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.

Unintended Consequences

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.

Key Takeaways

  • The broken window fallacy suggests that an economic event can have unforeseen and negative ripple effects.
  • A boost to one part of the economy can cause losses to other sectors of the economy.
  • The parable has been used to illustrate the negative economic effects of war.

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. 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.

War siphons off resources and capital used to produce consumer goods and rededicates it to producing weapons.

Moreover, post-war rebuilding will involve primarily maintenance costs and further depress 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.

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. This concept is also applied to the recent "Cash for Clunkers" program.