A:

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.

For related reading, see Macroeconomic Analysis.

RELATED FAQS

  1. When has the United States run its largest trade deficits?

    Learn in what year the United States ran its largest negative balance of trade as a result of imports greatly exceeding the ...
  2. Which is more important to a nation's economy, the balance of trade or the balance ...

    Learn how to differentiate between the balance of trade and balance of payments for international trade and why the balance ...
  3. What are the ethical arguments against government subsidies to companies like Tesla?

    Learn about the ethical argument behind government subsidies.
  4. How can tariffs cause inefficiencies in domestic industries?

    Understand what a tariff is and why a government would want to impose a tariff. Learn how tariffs can contribute to domestic ...
RELATED TERMS
  1. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  2. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
  3. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  4. European Economic and Monetary Union (EMU)

    The successor to the European Monetary System (EMS), the combination ...
  5. Nordic Model

    The social welfare and economic systems adopted by Nordic countries.
  6. Welfare Capitalism

    Definition of welfare capitalism.

You May Also Like

Related Articles
  1. Economics

    Is Texas The Future Of America?

  2. Economics

    10 Most Influential Chinese Companies

  3. Stock Analysis

    Is Now the Time to Bet on Vacation Spending?

  4. Economics

    Why Israel Is Attracting Chinese Investors

  5. Economics

    Venezuela: Portrait of a Country in ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!