In modern economics (the economics taught in public schools and universities) there is one fallacy that pervades almost all economic thought. That is the broken window fallacy. It was used and expanded upon extensively by economist Henry Hazlitt.
The fallacy is usually explained like this: Imagine that some hoodlum throws a rock through a shopkeeper’s window. The hoodlum gets away and now a crowd starts to gather around to marvel at the shopkeeper’s broken window. At first, the crowd remarks on the shopkeeper misfortune; his window was destroyed after all. But, then someone in the crowd cheers that this is a good situation. They explain to everyone that this is good for the economy because now the shopkeeper will have to spend money to replace the window. This spent money will employ glaziers to rebuild the window. Then the glazier can spend the money and further employ other people in the economy. Then these people can spend the money and employ even more people. You get the idea. This spent money “stimulates” the economy. Having realized this, the crowd cheers that economy will now be in better shape because the shopkeeper must spend some money. However, there is something wrong with this argument. How can destruction be a good thing?
The fallacy arises because people fail to look at all the effects of the broken window on all groups. It is true that the glazier will benefit from the broken window; he will get more business. However, there are some losers in the situation. The shopkeeper loses because now he must spend his money on replacing the window instead of something else. He can no longer have the new sweater he wanted because he must spend that money to replace the window. Instead of having a sweater and a window, he only has a window. Therefore, he is a loser. Additionally, the sweater maker is also a loser because he will no longer get the business of the shopkeeper.
Therefore, there are two losers and one winner in this situation. The glazier benefits, but the shopkeeper and the sweater maker do not benefit. The economy still would have been stimulated even if the shopkeeper’s window wasn’t broken. The shopkeeper would have spent his money on something that he actually wanted, but instead he had to spend it to replace the window. This makes sense because how could destruction be a good thing? By that logic, it would be beneficial to bomb and destroy all of civilization. Think of all the jobs it will create to rebuild everything. Clearly this is preposterous, but people today constantly cheer like the crowd above in the broken window fallacy for many similar situations.
Almost every case of government intervention is like the broken window fallacy. Sure, it benefits one group, but at the expense of two or more other groups. This results in a net loss for society. However, people hardly ever look past the one group that is benefited. This is how government subsidies work, how tariffs work, and how the vast array of special interest legislation works. The special interest groups are amazing at persuading the public to ignore the harmful effects of policies on other groups. A refusal to look at the effects of a policy on all groups is the essence of the broken window fallacy, and it is applicable to nearly every government program.
I hadn’t heard of this fallacy before. Interesting
Nice way to explain to folks how govt works.
Another informative read.