Monday, September 19, 2011

Bastiat's Fallacy In The Parable Of The Broken Window

Frédéric Bastiat
The Broken Window may be the most popular story among today's Libertarians and disciples of Mises. Discuss government spending, and they will almost assuredly bring up Bastiat's parable of the Broken Window as if its mere mention should ward off all thought of govt spending. Unfortunately for Broken Window devotees, Bastiat's bases his conclusion on a false assumption.

For anyone not already familiar with the story, Bastiat presented us with a citizen whose son had broken his window. Bystanders consoled the citizen with the thought that at least some good would come of the broken window in that it would mean business for the glaziers. Bastiat, however, argued that had the citizen not needed to pay six francs to the glaziers to fix the window, then those six franks would have been spent on new shoes or a new book. As such, according to Bastiat's telling, the additional work for the glazier came only at the cost of work for the cobbler, the bookbinder, or some other profession. Bastiat offered up his story as an argument against the trade restrictions of protectionism, although today it is more commonly used as an argument against figures showing an increase in economic activity in the wake of a disaster. It's also rolled out against any govt project on the basis of the opportunity cost of what might have happened otherwise.

Bastiat's fallacy: The six francs would not necessarily have been spent. The shoes might not have been bought. Nor the book. His six francs might well have sat buried in his mattress, his house fell down, and someone built over it. Bastiat and all those who call out "the parable of the Broken Window" depend upon an assumption that does not hold, namely that the citizen must certainly have spent that six francs. Clearly that is not the case. The citizen may or may not have spent the six francs. If they were not spent at that time, the six francs may have been lost or forever stored in a static asset (such as cash or gold physically kept in a safety deposit box). Even if it were spent, there is no guarantee that it would be spent in the region of the window and employ a local cobbler or bookbinder.

The safe or safety deposit box are among many options for static assets representing inactive money for our economy. For a domestic economy, any store of assets outside of that economy (e.g., in a foreign nation) will generally spur no activity whatsoever in the domestic economy while those funds remain outside. If the citizen must withdraw funds from a foreign investment to fix the window and those funds would have otherwise stayed in the foreign investment indefinitely, then activity has been added to the domestic economy. Likewise, funds that the citizen would otherwise have invested in foreign assets can not be said to cause the domestic bookbinder to lose a sale because of those funds going into fixing a window. An event that diverts funds back into the domestic economy has increased the domestic economy from funds that would not otherwise have been put to use in the domestic economy.

In Bastiat's example, this obviously means the son breaking the window did not necessarily hurt the cobbler or bookbinder. That would only be the case if the citizen was sufficiently impoverished by the replacement of the window as to be unable to afford the shoes or the book. That may have been the case for Bastiat's citizen, but will not necessarily be the case whenever a citizen's window is broken by his son. Some citizens will have spare gold in the vault or spare funds in foreign investments that they will bring into the economy in order to replace the window and still get the new shoes or book.

Beyond Bastiat's example, at least some of the funds used to rebuild after a disaster will normally have been sitting in static assets. For the region being rebuilt, it doesn't matter what those static assets were so long as they were not otherwise going to be spent in that region. That's how regions get an economic boost from disaster recovery, such as fixing windows. Of course, recognizing this effect does not mean celebrating the disaster. No reasonable person is happy to see damage just because of the effects of the rebuilding. Among other reasons for non-celebration, the additional activity for repairs will not always be sufficient to more than make up for jobs lost or suspended because of damages. Still, deploring the damage doesn't mean we can't recognize the economic effects of the rebuilding itself.

For govt projects in general, the fallacy shows us that govt spending will generally defy its Broken Window critics and add to the economy so long as the spending draws a sufficient portion from outside the active, domestic economy. Unless too much of the funding comes from taxing those on a tight budget, building a new or expanded road and hiring a construction worker should not be expected to impoverish the taxpayer even before we consider the long term benefit of the road to the taxpayer. Only taxes on those who have the least will necessarily withdraw money from the economy. Upper-bracket taxes can simply mean somewhat less being stored in static assets such as foreign investments that would not benefit the domestic economy anyway. And issuing T-Bills at today's extraordinarily low rates to pay for expanding and improving infrastructure will not tend to divert funds from business investment either. My choice of how much to invest in risky start-ups with high potential return will be determined by my risk tolerance rather than how many bonds the Treasury issues. It's a safe bet that's the case for most other investors too. That risk tolerance isn't likely to increase until we have a credible boost for the economy -- not just some half-hearted nod to the idea. Let's fix some windows. And make those "windows" big infrastructure improvements and lot's of 'em.


