21 Feb 2009

Fleshing Out the Broken Window Fallacy

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A colleague recently forwarded me an email he had received asking about the broken window fallacy. (If you have never heard this spelled out before, you absolutely must read Hazlitt’s discussion–it’s very short.)

Anyway, the correspondent was puzzled, because if the “flaw” in the broken window fallacy is that the baker would have spent money on, say, a suit, then isn’t that compensated when the glazier goes and buys something? In other words, isn’t Hazlitt just narrowly focusing on the loss in employment and income to the tailor (who would’ve sold a suit to the baker had the hooligan not broken the baker’s window)? Here is my answer:

The issue isn’t one of income or job creation. [Your correspondent] is right; there will be just as much employment and the level of sales will be the same in the aggregate.

The difference is that the community will be one item poorer. So yes, the window glazier can go buy a suit that the baker would originally have purchased, but by the same token the tailor would have bought something with the $$ that the baker would have spent on his suit, if the window had never been broken.

If you picture the two timelines diverging once the hooligan breaks the window, the point is that no matter how much production the spending stream entails, the community will always be materially poorer in the timeline that starts off with one fewer window. Only by assuming that people produce *more* after the kid breaks the window, can the community close the gap in wealth at the starting point.

And Bastiat/Hazlitt’s point is that there’s no reason to assume people would produce more after the window is broken. The baker’s spending doesn’t do it, because he would have spent that $$ on somebody else, and the glazier’s spending doesn’t do it, because the tailor’s spending would have done the same in the original timeline, etc.

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