March 25, 2011

Broken window fallacy destroyed in seconds

Broken windows make bad economies
The broken window fallacy is simply the mistaken belief that damage to some asset is ultimately good for the economy because the effort to replace that asset will generate business.  The example of a broken window needing to be replaced means a factory somewhere has to make a window and the damage will therefore generate more business activity. The fallacy is that the $100 spent to fix the window doesn't get spent elsewhere - it just shifts the economic activity from one area to another.  For a more detailed description and example, check out here or here.

But today, along comes this piece of awesomeness from Peter Foster of Canada's National Post.  He blasts Keynesianism, which falls into the broken window fallacy trap, back to the Middle Ages where it belongs.  He attacks the broken window fallacy with the reconstruction of Japan after the recent disasters there as the backdrop.  I'd encourage you to read the whole piece here, but to whet your appetite, here's two excellent excerpts:

The Japanese rebuilding effort is a perfect example of Keynesian stimulus, in that Keynes promoted the idea that war and destruction were economically useful, and that government “investment” was as effective as the real thing. The Cambridge sage thought pyramids were a great means of boosting the economy. This single-entry bookkeeping mentality led to such bizarre notions as that Germany had received a great benefit from being bombed flat in the Second World War, whereas Britain’s flagging post-war performance was perhaps due to not being bombed thoroughly enough. Keynes also suggested that destroying crops was a useful way of stimulating agriculture, an idea that received praise last year from the University of Chicago’s Richard Posner after the good professor went over to the Keynesian dark side.
Foster continues;
One has little doubt that the Japanese are an amazingly resilient and resourceful people. Similarly, Warren Buffett may well be correct in noting that the stock market reaction to the Japanese disaster has been overdone and that there are killings to be made on the Nikkei. But the notion that the disaster is an economically “good thing” is preposterous. It also reflects the broader failure to grasp that the post 2008 potlatch of global Keynesian stimulus spending amounted to a silent tsunami whose consequences in terms of crippling government debt, rising interest rates and possibly soaring inflation are still ahead.
If all it took to fix an economy was to trash everything, then why wouldn't the United States just destroy every window, every building, every vehicle and start over?  Because it doesn't make sense.  Destroying the economy does not help the economy, but it might explain the radical path Democrats have mistakenly taken.  Disasters are bad.  Period.  So too are Keynesians.


  1. I never have understood how it helps the economy if I tear up my stuff.

    Kinda like Nancy Pelosi saying that unemployment checks help the economy four times more than the money they cost. That, like every other "Progressive" idea, is simply ridiculous.

  2. Wow - YOUR stuff must be really dangerous if tearing it up helps the economy.

    Pelosi understands economics like I understand thermodynamic entropy, which is to say, not at all. The difference is I don't profess to be an expert at it, unlike Pelosi. She fancies herself an expert on EVERYTHING and expects you to do the same.


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