The Broken Window Fallacy revisited in the context of the Coronavirus
In Pettah, Colombo, for example, an 11-year-old boy throws a hammer through the window of a mobile phone shop and smashes it to pieces. The shop owner is enraged and goes out of the store, but the child has vanished. Many people are drawn in by the gaping hole and the broken glass over the phones and memory cards, which they stare at with “quiet enjoyment”. After a while, the crowd feels the desire to ponder philosophical issues in depth. There’s also a good chance that several of its members will tell each other or the Phone shop owner that, after all, the disaster has a “positive side”. Some will benefit, while others will suffer. In the process of pondering this, they begin to elaborate on the topic at hand. How much does it cost to replace a plate glass window with a new one? $1000(200k Sri Lankan Rupees)??
Let’s take a closer look at this. At the very least, the crowd’s original conclusion is correct. A few glaziers will benefit from this vandalism in the short term. When Glazier learns of the occurrence, he’s no more upset than when an undertaker learns of a death. This means that the shopkeeper’s mother’s medical expenditures will be out of pocket by $1000. Were it not for the window that had to be replaced, his mother’s medicine would be out of reach. A window and $1000 are no longer available to him. Instead of having both the window and the cash to pay for extra medical bills, he must have been in a dilemma.
In short, a glazier’s gain of business is merely a Pharmacist’s loss of business. There is no new “employment: added. The crowd was only thinking about two parties involved in the transaction: the proprietor of the phone shop and the glazier. They had overlooked a potential third party, the medical supplier. They forgot about him exactly because he will no longer appear on the scene. They will be able to see the new window within the following day or two. They will never notice the additional medical bills since they will never be incurred and the potential life that could’ve been saved. They only see what is immediately visible to the naked eye.
This broken window fallacy is more veiled and unctuous than ever, and it is the most persistent economics fallacy all across the world, including the syllabus in our textbook. It is hailed and repeated by our society’s intellectuals, editorial writers, columnists, learned statisticians employing the most sophisticated methodologies, and economics professors at our top universities. They all exaggerate the benefits of destruction in their own unique ways. They tell us how much better off we are economical while we are at war or in a natural disaster than when we are at peace with nature and with countries. When someone claims that a harmful act, whether natural or man-made, is paradoxically “good for the economy,” free-market economists, unfortunately, gleefully use the broken-window fallacy. The allusion is to a classic lesson delivered by economist Frédéric Bastiat from “That Which Is Seen, and That Which Is Not Seen,” in1850.
Bastiat first establishes that there is no net stimulus to employment or income in order to reach his conclusion, which is similar to my updated example above, that the hooligan kid has conferred no economic advantage on the community of Pettah. True, the glazier’s income is larger than it would have been otherwise. This is what is seen. However, Bastiat argues that this apparent benefit to the glazier is exactly offset by a reduction in income for someone else in the community who is now earning less as a result of the hooligan kid.
Specifically, Bastiat assumes that the shopowner would have spent his $1000 somehow and that the boy has merely forced him to spend the money on repairing the broken window. It is wrong to view the employment of the glazier as a net gain to the economy because the shopkeeper (in the absence of the broken window) might have spent that $1000 getting his medical expenses covered for his mom, for example. In that case, the glazier’s gain is exactly counterbalanced by the family’s and the pharmaceutical company’s loss.
As a result, if we assume that the employees in the community would have been “fully employed” if the youngster hadn’t broken the glass, it’s evident that the boy isn’t “creating jobs” or “increasing total revenue.” All he’s done is given the glazier extra work/income at the expense of some other people in the community.
This is merely your old friend, the broken window fallacy, in new clothing and grown morbidly obese beyond recognition. It has confused need with demand. both of them are different from an economics point of view because effective economic demand requires not merely need but corresponding purchasing power. The needs of Sri Lankans today may be greater than the needs of the Aussies. But the purchasing power, and therefore the “new business” that it can stimulate, are profoundly smaller.
Purchasing power ≠ Money
With the advent of the printing press off the charts, it is now possible to print unlimited amounts of money. Even as I type, producing money is the dominant economic activity if you measure it in terms of money. As more money is created in this manner, the value of each unit of money decreases. Commodity prices are rising as a result of the decline in currency value. But because most individuals think of their wealth and income in terms of money, they consider themselves better off when these monetary totals climb, despite the fact that they may have less and buy less in terms of material goods and services. As a result of pandemics like COVID-19 or war, people assign “positive” economic benefits.
Is there a point in Employment?
It is clear that there are many personalities all across the board who sympathises with the broken window fallacy, interjecting that Bastiat could have been wrong. After all, suppose a Pandemic like COVID came along and struck a community that initially had a large number of unemployed healthcare workers. Who would deny that the pandemic might (under the right circumstances) actually lead to more employment and a higher “gross domestic product” as it is currently measured?
Consider the possibility that, in the absence of a pandemic or (terrorist attack, tsunami, famine etc.), people in a town might work fewer hours, resulting in a lower measured GDP. Maybe there is some “silver lining” to the calamity that might at least somewhat offset all of the unavoidable losses in wealth?
What if we said, “Sure the pandemic depleted the wage/day workers, forced us to use Zoom or Microsoft Teams to hold our meetings and lessons, and used a heck load of wifi to execute them, but at least they stimulated our depressed economy; so we have to add up the loss in wealth on the one hand and balance it against the gain in activity on the other to see if COVID19 were a net benefit?”
In response to this question, the typical free-market position is no, it makes no sense to speak in such a way! The purpose of economic activity is to generate commodities and services for consumption by the general public. Not only is work a necessary evil, but it is also a means to an end. Henry Hazlitt once put it this way,
It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment — very full employment; long, weary, back-breaking employment — is characteristic of precisely the nations that are most retarded industrially.
Referring back to my example above and amalgamating today’s context, there are those in the community who definitely lost out as a result of it. Because of this, they had to pay construction workers and other people from their residual wealth in order to restore the factory. It is a cost to society that hundreds of workers must give up hours of their time, as well as those who own limited shingles, bricks and concrete must give up some of their property. Those are not advantages.
In fact, it’s difficult to notice this, as most of the people involved view it as an “increase in demand” for their services and products.
When we go further and ask why it’s beneficial to have a job, the answer isn’t that they want to keep in shape. As a result, they receive a paycheck with which they can purchase other things.
Any disaster, whether it’s a pandemic or storm, or even a war or terrorist attack that has no redeeming qualities. As a general rule, destroying precious resources is a bad idea. When one of these tragedies occurs, the greatest damage is done to irreplaceable human lives and the disruption of livelihoods. Those who survive a calamity aren’t reassured when a pundit tells them how fortunate they were. Each and every one of their precious possessions has been smashed to pieces. !
