The Real Problem with the Broken Window Fallacy

John Quiggin recently posted on the “Broken Window Fallacy” (BWF), a parable beloved by libertarians, originating from Frederic Bastiat but finding its most modern exposition in Henry Hazlitt. The basic idea is that while breaking a window will seem to stimulate spending by providing work for a glazier, the money used to employ him could have been spent elsewhere, say by employing a tailor to make a new suit. Therefore, as a result of the broken window the community has only a window (what they started with), rather than both the original window and a new suit. We must look at the “unseen” in order to understand the true economic effects of smashing the window.

Quiggin tries to refute the fallacy thusly:

Implicit in the crowd’s reaction is the assumption that glaziers are short of work. If (as sometimes happens) glaziers have more jobs than they can handle, then there is no extra window – at best, the shopkeepers order simply displaces some other, less urgent, repair. Similarly, for Hazlitt’s riposte about the tailor to work, there must exist unemployed resources in the tailoring industry, so that the shopkeeper’s suit represents an addition to output. If not, the additional demand from the shopkeeper will raise the price of suits marginally, just enough to lead some other customer to buy one less suit. So, the story seems to imply that the economy is in recession, with unemployment across a wide range of industries.

Yet “rais[ing] the price of suits marginally” – such that the person most willing to pay receives the suit – is precisely what libertarians have in mind when they envision a market economy functioning nicely. Under the assumption of full employment and no broken window, the shopkeeper purchases a suit while the glazier is put to work elsewhere creating a new window. Under the assumption of full employment and a broken window, the shopkeeper employs the glazier, meaning that somebody who previously would have employed the glazier goes without, while the tailor is put to work for somebody who likes the suit slightly less than the shopkeeper. Aggregate welfare and wealth is decreased, even if the flow of production is the same.

Quiggin attempts to introduce the assumption of unemployment to counter the standard story:

With these facts in mind, we can tell a different story. Suppose that the glazier, having been out of work for some time, has worn out his clothes. Having fixed the window and been paid, he may take his $50 and buy a new suit. To make the story stop here, we’ll suppose that the tailor is a miser (a vice traditionally associated with the clothing industry, as with Silas Marner), and puts the money under his mattress. So, in this version of the story, the glazier and the tailor are both paid, and the social product is increased by a new window and a new suit.

But the social product is not increased. If the window were not broken, we’d have a window and a new suit. When the window is broken, we have a window and a new suit. The allocation of the suit has changed, but not the total product. Quiggin will never refute the BWF like this, on its own terms, because if you start with the premise that a window gets broken, you will inevitably end up at the conclusion that the world is worse off than before. Once the window has been broken, we have lost $50 worth of window and will have to replace it. Depending on your ethical presuppositions, you might view the redistribution as desirable, and the employment of the glazier as an end in itself, but this is another debate.

And this is the real problem with the BWF: it’s a complete straw man. Noone, anywhere, ever, has claimed that ‘breaking windows’ is a desirable economic strategy, or that it will somehow add to wealth or welfare. True, you can pick and choose your own auxiliary assumptions to add ‘silver lining’ to the story. Given that the window is broken, the fact that the glazier then wants to buy a new suit is better than if he just hoarded the money. Perhaps the new window is slightly nicer than the old one. Perhaps, as a commenter suggested, the shopkeeper has an emergency fund which is “psychologically separate” from his other money, so he still buys both the window and the suit. Or maybe the glazier has an apprentice who benefits from the training when he otherwise wouldn’t, while the tailor does not. We can do this all day but ultimately, the broken window devotes resources which could have been used – even if they were previously idle – to increasing wealth and welfare.

Should we utilise idle resources? The answer to this question needn’t have anything to do with breaking windows. Quiggin, like most critics of the BWF, implicitly recognises this, which is why he stresses that none of what he says “means that it’s a good idea to go around smashing windows during recessions.” So why start with the assumption of a broken window? We could instead tell an alternative story where there is no broken window. The tailor is unemployed, and there is a kid who wants a shirt but cannot afford it. The government prints $50 and gives it to the kid, who buys a shirt from the tailor, increasing the social product without any broken windows. This story is similarly arbitrary, demonstrating the ease with which we can formulate a parable to come to the conclusion we like. But the question of which story’s assumptions (in particular unemployment) are true or not is an empirical matter.

