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All too often you hear about the economic benefits of going to war. This misnomer is so ingrained in American culture that conventional wisdom suggests that armed conflict is good for business. Few are willing to question this enduring presupposition. Some are even so bold to claim that World War II ended the Great Depression. Over the years, experts have started to refute such claims. That does not mean that many are still not exalting the economic virtues of war.

 

Economists such as Noble laureate Joseph Stiglitz point to the technological advances of the War on Terrorism as being one of the advantages. Even if so, there are a myriad of other costs that most likely outweigh such developments. Overall, war is costly. Morally, financially, and diplomatically.  War is far from the only category of calamitous events that are seen to be profitable. Natural disasters are also seen as an unfortunate but lucrative means of stimulating the economy. However, are any of these widely held assumptions true? The 18th-century political/economic/legal theorist Frederic Bastiat would ardently disagree.

 

In Bastiat’s essay That Which is Seen, That Which is Not Seen introduces a concept that undermines arguments for the economic benefits of war. This is the conceptualization of the Broken Window Parable, colloquially known as the Broken Window Fallacy. The general assertion of this postulation is that the efforts to recover from destruction do not benefit society.

Everybody must live, and what would become of the glaziers if panes of glass were never broken?” …..

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade — that it encourages that trade to the amount of six francs — I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. …

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen….

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not……

…….suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: “Society loses To break, to spoil, to waste, is not to encourage national labour; or, more briefly, “destruction is not profit.”

The hypothetical shopkeeper did not obtain any benefit from restoring the broken window. The labor and money expended to replace the window that was already initially purchased. Operating as a financial redundancy.  The shopkeeper did not get full utility of the window nor did he plan to replace it. Rather he had to allocate time and money repurchase an item he already had. All because the glazer may benefit from this turn in vicissitudes, that does not mean everyone does because the shopkeeper is at a loss. The benefit is at the expense of the shopkeeper. This unexpected and unnecessary expense prevents him from spending money on productive goods and services. In contrast to merely replacing what he already had, only serving as a detriment. It is analogous to intentionally burning down a town to revitalize the construction industry in the county. The lost time, man-hours,  and money makes such an endeavor a waste of resources.

An excellent modern-day application of this concept was demonstrated by Art Carden, a fellow of the American Institue for Economic Research (AIER). Carden details how while at the gym he accidentally shattered the screen on his iPhone. Superficially, this appears to be an overall net benefit for the economy as a whole. After all, the iPhone vendor and Apple just gained another sale. No one actors in the economic benefit. Art merely squandered the time and money to replace an item he already had. The provincial view that Art’s misfortunate is an economic benefit does not take into account what else he could have done with that very same money. He mentions in the article how he could have put the money towards a family vacation rather than a redundant financial obligation. Mirroring the scenario contrived by  Bastiat back in the 19th century.

Arguably one of the best interpreters of Bastiat’s Broken Window Parable was the economic writer Henry Hazlitt. Hazlitt applied the idea of the Seen and Unseen to government spending. Similar to expecting economic stimulus from destruction, perceiving the benefits of government spending only takes into account the most conspicuous consequences. As detailed in Hazlitt’s benchmark book Economics in One Lesson government spending operates as a form of destruction. It redirects resources (time and tax dollars) to efforts, not within the needs or wants of the taxpayer. For every government job created there is a job in the private sector lost. Tax dollars levied from a business could have been utilized to hire more staff (which is the unseen consequence). Hazlitt succinctly demonstrates this in his description of public works:

Here again, the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars, and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is mere that one thing has been created instead of others. (Page 20)

At its core, it is a natural fallacy to assume that job creation is always a net positive benefit. Unfortunately, it is not that simple. Applying Occum’s Razor would lead us to a very shallow understanding of economic impact. The public sector operates differently than the private sector. So how is it possible for the government institutions to determine the optimal number of plumbers in the economy? Again we fall back to the economic knowledge problem, fundamentally that golden mean cannot be ascertained. Sure research can be conducted. The possibility of data not being applicable to actual economic behavior is always lurking in the background. Sampling error, perhaps?! A business owner may not know the precise ratio for ideal production. Considering the purveyor of a business is the one actually producing goods and services they would have a better estimate of market demand.

At this point is most likely clear that destruction does not lead to more wealth. Rather you are wasting resources. That is the fatal flaw in the assumption of assuming a war will jump-start the economy. First off, the tax dollars allocated for armaments could be better spent by the private sector. We don’t see the businesses that are not started due to the taxes levied to fund a war. The second point is the cost of restoration. Money allocated to repair damaged infrastructure and civilian homes. If you want to take a morbid turn you can also calculate the expense of unexpected funerals.

 

2 thoughts on “The Broken Window Fallacy- The Real Cost of Destruction

  1. My take on this is that the armaments industry always benefits from war. As does the banking sector, which will be lending to both sides. Those two industries are among the biggest in the world, in which myriad investors are heavily weighted. The six francs for the glazier goes, in this case, to the reconstruction industry, after the carnage, Again, huge companies are involved, with untold numbers of investors. Maybe those three industries, together, are enough to generate new economic momentum?
    (Don’t get me wrong. The whole notion of expanding economiues are ultimately based on expanding lending and ripping more resources out fo the ground. It’s a model that dooms the planet, and leave sme feeling nauseous).

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    1. That is certainly true from the standpoint of the investors in the private industries involved in war efforts.

      In my opinion it kind of turns into a rob Peter to feed Paul scenario. In recent years, war expenditures in the United States have yield unprecedented amounts of debt. While Boeing may be prosperous the United States is deeper in debt.

      I’ll agree that the individual beneficiaries (armament companies, etc.)will see short-term gains. This may provide a boost in certain sectors. Where I become concerned is when the tax payer and their children are on the hook for a failed military intervention. Especially when the bill is as steep as the one for the War on Terrorism.

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