A careless young man breaks a glass window in his father’s shop. To console the shopkeeper for his loss, bystanders offer that, “Everybody must live, and what would become of the glaziers, if panes of glass were never broken?” And so the broken glass will stimulate the glazier trade, providing income to the repair person who, in turn, will use that income to purchase supplies and other goods and — presto! — we have economic growth.
The parable of the broken window is the essence of Frédéric Bastiat’s 1850 essay, That Which is Seen and That Which Is Unseen, which illustrates how money spent to recover from destruction is not a net benefit to society.
The parable comes to mind when one hears of the silver lining, supposedly in the form of job creation, inherent in natural disasters such as Hurricane Sandy, in wars, in Cash for Clunkers programs or in the claims of jobs created by government-financed public works projects.
In Bastiat’s fable, the shopkeeper stands for society at large and the glaziers represent a special interest group. The new window is the impact “which is seen,” and on this basis we conclude that the broken window was good for the economy.
If this were the case, though, it would then make sense to burn down the entire shop to further stimulate economic activity in other industries.
However, the forgone activity — “that which is unseen” — is the effect of what the shopkeeper (i.e., society) would have done with his money if he had not had to spend it in fixing the broken window. Presumably, he would have bought clothing, groceries, other goods and services or invested in growing his shop. He is now unable to make these purchases or invest since he had to use his money to repair the broken window.
The broken window resulted in a misallocation of resources. The shopkeeper is definitely poorer. Rather than having a window and some clothing or groceries, he will only have a repaired window.
When “that which is unseen” is taken into consideration, it is obvious that government public works programs, although stimulative to specific industries, are not a net gain for the community’s economy. They are paid for by reducing the citizenry’s purchasing power via taxation (or inflation), thus decreasing expenditures elsewhere in the economy.
The stimulus felt in one industrial sector comes at a real, but unseen cost to other sectors. All that is accomplished by such programs is to provide more work and income to some industries at the expense of work and income in other industries.
Bastiat urges us to observe that there are not just two, but three actors in his parable. The shopkeeper, representing the taxpayer, is worst off because to repair the window he will have to forgo other purchases. The glazier — the special interest producer — who will benefit from the repair work. The third, the unseen, are all the other producers that will not enjoy the stimulus of the shopkeeper’s expenditures.
For every job created by a public-works project, a private job has been excluded somewhere else in the economy.
Because the incomes and outcomes of government funding are visible, public works programs are often thought to benefit all. But this fails to consider the hidden costs. Ultimately, every dollar of government spending must be raised through a dollar of taxation.
Taxpayers are poorer by the same amount spent in the public work, and the goods and services they would have bought with that money now will not be purchased. Economists refer to these “non-purchases” as opportunity costs; Bastiat describes them as “what is unseen.” They are, however, no less real or significant, but the illusion is created that the benefits are free of costs.
The broken window fallacy is a sophism often used in political discourse to justify foolish and prodigal public works projects. If a project offers real utility to the community, that fact alone is what should be used to argue in its favor. The project should be defended only on its intrinsic merits.
Certain pubic works are clearly necessary, and the humanity of helping victims of a natural disaster should not be corrupted with unscrupulous economics. But when we hear the specious argument that a public works project will create jobs and stimulate economic growth we can be sure we are being hoodwinked with the broken-window fallacy.
José Azel is a senior scholar at the Institute for Cuban and Cuban-American Studies, University of Miami and the author of the book, “Mañana in Cuba.”