The Broken Window Fallacy

Release Date
June 29, 2011

Topic

Basic Economics
Description

Does destruction create jobs? After natural disasters, terrorist attacks, and wars, some people argue that these disasters are good for the economy, because they create jobs and prosperity. As Prof. Art Carden of Samford University explains, this is an example of the “broken window fallacy,” a term coined by Frederic Bastiat. When a shopkeeper’s window is broken, he will spend money on a new window, which gives income and jobs for glaziers. This activity is “seen,” but the “unseen” is just as important: the money spent on a new window could have been spent on other things. Wealth has not increased; it has only been reallocated from some people to others, and society is worse off by one window.

The Broken Window Fallacy
Natural disasters, terrorist attacks, and wars have one thing in common: They involve a lot of destruction. But every time there’s a natural disaster or a terrorist attack or a war, it can be virtually guaranteed that someone is going to come along and say that there’s a silver lining in all of this. It’s good for the economy because it’s going to create jobs. When there’s a natural disaster or a terrorist attack or a war, we have to spend money replacing all the stuff that gets destroyed. This is an application of what we call the broken window fallacy.
Frederic Bastiat corrected this fallacy in his early 19th century essay, That Which Is Seen and That Which Is Unseen. The key point is destruction does not create prosperity. Destruction destroys prosperity. Imagine someone who owns a shop. The shop has a glass window. Now a kid comes along and throws a rock through the window so the window’s broken, shattered glass everywhere. The shopkeeper’s upset. Why? Because his window’s been broken. He has to go and pay the glassmaker in order to get the window replaced.
Now some people might come along and say well, no, look, you should all be smiling because this is going to create jobs. You spend money on new glass. The glassmaker earns this money. He can then spend it at restaurants, and he can spend it on new clothes. He can spend it on things that he likes. That’s going to create jobs for other people. This money’s going to circulate, and we’re all going to be richer as a result of the fact that this kid has thrown a rock through a window and now we’ve had to replace a window.
Let’s think for a moment about what the policy prescription would be if it were in fact true that this is a good idea. What we should do instead of trying to prevent people from breaking things, instead of trying to prevent people from destroying property, we should in fact be enlisting armies of kids with rocks to go around breaking windows to destroy things because, after all, if this were to require a new spending that would make us richer, that would make us better off, that would be the path to prosperity: destroying things, breaking things and then spending money to replace them.
What we’re doing when we indulge this kind of thinking is we’re focusing our attention on what is seen but we’re not taking account of what is not seen. What we don’t see is what the shopkeeper would have used that money for if he hadn’t had to replace his window. He might have used it to buy a suit. This would have created an opportunity for a tailor. The tailor then could have spent the money on something else. He could have used it to buy groceries. This would have created opportunities for grocers. Maybe he would have saved it; then the money could be lent to someone who wants to start a new business. He could have done something else that would have created job opportunities for other people. The world would have still had the window and it would have had the benefit of all of this additional activity that would have gone on had the window not been broken in the first place. On net, society is worse off to the tune of one window.
Whenever we actually destroy resources, that’s precisely what we’re doing. We’re destroying stuff. We’re not creating wealth. It’s important to remember that it’s production that creates prosperity and not destruction.