Quiggin, in trying to refute an abstract parable built on arbitrary assumptions by introducing his own, slightly different arbitrary assumptions, is fighting a losing battle. The BWF may or may not be useful for demonstrating a certain point, but it is not a model of the economy and it is not always and everywhere applicable to economic problems. If you are arguing with somebody who thinks repeating ‘Broken Window Fallacy’ at you will settle the debate, you aren’t going to convince them by telling them the ‘Broken Window Fallacy, version 2′. You simply need to stop having the debate in terms of Broken Windows, and start having it in terms of what is actually going on in the economy. Otherwise you’ll be forever trapped at a useless level of abstraction.

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  1. #1 by caseyjaywork on August 8, 2014 - 7:52 pm

    Reblogged this on Casey Jaywork and commented:
    “If you are arguing with somebody who thinks repeating ‘Broken Window Fallacy’ at you will settle the debate, you aren’t going to convince them by telling them the ‘Broken Window Fallacy, version 2′. You simply need to stop having the debate in terms of Broken Windows, and start having it in terms of what is actually going on in the economy. Otherwise you’ll be forever trapped at a useless level of abstraction.”

  2. #2 by Roman Plotnikov on August 8, 2014 - 10:11 pm

    BWF is not a parable, it’s a piece of propaganda made for separating ‘us’ (the orderly citizens who get by through their honest labour) and ‘them’ (those dirty stealing socialists). As such, it shouldn’t even be discussed, in my opinion.

    • #3 by Unlearningecon on August 9, 2014 - 10:29 am

      I agree completely. That people like Quiggin should stop arguing in terms of the BWF is exactly what I’m saying here.

  3. #4 by Min on August 9, 2014 - 11:37 pm

    Paint me puzzled. The broken window fallacy, put in the mouths of the crowd in Hazlitt’s story, is plainly a fallacy. But what crowd is that? Real crowds generally follow common sense, which says that the broken window is a cost, even if it is replaced. And yet Hazlitt seems to draw the conclusion that economists avoid the fallacy, even if ordinary citizens do not, because economists look at what is not obvious. Huh? (Hazlitt’s reasoning is confused, even if there is a fallacy.)

    I think that Quiggin has a point about miserliness. There is a social cost to miserliness. But hasn’t he picked the wrong miser? It is the glazier who should be the miser, so that the breaking of his window puts money into circulation that would otherwise have been hoarded. And, to make it a good story, that money means that Tiny Tim can walk. Isn’t that worth a broken window?

    • #5 by Unlearningecon on August 12, 2014 - 10:16 am

      The point about opportunity cost is non-intuitive and relevant in some circumstances: people only look at the money that has been spent, rather than considering what else may have happened. Yet the broken window is not necessary to illustrate opportunity cost; it’s just a pointless distraction that’s used to support certain political conclusions (government = bad).

      • #6 by Min on August 18, 2014 - 6:50 am

        IMX, ordinary people reason about counterfactuals all the time, and often correctly so. At the same time, motivated reasoning can cause them to ignore or downplay them. I noticed long ago that in politics proponents of a policy usually offer shallow arguments for it, while its opponents will bring up opportunity costs and systemic effects.

  4. #7 by MsJones (@TickyW) on August 9, 2014 - 11:53 pm

    “Have you ever been witness to the fury of that solid citizen, James Goodfellow,*1 when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?””

    The above extract from the framing of the fallacy indicates what compete crap it is.

    Onlookers to the spectacle are unlikely to to be as callous as to tell the unfortunate victim that “it’s all for the good as the glazier benefits despite your losses” The parable is thus misleading.

