Paying people to break windows
Steve Saville
email: sas888_hk@yahoo.com
Aug 10, 2009
The "Broken Window Fallacy"
originally described by Bastiat in 1850 is well known in economics,
thanks in large part to Henry Hazlitt's excellent book "Economics
In One Lesson". Wikipedia
provides the following explanation:
"The parable [of the broken window] describes a shopkeeper
whose window is broken by a little boy. Everyone sympathizes
with the man whose window was broken, but pretty soon they start
to suggest that the broken window makes work for the glazier,
who will then buy bread, benefiting the baker, who will then
buy shoes, benefiting the cobbler, etc. Finally, the onlookers
conclude that the little boy was not guilty of vandalism; instead
he was a public benefactor, creating economic benefits for everyone
in town."
"...The fallacy of the onlookers' argument is that they
considered only the benefits of purchasing a new window, but
they ignored the cost to the shopkeeper. As the shopkeeper was
forced to spend his money on a new window, he could not spend
it on something else. For example, the shopkeeper might have
preferred to spend the money on bread and shoes for himself (thus
enriching the baker and cobbler), but now cannot because he must
fix his window.
"Thus, the child did not bring any net benefit to
the town. Instead, he made the town poorer by at least the value
of one window, if not more. His actions benefited the glazier,
but at the expense not only of the shopkeeper, but the baker
and cobbler as well."
The popular "Cash For Clunkers" program implemented
by the US government is a great example of the "broken window
fallacy" in action. Under this program the government pays
people to destroy their old cars on the proviso that the money
they receive is put towards a new car. The idea is that the additional
spending on new cars will help support the auto industry and
give the overall economy a boost.
"Cash For Clunkers" is akin to paying people to break
windows. It gives a temporary boost to the makers of new cars
in the same way that the breaking of a window gives the glazier
in Bastiat's parable an immediate benefit, but it makes the overall
economy poorer.
But let's put aside logic for a moment and assume, for the sake
of argument, that "Cash For Clunkers" and programs
like it actually offer a net benefit to the economy. The question
then becomes: why stop at old cars? Few industries are in worse
shape than the construction industry, so why not start giving
people cash to have their old homes demolished on the condition
that they use the cash for a down-payment on a new home? And
for that matter, why stop at homes? Just imagine, for instance,
how much new work could be generated for the construction industry
by destroying an entire city or two.
Programs such as "Cash For Clunkers" make no economic
sense, but it is not difficult to understand why they appeal
to politicians. They are politically appealing because the economic
positives (more jobs in a particular industry) can be seen and
therefore pointed to when on the campaign trail, whereas the
negatives will be unseen (the overall economy will be weaker,
but it will be impossible to show that the weakness is partly
attributable to the policy). In the specific case of "Cash
For Clunkers", politicians can also claim that they are
helping to save the planet by encouraging the replacement of
old 'gas guzzlers' with the new fuel-efficient machines.
Steve Saville
 email: sas888_hk@yahoo.com
Hong Kong Regular financial market forecasts and analyses are provided at our web site:
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