The broken window fallacy is a parable that is sometimes used to illustrate the problem with the notion that going to war is good for a nation's economy. Its wider message is that an event that seems to be beneficial for those immediately involved can have negative economic consequences for many others.

The broken window fallacy was first expressed by the 19th-century French economist Frederic Bastiat.

Key Takeaways

  • The core of the broken window fallacy argues that spending money on items that have been destroyed does not lead to economic gain.
  • The broken window fallacy suggests that an event can have unforeseen negative ripple effects if money is redirected to repairing broken items rather than to new goods and services.
  • The theory suggests that a boost to one part of the economy can cause losses to other sectors of the economy.
  • The parable used in the broken window fallacy illustrates the negative economic effects of going to war: money is diverted from creating consumer goods and services to creating weapons, and money is further spent on repairing the damages from war.

The Broken Window Fallacy

In Bastiat's tale, a boy breaks a window. The townspeople looking on decide that the boy has actually done the community a service because his father will have to pay the town's glazier to replace the broken pane. The glazier will then spend the extra money on something else, jump-starting the local economy. The onlookers come to believe that breaking windows stimulates the economy.

Bastiat points out that further analysis exposes the fallacy. By forcing his father to pay for a window, the boy has reduced his father's disposable income. His father will not be able to purchase new shoes or some other luxury good. Productivity has also decreased, as the time the father spends dealing with the broken window could have been put to better use. Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount spent on other goods.

Bastiat also noted that the townspeople should have regarded the broken window as a loss of some of the town's real value. Moreover, replacing something that has already been purchased represents a maintenance cost, not a purchase of new goods, and maintenance doesn't stimulate production. In short, Bastiat suggests that destruction doesn't pay in an economic sense.

The War Economy

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 redirected from producing consumer goods and services to building weapons of war.

Moreover, post-war rebuilding will involve primarily maintenance costs and further depresses the production of consumer goods and services. The conclusion is that countries would be much better off not fighting at all.

Lost Sales Opportunities

The broken window fallacy also demonstrates the faulty conclusions of the onlookers. In considering the lucky glazier who will make some money repairing the window, they have forgotten about others who will be adversely affected, such as the shoemaker who has lost a sale because the money the father could've spent on new shows is now being spent on fixing a product that was already paid for.

Behavioral economists believe that consumers gain more satisfaction, known as utility, by spending money on new goods rather than on maintaining existing goods, even if the cost is higher. This is known as loss aversion, or prospect theory.

In this sense, the fallacy comes from making a decision by looking only at the parties directly involved in the short term. Rather, Bastiat argues, we must look at all of those whose businesses will be impacted by the broken window.

The Bottom Line

The broken window fallacy argues that there is no economic gain from fixing the destruction caused by a certain event. Even though capital will be spent to repair any damages, that is only a maintenance cost that does not spur the economy in the long run, as it is not a true increase in economic output. The money and time spent on repairing damages could be spent on more productive goods and services.

In war, resources are diverted to creating weapons as opposed to using those resources to invest in areas that could increase actual economic output.