The Broken Window Fallacy

Economic illiteracy may be the primary cause of two problems:

  •  bad legislation by politicians and,
  • the willing acceptance of the bad legislation by the citizens.

An understanding of basic economic concepts by the voters would stop many foolish politicians from successfully selling their harmful plans.

Maybe the reason that public education fails to teach basic economic principles is because politicians prefer malleable voters.  Whatever the reason, one of our goals here at realitybatslast.com is to contribute to  the economic literacy of voters.

The bad news is that most people view economics as a dry and boring and very complicated subject.  The good news is that basic economics, the kind that will make us smarter voters, is readily accessible to any thinking person.  And it’s our responsiblity as voters to make the effort to educate ourselves.

One economic fallacy that is everywhere in politics is the Broken Window Fallacy.  See the brief explanation here:

It doesn’t take a genius to realize that property destruction does not increase the wealth of a society.  Property destruction constitutes a net loss of wealth.   It may take a real “expert”, like a Harvard Professor or Nobel Laureate to be foolish enough to think otherwise.

You saw in the video that Paul Krugman said this after the 9/11 attack on New York:

“Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could do some economic good.”

Harvard Professor and former Obama economic adviser Larry Summers said that the terrible destruction of the recent Japanese earthquake and tsunami, “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.”

It’s too bad the earthquake didn’t destroy Tokyo, too.  Think of how much that would have helped.

19th century French economist Frederic Bastiat explained that there are two types of economists:

 ”There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

We are surrounded by bad economists who tout the visible effects of their actions and think nothing about the less visible consequences.  So called stimulus spending and government job creation schemes fit this pattern.  There is much hoopla about the wonderful spending and little concern about what those dollars would have accomplished if they had not been taken by the government.

Think of it this way.  Imagine a boastful doctor who is giving a man a blood transfusion.  You can see the blood going into the patient and you can hear the Dr. explaining how he is helping.  What a great guy.  What you can’t see is that the blood tube is coming out of the patients other arm, and half the blood is being spilled and wasted in the process.  A patient could die from that kind of help.