Bastiat's Broken Window
In his 1850 essay"That Which We See and That Which We Do Not See" ("Ce qu'on voit et ce qu'on ne voit pas"), French economist Frédéric Bastiat used the parable of the broken window to explain why destruction and the money needed to repair it are not actually a net benefit to society.
The parable aims to demonstrate how the law of unintended consequences and opportunity costs has an impact on economic activity in ways that are hidden or disregarded. The broken window fallacy or glazier's fallacy is the term for the idea that damage is good for the economy.
The parable
The story can be summed up as follows: a lad smashes a window in his father's store. Unsurprisingly, the father is furious since he now has to incur unforeseen costs to fix the window. The father is comforted by onlookers who explain that repairing the damage will boost the local economy because the glazier will be paid for the work and will then spend the money earned elsewhere, which means the incident has generated new money circulation that will continuously benefit other sectors of the economy. Even if this scenario were to come to pass, it would completely ignore the fact that the father lost money that he could have invested in improving the economy, which he eventually would have done anyhow, nullifying the argument. He could have instead bought new shoes, taken his wife out to dinner, or purchased a baseball bat for his vandalizing son.
Bastiat's wisdom
Imagine it came to light that the young child was, in fact, the glazier's employee, paid a franc for each window he smashed. The identical action would suddenly be considered theft: the glazier was shattering windows to coerce people into hiring him. The bystanders' observations, however, continue to be accurate: the glazier makes money off the deal at the expense of the baker, the tailor, and so on.
According to Bastiat, society approves of actions that are ethically akin to a glazier hiring a young child to smash windows for him. Bastiat is talking about the stock of wealth, not productivity. In other words, Bastiat considers the long-term implications of breaking the window in addition to its immediate ones. Bastiat considers the effects of shattering the window on society as a whole as opposed to just one particular group.
According to Austrian economists, this mistake is typical of mainstream economics. In his book Economics in One Lesson, American economist Henry Hazlitt included a chapter on the fallacy.
According to Hazlitt:
“It is never an advantage to have one’s plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence. ... Plants and equipment cannot be replaced by an individual (or a socialist government) unless he or it has acquired or can acquire the savings, the capital accumulation, to make the replacement. But war destroys accumulated capital. ... Complications should not divert us from recognizing the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.”
Implications
Austrian critics of Keynesian economics frequently cite the aforementioned justification to deny the importance of fiscal policy in macroeconomic stabilization. Austrians specifically point out that any money gained by taxing to pay government expenditure would have no overall impact on the economy since it would leave less money for the private sector to spend, similar to the bakery example given above. In other words, any increase in government expenditure merely "crowds out" an equivalent decrease in private spending, maintaining the current level of total aggregate spending in the economy.