    The alleged fallacy is a non-existent one. It is more likely that onlookers will commiserate with the shopkeeper for his loss. This will be the motivating force for an insurance industry to develop. The existence of an insurance industry exposes the disinguousness with which the parable has been framed. Insurance will restore the shop keeper to the original position ex ante the broken window.

    The Insurance will immure the shopkeeper from losses and preserve his or her purchasing power. His or her purchasing decisions will thus be able proceed as if the broken window had never occurred. So the parable is misleading to assert an opportunity cost.

    The framing of the parable is a hoax.

    • #8 by Unlearningecon on August 12, 2014 - 10:37 am

      Absolutely. I see this throughout economic reasoning: the assumption that people will be as callous and detached as the economist assumes they are. Public Choice Theory is the main culprit here, but I see it a lot in casual discussions, too (another example si the so-called tragedy of the commons, where everyone keeps putting cows on a piece of land until it’s full. Really?). In reality, people are far more considerate and complex than that, and I can’t imagine anyone who isn’t completely anti-social saying that to a shopkeeper whose window had been broken.

  5. #9 by Mike Huben on August 10, 2014 - 12:04 pm

    “Noone, anywhere, ever, has claimed that ‘breaking windows’ is a desirable economic strategy, or that it will somehow add to wealth or welfare.”

    Actually, Bastiat’s Broken Window Error points out that San Francisco and Europe were vastly more prosperous after earthquake and wars, which is used as evidence that Bastiat is wrong, that destruction can add to welfare.

    “Insurance will restore the shop keeper to the original position ex ante the broken window.”

    But where does the money to pay the shopkeeper come from? He and others are paying premiums that are greater than the amount he will regain. Insurance plays right into the “what is not seen” argument.

    I think the basic problem is that Bastiat does not distinguish (a) the store of currency (b) the production and store of durable goods and (c) the production of consumable goods from (d) the cycle of economic activity. He lumps it all together in a mish-mosh, and (as pointed out above) just assumes what he needs to make his moral story.

    • #10 by MsJones (@TickyW) on August 10, 2014 - 1:14 pm

      No, the point about the insurance is that it addresses the objection that the shop keeper’s cash must be used to replace the window rather than being allocated to “social production”. That is to say, the real economy, or production, is not (or need not) be affected by the broken window. The shop keeper can proceed with the purchase of the suit despite the broken window.

      The existence of insurance means that the broken window does not lead to a loss of social production (eg, the shop keeper can still buy their suit and the tailor still gets an income). This, of course, depends on the shop keeper. He or she may decide to save instead of buying the suit (or shoes etc).

      In the context of the parable, the insurance can be seen as a form of saving for a rainy day. When an insurance policy pays out it injects additional demand into the economy. So in this case, the insurance payout will cause the demand for windows AND for suits to increase. Without the broken window, only the demand for suits increases.

      The insurance is an opportunity cost, yes, but only to the same extent that saving (or hoarding cash) causes opportunity costs to arise.

      Taking out insurance is not irrational and can be justified with economic logic that perhaps even the original author of the parable would approve of.

      I think the parable, at least as it has been framed, carries a false message.

      • #11 by Mike Huben on August 11, 2014 - 12:17 am

        I don’t follow your argument. The broken window injects a particular demand into the economy whether it is paid for directly by the shopkeeper or indirectly by the insurance company. But the problem is that the insurance premiums reduce the demand for other products such as suits. So, for example, if the shopkeeper was self-insured he would then not buy the suit as he paid for his window.

      • #12 by Min on August 11, 2014 - 2:34 am

        Insurance changes the story in a subtle way. The reason is that the insurance company pays for broken windows all the time. Thus the broken window is no longer a singular occurrence, an unanticipated loss that must now be paid for, but one of a set of expected broken windows that have already been budgeted for.

      • #13 by Mike Huben on August 11, 2014 - 12:05 pm

        Min, whether the story changes from unexpected loss to expected average loss, the result is still the same economically: there is still the loss of a window and the shopkeeper (or insurance pool) loses the money to buy a suit.