  1. Thanks, it's an interesting post. It lead me to a discussion with an "Austrian". I asked him how their policies of strong currency, which would hurt exports, and deflation, which would curb domestic spending and demand, would help a nation in recession. I've yet to receive an answer.

  2. > I've yet to receive an answer.

    An excellent question, Robert. I'd be interested to see that answer if it ever comes.

  3. Not even close. You're talking about saving versus spending so your post should have been titled "Bastiat's fallacy of Mondor". You didn't even mention what Bastian said of Napoleon's philanthropy. I know it's not the shortest essay but if you're going to effectively criticize Bastiat you might want to read the entire thing...What Is Seen and What Is Not Seen.

    You only once mentioned the concept of opportunity cost...which was the idea of Bastiat's broken window...yet you didn't address the concept at all in your critique.

    Let's accept your argument that taxing people is a good thing. The problem then becomes how the government should spend the money. The government has plenty of statistics...but how does it compare shortages in public education to shortages in public health? How does it decide to send people to the moon rather than to improve infrastructure?

    That's the opportunity cost problem that still applies even if we accept that people should pay taxes. Every single taxpayer values every single public good differently. How does the government guarantee that we will get the most bang for our buck?

    The problem is that it can't. Here's where it gets good. A typical Austrian might conclude by saying that the less taxes the government takes the better. Then the two of you might go back and forth in endless debate.

    Fortunately I'm not an Austrian...I'm actually a pragmatarian. My conclusion is that the only way to guarantee the best possible use of public funds is if each and every taxpayer were allowed to directly allocate their individual taxes among the various government organizations. This would force taxpayers to consider the opportunity costs of their individual tax allocation decisions.

    The Austrians aren't dummies...they have the opportunity cost concept down pat. But taxes ensure sufficiently high levels of public goods. The two don't have to be mutually exclusive though. We can have high levels of efficiently allocated public goods simply by allowing taxpayers to directly allocate their taxes. That's the beauty of pragmatarianism.

  4. Xerographica, how do you propose that opportunity costs would have bearing on the question of whether the money is spent in the domestic economy or instead in a foreign economy?

    Bastiat claims that the citizen will spend the money in the domestic economy no matter what, whether the window was broken or not. (Though he does not explicitly use those precise words, that is the nature of what he said.) According to Bastiat, if not to the glazier, then to the cobbler or the bookbinder ... but certainly -- or so Bastiat claims -- the money will be paid to someone in the economy in question. That's false. That's the fallacy. If not for the need to repair the window, the citizen may well have spent (or invested) the money OUTSIDE the domestic economy.

    It's not just about a mere, simple question of savings versus spending. Though it doesn't always, savings *can* involve activity in the economy. The problem is a matter of that which creates activity in the economy in question versus that which does not create activity in the economy in question. Bastiat's telling of the broken window story claims that there must be equal activity in the economy either way. That claim is false.

  5. Yikes, you just made Bastiat role over in his grave. Read this...Negative Railroad.

    Opportunity cost is such an intuitive concept. For example. Let's say I told you to read all the 40 or so entries on my blog...pragmatarianism. The first thing that would go through your mind is all the "better" things you could be doing with your time. You would be considering the opportunity costs of reading my entire blog.

    You have limited time and money so you're forced to prioritize how you spend your time and money. Millions and millions of consumers considering the opportunity costs of their spending decisions results in the efficient allocation of scarce resources.

    So you want the government to spend our taxes in the economy. That's fine. Great. But Bastiat's opportunity cost concept still applies. Taxpayers should be allowed to directly allocate their taxes. This will force them to consider the opportunity costs of their tax allocation decisions. This will result in the best possible use of public funds.

    If you still disagree or don't get it then please do me a favor and read my post on the ostrich response to pragmatarianism.