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Parable of the broken window

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The parable of the broken window was created by Frederic Bastiat in his essay "What is Seen and What is Not Seen" (http://bastiat.org/en/twisatwins), to illuminate the notion of hidden costs[?] (aka opportunity costs).

Bastiat uses this story to introduce a concept he calls "the broken window fallacy", which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian school of economics frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book "Economics in One Lesson[?]".

The parable 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, benefitting the baker, who will then buy shoes, benefitting 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 the positive benefits of purchasing a new window, but they ignored the hidden costs[?] to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefitting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefitting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt. The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window.

Economists of the Austrian School and Civil Libertarians[?] argue that the "broken window fallacy" is extremely common in popular thinking. For example, after September 11, 2001, some economists suggested that the rebuilding in New York would stimulate billions of dollars of economic activity, which would provide a net benefit to the United States economy, which was in recession at the time. But libertarians argue that this was an example of the broken window fallacy, since it ignored the billions of dollars in assets which were totally destroyed as a result of the attack. If the World Trade Center should be rebuilt exactly as it was before, the world would have a World Trade Center, whereas without the September 11, 2001 attack, the world would have not only the World Trade Center, but also all the good things that could have been done with the resources now spent at rebuilding it (not to talk about all the lives and assets lost with the WTC).

Austrian Economists, and Bastiat himself, applied the parable of the broken window in a more subtle way. If we consider the parable again, we notice that the little boy is seen as a public benefactor. Suppose it was discovered that the little boy was actually hired by the glazier, and paid a dollar for every window he broke. Suddenly the same act would be regarded as theft: the glazier was breaking windows in order to force people to hire his services. Yet the facts observed by the onlookers remain true: the glazier benefits from the business, and so does the baker, the cobbler, and so on. Bastiat suggested that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him.

Specifically, Bastiat, Hazlitt and others would equate the glazier with special interests, and the little boy with government. Special interests request money from the government (in the form of subsidies, grants, etc.), and the government then forces the taxpayer to provide the funds. The recipients certainly do benefit, so the government action is often regarded by the people as benefitting everyone. But the people are failing to consider the hidden costs: the taxpayers are now poorer by exactly that much money. The food, clothing or other items they might have purchased with that money will now not be purchased--but since there is no way to count "non-purchases", this is a hidden cost[?], sometimes called opportunity cost. Bastiat referred to this in his essay as "what is not seen". Because the costs are hidden, there is an illusion that the benefits cost nothing. Hazlitt summarized the principle by saying, "Everything we get, outside the free gifts of nature, must in some way be paid for." Heinlein summarized it with TANSTAAFL.

Bastiat's original parable of the broken window went like this:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation, "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

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.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! your theory is confined to that which is seen; it takes no account of that which is not 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.



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