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. Why is a bank guarantee important in a long-term project contract?

    Understand what a bank guarantee is and learn why it is so important to the risk and safety of a long-term project contract Read Answer >>
  2. How can you avoid the sunk cost trap?

    Read out how the sunk cost trap works, an example of how it affects decision-making and how to avoid it when making economic ... Read Answer >>
  3. I failed the Series 6 exam. How long must I wait before I can re-take it?

    If you fail your first attempt at the Series 6 exam, your sponsor can submit an amendment to reopen a window in which you ... Read Answer >>
  4. What is the homo economicus?

    Homo economicus or "economic man" is the characterization of man in some economic theories as a rational person who pursues ... Read Answer >>
  5. If my son transfers stock to me, I understand that the basis is the stock price upon ...

  6. Where is the best place for my 22 year old son to start investing his savings in ...

    My young son is saving faithfully and has amassed a few thousand dollars and continues to save at leas... Read Answer >>
Related Articles
  1. Insights

    MSFT to Start Charging Users for Windows Upgrade (MSFT, AAPL)

    Microsoft will start charging for Windows 10 upgrades in July.
  2. Managing Wealth

    What Does Window Dressing Mean?

    Window dressing is the actions taken close to the end of a reporting period by managers to try and make their financial numbers look better.
  3. Trading

    Beginner's Guide To ScottradeELITE Online Trading - Trading

    Traders and investors can use the ScottradeELITE platform to place orders for stocks, ETFs and options. Placing a Stock or ETF OrderThe ScottradeELITE Order Entry window is where orders to ...
  4. Trading

    How To Place A Trade With MetaTrader 4 - Placing An Order

    Opening the Order Window The MetaTrader 4 Order window is used to place trades. The Order window can be opened using any of the following methods (see Figure 2): 1. Right-click on a currency ...
  5. Trading

    Beginner's Guide To ScottradeELITE Online Trading - Charts And Settings

    Once the trader has chosen a layout - either by creating a custom layout or selecting one of the standard layouts - it's time to customize the data and appearance of the windows. Different windows ...
  6. Trading

    Beginner's Guide To FXCM: Basic Navigation

    The Trading Station platform is installed and we are almost ready to trade. Each time you launch the program, it will ask you for your Login ID and Password. If you don't have these handy, this ...
  7. Trading

    Behavioral Finance: Key Concepts - Gambler's Fallacy

    By Albert PhungKey Concept No. 4: Gambler's FallacyWhen it comes to probability, a lack of understanding can lead to incorrect assumptions and predictions about the onset of events. One of these ...
  8. Trading

    Beginner's Guide To Tradestation Trading Software: Charts And Settings

    Opening a New ChartTo open a new chart in TradeStation, select File from the main menu > New > Window. A pop-up window appears allowing traders to choose the type of window to open, including ...
  9. Personal Finance

    3 High-Pressure Home Improvement Sales Tactics

    Vendors selling products related to the improvement of your home can be some of the most challenging salespeople to deal with.
  10. Trading

    Advanced Guide To NinjaTrader: Market Analyzer

    NinjaTrader's Market Analyzer window, shown in Figure 1, is a quote sheet that enables real-time market scanning of multiple instruments based on user-defined criteria. The Market Analyzer includes: ...
RELATED TERMS
  1. Frederic Bastiat

    A 19th-century philosopher and economist famous for his ideas ...
  2. Window Guaranteed Investment Contract

    A type of investment plan where a series of payments are made ...
  3. Window Dressing

    A strategy used by mutual fund and portfolio managers near the ...
  4. Brokerage Window

    The ability to direct trading within a brokerage's offering through ...
  5. Base Rate Fallacy

    Base rate fallacy, or base rate neglect, is a cognitive error ...
  6. Window Settlement

    A form of settlement between dealers whereby trades are settled ...
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center