      • #14 by Min on August 18, 2014 - 7:07 am

        Mike,

        Insurance causes a change in counterfactuals. It is no longer, the cost of a window vs. the cost of a suit (or other comparable thing), it is the cost of one window vs. the cost of a different window. True, knowing about one broken window will generally mean a small increase in the number of expected broken windows, but will not add one to that number, because we cannot say that this broken window was unanticipated. The fact of insurance says that it was anticipated. When the insurance pays for this window no one will go without a suit.

    • #15 by Unlearningecon on August 12, 2014 - 10:28 am

      Actually, Bastiat’s Broken Window Error points out that San Francisco and Europe were vastly more prosperous after earthquake and wars, which is used as evidence that Bastiat is wrong, that destruction can add to welfare.

      Even if the destruction resulted in long-term economic improvements, the people there are still not saying the destruction was a good thing overall. Clearly, replacing all of the existing buildings, capital equipment etcetera could have been done without the associated destruction. However, one thing that Bastiat doesn’t touch on here is that the destruction itself can be costly. The breaking of the window in his parable is costless, but actually getting rid of existing capital stock is not. Hence the only way a ‘welfare improving’ change will be made is if the benefit to rebuilding exceeds the cost of destruction. Hurricanes etcetera take care of this costlessly; with war, the money used for bombing could have been more efficiently deployed to peacefully dismantling whatever was destroyed.

  6. #16 by Boatwright on August 12, 2014 - 1:03 am

    There is a more general problem with this line of argument:

    It assumes fixed, binary and linear relationships between supply and demand for glass, the glaziers time, the demand for suits, etc.. The glazier is either employed or unemployed. The shop owner would rather spend his money on a suit or not.

    In reality, all of these sorts of decisions in the real world, when we try to analyze them, are subject to the shopping cart problem. The glazier can put in an extra hour instead of stopping for a beer. The shop owner can decide he would rather have a weekend in a hotel with his girlfriend than a new suit. The variables are vast, the supply and demand of and for desirable goods and services is elastic, and it is a fools game to reduce things to this sort of non-sense.

    • #17 by Unlearningecon on August 12, 2014 - 10:21 am

      You’re absolutely right about this. The real world is full of contingency funds (time as well as money), queues, insurance, psychological nuances and other mechanisms humans have evolved – either socially or individually – to make sure that things function with some regularity even when proverbial windows get broken. Economics as a whole is still stuck in this sort of 19th century reasoning from individual behaviour, but it needs to realise the most regular aspects of human behaviour are the at the social and institutional level.

      • #18 by Boatwright on August 12, 2014 - 12:10 pm

        Economic ideologues are a busy bunch and libertarians are the worst.

        Ideology is offered, similar to religious doctrine, as a complete and sufficient moral explanation, prescription, and proscription for how humans should conduct their economic and social affairs.

        A noble goal, perhaps. Unfortunately, as modelers and mathematicians, in actually explaining the workings of their imagined perfections, they are a lazy crowd.

  7. #19 by Morgan Warstler (@morganwarstler) on August 12, 2014 - 11:39 am

    For Christ’s sake THINK.

    What is a broken window really?

    It is a KNOWN statement of want. We KNOW the owner wants a window. So one broken means to us all “real demand”

    But when the window isn’t broken, that $50 is Not misered – it doesn’t go under mattress – it goes in bank and gets loaned, but no matter let’s stick with your modela nd the mattress.

    We have a glazier, this is what he likes to do, wants to do, judges himself best at doing… And he DESPERATELY needs the $50.

    F*ck the glazier.

    The important signal to him is two fold:

    1. less need for windows than he wishes.
    2. try to find another thing that gets you that $50.

    The plight of the glazier doesn’t go away with a broken window. It just makes us addicted to breaking windows.

    The optimal system is one that makes the glazier confront the reality of the non-broken window directly. How much he suffers must be directly tied to whether he lets go of being a glazier.

    IF the system makes him deal with REALITY, and he proves he is ALTERING his life, THEN we are most able to help him.

    • #20 by Andrew on September 3, 2014 - 7:13 pm

      Sorry, but no. Deposits don’t create loans. Loans create deposits.

