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Broken Window Fallacy Applied

The broken window fallacy story,written by Frederic Bastiat, is a very famous story in Economics ,though it is quite neglected by the mainstream economists. It is as follows.A child breaks a person’s window.The glazier comes and repairs it.People who surrounds the location exclaims that the broken window has done some good and it has helped that glazier earn some money.”What would becaome of the glaziers if windows are not broken?” They believe that the broken window has created wealth.What they fail to see is that if the window wasn’t broken, the person would have spent his money on say,a new coat.The coat maker would have made some money and he would have added a new coat to his collection.No destruction takes place here.There is no loss to the trade either.There is only addition of goods,which means wealth.In the other case,a window is lost,which is rebuilt.Nothing new is added.In the case in which the window is broken,the person is left as he was before,with nothing to add to his possesions while the trade happens.In the other case too,the trade happens in the same manner,but the person has a coat to add to his possession.So,we good economists conclude that destruction doesn’t create wealth.So,wars,Tsunami’s earthquakes and all won’t create wealth.They only destroy wealth.

P Sainath,in one of his speeches draws our attention to the fact the stock exchanges of the Tsunami affected countries reached a historic high within the 72 hours of the disaster.The case Sainath mentions is a typical application of the broken window fallacy.Economists like John Maynard Keynes and idiotic journalists like Sainath look at wars (or Tsunamis or earthquakes) and they conclude that, a lot many buildings were being destroyed.These buildings will have to be reconstructed.This would provide employment to a lot many people.They think that this would create wealth.What they fail to see is that reconstruction costs money.If the destruction had not happened, people would have spent their money on other items.They would have added other items to their collection.That would have created real wealth.But,they fail to think beyond the immediately seen and stand stubborn in their stance that wars create prosperity.What is different with Sainath is that he is not as enthusiatic like the economists who cheer Tsunami’s proclaiming that it would create wealth.He laments the situation.He is of the opinion that it would get the reconstruction dollars flowing in and add to the prosperity of the wealthy.It is as if all the money of the investors are invested in reconstruction businesses,which obviously it isn’t.

There is another reason for them to believe that wars and natural disasters create prosperity.Whenever there is a war,to fund their operations,Governments print too much money.That would make the GDP seem bigger than it really is.Newly printed money would make business profits seem bigger than usual,when actually the real profits are falling.When they look at it,they think that the businesses are making too much profits and people are starving.What they fail to see is that there is no real increase in profits,it is only nominal profits that are rising,the real profits are falling.It is only that the printed money made it seem otherwise.

This is not to say that some people does not profit from Tsunami.Obviously,they do.It includes the politicians who take pleasure in dispensing favors and reconstruction firms whose power depends on forcefully taxed money from the public.It is on their behalf our power hungry mainstream economists are speaking!

One Comment

  1. todd h

    Libertarians are consistently incapable think below the surface level of reflective analysis on any issue.
    Ever business decision has an opportunity cost. From time to time, when a basket of structures is destroyed something that was due or nearing its obsolescence will be destroyed. Sometimes bad property that is not up to standards is protected by penny pinching property owners. Unused fixtures or vehicles that are swept away may be replaced when they were being maintained in their current condition out of sheer apathy. These improvements results in net, real gains. In these cases you’ve saved money on demolition costs. You may well have learned something about the reliability of those structures or reinforcing structures and their imperviousness to weather phenomenon. You may learn something about the porousness of that commercial or residential zone in the event of a flood. These are intangible assets. They may not have a dollar figure, but they are highly valuable and not easy lost.

    Once you’ve eliminated the opportunity cost, which you will have if you were rational in deciding to reconstruct the new structure, you’re taking a building that was almost certainly depreciated to some extent and replacing it with something newer. The difference in value is the net of the new structure – the old structure + every new tool used in construction – all the wear on every tool used in construction + every new labor hour adding value or for example increased energy efficiency standards – every new labor hour simply replacing more of the same.

    People aren’t rational actors. Capitalism is and has been regarded as monstrously inefficient since the very beginning. Liquidity and capital restrictions as well as a lack of foresight or poor information about the necessity of necessary goals prevent important market operations from being accomplished. If you want to talk about redundant activity you should be looking at financial markets.

    Why do you suppose Japan, Germany and Spain experienced economic miracles after their bouts of national trauma? Do you really think Chicago and London were worth exactly as much before their great fires as they were afterwards?

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