Source: Forbes
In the Texas section of today’s New York Times (p. 33A) under a four column picture of a fellow installing a new windshield is the headline “Big Rocks, Torn-Up Roads, Fragile Glass.” A sub-headline reads “An Oil Boom Can Be Good for All Kinds of Entrepreneurs.” One hardly has to read the article to know the content, especially ones who recall the old story about the way denim jean “entrepreneurs” thrived during the California gold rush. Of course the oil boom in South Texas results in cracked windshields and of course money can be made repairing them.
(I put entrepreneur above in quotes to protest the way Joseph Schumpeter’s concept has been corrupted by the popular press to cover just about any small business venture no matter how common and routine it has become.)
Readers in the know are ahead of me and have already made the connection with Frederic Bastiat’s classic “Broken Window Fallacy.” In Bastiat’s original version, some teenagers throw a brick through a baker’s window. The gathering crowd said what a shame, but soon focused on the silver lining: much helpful economic activity will be set in motion when the baker has the window replaced. The repairman has more income to spend on something else, and the seller of something else will have more income to spend on still something else, and so on until we have an expansion of economic activity that is some multiple of the initial repair job.
Bastiat called it a fallacy because, while the spending chain originating with the broken window does generate economic activity, it does so at the expense of other spending chains that don’t occur because this one did. In other words, had he not had to spend his money on window repair, the baker would have spent on something else, and the beneficiary of that spending would have new income to spend, etc. The broken window didn’t create net new economic activity. What it did was divert economic activity from one set of players to another. While some people benefit from the spending that took place, others are harmed (probably unknowingly) by the diversion of spending away from them.
Broken windows do not add to the wealth of nations. They diminish it by destroying part of the nation’s capital stock and productive capacity. Surely the nation would be better off if unbreakable windows could be produced as easily and cheaply as breakable windows. Surely, the nation, and the world, would be better off if trains, planes and automobiles could run on water rather than on the product of those South Texas oil fields. (See Merle Haggard’s “Rainbow Stew.”)
The Broken Window Fallacy is a great tool for understanding much of what goes on today. We are confronted daily by pitches for government to spend on this or spend on that to generate economic activity without anyone pointing out that the economic activity that does not take place because of that that does. One classic example is what I call “stadium socialism.” The franchise owner gets local governments to help finance a new stadium on the grounds of all the new business it will generate locally. Left out of the equation is what spending is cancelled by the use of resources in this way rather than other ways and the locations that miss out on the stadium windfall. This doesn’t necessarily mean that I wouldn’t do it if I were the local mayor, but it probably does mean I wouldn’t do it as president.
The broken window fallacy is reproduced over and over every day, but rarely is it as clear as glass. Thank you New York Times for giving us the broken windshield fallacy. (Those readers who unfortunately don’t get the Texas section in their NY Times will have to take my word for it.)