  8. #21 by Morgan Warstler (@morganwarstler) on August 12, 2014 - 11:48 am

    My point is, you shouldn’t feel threatened or insecure about the fact that NOBODY yet knows what that $50 should do.

    If you limit your conception of “real demand” to things that you already know exist. Society sucks and dies.

    All of humankind ONLY improves its lot with a bunch of $50 sitting there shopping waiting to see what piques it’s fancy.

    Focus on making sure the glazier gets the real signal – windows not that important right now, too many glaziers. REWARD he that gets the signal and deals with it. PUNISH he who refuses to take the signal and think breaking windows is a fine option.

    Look, I and other Libertarians are not opposed the plight of the glazier.

    But how much help he gets is DIRECTLY tied to whether you let our analysis carry the day.

  9. #22 by douglas on August 14, 2014 - 11:40 pm

    A much more interesting counterfactual is not that the baker invests out of retained earnings, but he borrows to fund the window. His only “loss” is NPV of the interest repayments. Of course many people will still think in terms of loanable funds and say that results in a loss of investment elsewhere, but that isn’t how the world works.

    • #23 by Min on August 18, 2014 - 7:22 am

      Yes, as long as he borrows money from a bank. The bank loan creates money. (Surely that is not controversial.) There is therefore no loss of a suit by comparison.

  10. #24 by Boatwright on August 15, 2014 - 1:47 pm

    Unlearning finished his post with this:

    “If you are arguing with somebody who thinks repeating ‘Broken Window Fallacy’ at you will settle the debate, you aren’t going to convince them by telling them the ‘Broken Window Fallacy, version 2′. You simply need to stop having the debate in terms of Broken Windows, and start having it in terms of what is actually going on in the economy. Otherwise you’ll be forever trapped at a useless level of abstraction.”

    Nevertheless, what followed was a round of libertarian useless abstraction.

    I propose replacing the broken window with a ripening banana, two children — one who likes banana bread and one who doesn’t, a torn screen window, a hungry squirrel in the bushes, a handyman who has misplaced his tack-hammer, a banker who is on the 7th hole of his daily round, and a grocer who wants to buy a Ferrari. I’m sure we can now come to an exact solution to the question of how best to send perfect market signals to all involved………….

  11. #25 by Julia on August 15, 2014 - 7:43 pm

    The BWF seems like one of those things that everyone is introduced to in ECON 101 but soon grows out of once they understand macro and micro more in-depth. I’ve also found it odd that the story assumes the money ceases to exist after it is given to the glacier.

  12. #26 by Andrew on September 3, 2014 - 7:46 pm

    All of this is confusion is caused by conflating money with real resources. Are we better off with a broken window? If we have some glass sitting around and a glazier who was just itching to put some glass in a window, then, yes, we should go and break windows (or let the glazier go ahead and break his own window and fix that). If we don’t think this is the case, then a broken window is a bad thing, as it takes glass and work to replace the window. This has nothing to do with money.

    One must also acknowledge that on the whole, money is not some scarce resource. We create it as we choose according to some rules we have concocted, good or bad. Sure, money may seem a scarce resource to some people, but that could be fixed just fine without breaking any windows. If you think someone should have some more money, just give him some money. If we want tailors to make suits, give people money with which to purchase suits — no broken windows necessary. Isn’t this exactly what Bush II did with his “tax” handout? Here’s some money…go spend it!

    Our economy is measured and based on making use of/consuming real resources. For some reason we see production as good and not producing things as bad. It is a bit of a strange measure, if you think about it. If I can keep using my car for 25 years versus buying a new one every five years, this is bad from a GDP perspective. But is it really a bad thing? Is it bad if people work, say, 30 hours a week instead of 40? (I vote “no” on that.)

    These are questions not of money, but of desires; not of economics, but of psychology. We don’t live in a world where we all have to work all the time to satisfy our basic needs. I’m not sure we’ve ever lived in that world. What seems to change over time is what we consider “basic needs.”

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