August 29, 2011
Bastiat’s “Parable of the Broken Window,” shouldn’t be controversial at all, but it is. Your more libertarian-type economists say that it’s a fallacy committed by Keynesians all the time, as they attempt “stimulus” while ignoring the costs. On the other hand, you have Matt Yglesias and others countering that the parable only applies when we have full employment, not vast quantities of idle resources, as we have today. As is so often the case, the problem is that everything got all screwed up when we tried to do the analysis in terms of money, as opposed to the perfectly comprehensible but non-existent barter economy. Here’s what Bastiat writes:
The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen. […] It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
The way Bastiat writes it, it would be easy to interpret this passage as saying that the wasted resource is the six francs that get used up in repairing the window.* But you don’t have to think about it very long to realize that that can’t be true. The six francs are as usable as ever, it’s just that now they are in the hands of the glazier instead of the shopkeeper.
Clearly, the real loss here is the glazier’s time and effort, which could have been applied to some other valuable activity had the window not been broken. Among the more important ideas in economics is that when resources have alternative incompatible uses, there is always a cost to employing them in some particular use: namely, the next-best alternative that you must give up.
Those who claim the Broken Windows Fallacy is not really a fallacy during recessions are abandoning too much of classical economics. The economic problem remains the same: we are trying to find and communicate information about the ways in which to employ our resources. Their main beef with the Classicals is that they assume that this information is always transmitted quickly and accurately; critics argue that that assumption is way off during recessions.
Still, that doesn’t mean that you should employ “idle” resources in just any old way you please. When you engage in Keynesian pyramid-building you can’t argue that it was a wise policy because “Look, now we have all these great pyramids that we built out of resources that were formerly unemployed.” No, you say, “It’s true, we built all these crappy pyramids, but actually it was worth it because building these pyramids was the only way to get that Neoclassical information-transmission machine up and running again.”
The Broken Windows Fallacy, which is always a fallacy, is simply to ignore opportunity cost. If, for the sake of argument, World War II was what cured the Great Depression, it wasn’t because we built a bunch of tanks and ships and blew a bunch of stuff up. Perhaps doing all that made it possible for the Depression to end, but we have to acknowledge that it would have been even better if we could somehow end the Depression and also use the resources that went into building that war stuff in ways that people valued.
*Matt Yglesias tries to rescue this strange interpretation by claiming, strangely, that in the 1850s silver pieces really were a scarce resource.