Thursday, March 12, 2009

Economic Fundamentals: Bastiat's Broken Window Fallacy

Originally Posted 2.11.09

The following is excerpted from Kenneth Green’s testimony before the Senate Committee on Environment and Public Works on September 25, 2007. It’s a great explanation of Frederic Bastiat’s refutation that destruction of wealth leads to its creation. Green uses a variation to show how the creation of “green jobs” at the expense of other jobs is a fallacy.

The fallacious idea that one can make jobs by destroying others is a variation of Bastiat's Broken Window fallacy. As Bastiat explained, imagine some shopkeepers get their windows broken by a rock-throwing child. At first, people sympathize with the shopkeepers, until someone suggests that the broken windows really aren't that bad. After all, they ‘create work’ for the glazier, who might buy food, benefiting the grocer, or clothes, benefiting the tailor. If enough windows are broken, the glazier might even hire an assistant, creating a new job.

Did the child then do a public service by breaking the windows? Would it be good public policy to simply break windows at random? No, because what's not seen in this scenario is what the shopkeepers would have done with the money that they've had to use to fix their windows. If they hadn't needed to fix the windows, the shopkeepers would have put the money to work in their shops, buying more stock from their suppliers, or perhaps adding a coffee-bar, or hiring new stock-people.

Before the child's action, the shopkeepers had the economic value of their windows and the money to hire a new assistant or buy more goods. After the child's action, the shopkeepers have their new windows but no new assistant or new goods, and society, as a whole, has lost the value of the old set of windows.

The analogy holds just as well when it is the government that comes, and by regulatory fiat ‘breaks the window’ of a company successfully providing goods and services into a free market. When the government establishes a regulation favoring product A over product B, what is seen is the new sales of product A, and the jobs associated with such sales.

What is not seen is the lost sales of product B, and the lost jobs that go with it. Because the market is superior at efficiently identifying and providing what people want than are planners, it is virtually certain that the lost jobs in any regulatory scenario will outnumber the created jobs in a regulatory scenario.

Well said!

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