Shortly before I moved to Cheyenne, Wyoming, a massive hailstorm hit the city and destroyed hundreds of roofs. The day I moved into my house, about two months later, a roofing company showed up at the door to inform me they would be replacing the roof. One of the roofers said she used to live in Cheyenne but moved to Denver because she could find no work in Cheyenne. Now she had lots of work in Cheyenne; the storm had been good for Cheyenne, she said.
Wow, I thought to myself. Here it is -- a real-life example of the broken window fallacy.
If we understand how this fallacy works we can see through the self-serving demands of special interest groups and look beyond the immediate effect of some action or government policy to its long-term consequences.
The French economist Frederic Bastiat first explained this fallacy using a story about a broken window. I’ve modified it here:
Suppose some boys are playing and one throws a rock and accidentally breaks a window in his neighbor’s house. The neighbor tells the boy’s parents who agree to pay for it.
The father shrugs his shoulders and says, well, there’s a bright side. It will mean more business for the glass company. He ponders a bit more and says this will cost about $100, but after all, now the glass company will have $100 to spend, and that money will get spent again and again. Hey, he says, our boy is helping to stimulate the economy!
Wait a second, says the mother. I could have used that $100 to buy shoes for the boy. Sure, now the glass company will have $100 to spend, but the shoe company won’t. The glass company’s gain is the shoe company’s loss. Plus, the boy won’t get new shoes.
So back in Cheyenne, the roofing company will have more income but it comes at a cost to someone else. The owner of the house (not me – it’s a rental) won’t be able to buy something else because he has to pay for a new roof. All we see, though, is more money in the roofer’s pocketbook. What we don’t see is the person who was made worse off. Destruction might help one group but it comes at a cost to another.
If we want to avoid one of the most common economic fallacies we must look beyond the seen to the unseen, from the short-term to the long-term consequences of events and actions.
