[Note: After completing this post, I discovered that Peter Schiff had already discussed this topic today. Watch his video.]
During lunch today, I cringed as a cable news anchor referenced the “silver lining” in the devastation caused by Hurricane Sandy — namely, that unemployed workers in construction and other industries can now be employed in the rebuilding effort. This is a textbook example of the broken window fallacy, and since I do not expect this news anchor’s ombudsman to dutifully identify and report the misstatement, I found myself motivated to reboot this blog after a couple months of inactivity.
Frédéric Bastiat identified the broken window fallacy as early as 1850, and although it is simple enough for any high school student to comprehend, in my experience it is not taught. (As for the reason why a government school might not seek to debunk this fallacy… I leave this as an exercise to the reader).
Bastiat sets up the fallacy in the following way. Suppose that a shopkeeper’s son accidentally breaks the window of the store. The shopkeeper pays the glazier a sum of 6 francs to create and install a new window. Onlookers observe that the broken window has led to an economic exchange which allows for the employment of the glazier, and so the onlookers conclude that broken windows are an economic boon.
The fallacy lies in the difference between the seen and unseen consequences. The onlookers in the story consider only the seen: it is certainly and visibly true that broken windows employ the glazier. But it is not clear, in fact not even knowable, how the resources in the story would have been allocated if the first window remained intact. These are the opportunity costs. For example, the shopkeeper would have spent his 6 francs on a different good or service, allowing for the employment of someone else. The glass demanded to create the new window might have been demanded for a different product, which now cannot be made. The glazier, if he truly could not maintain his industry in a world of unbroken glass, would then apply his labor toward a different industry to meet a different demand.
Destruction of property cannot make a society wealthier on the whole, because rebuilding expends economic resources and incurs opportunity costs, possibly of the unseen type. It is true and visible that the hurricane damage will cause a rebuilding effort, and the rebuilding effort will employ a number of people. But the net economic effects must necessarily be negative to a monumentally tragic degree. Many unemployed may find a temporary job, but many currently employed will lose their permanent jobs. Some people may be a little better off, but a great many will be much worse off. The news anchor referred to a “silver lining” that at least the hurricane damage will stimulate the economy, but if he considered the unseen consequences, he would realize that rampant devastation of capital can only make an economy worse.