the money to pay for the window, and he has nothing to show for his labor. If the window had not been broken, he might have spent that money to buy shoes for his family, a coat for himself, etc, etc, etc. The broken window was simply the destruction of wealth and the shop owner has paid for it by forgoing new shoes and a coat.
So you hear modern “economists” commenting on the effects of a flood, or an earthquake, or a hurricane; “But look at all the jobs this will create to repair the damage. In the long run, this will benefit the community”. This, of course, is the logical conclusion of Keynesian economics. Such fallacies are the guiding principles of most governments today.


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