I was reading through Frederic Bastiat’s “That Which is Seen, and That Which is Not Seen” essay, where he outlines his Broken Window Theory. Bastiat states that when a shopkeeper’s careless son breaks a window, onlookers console him saying, “Everybody has to make a living, and what would become of glass-makers if glass windows were never broken?” Bastiat attempts to refute this logic by saying that ‘what is seen’ is the immediate ₣6 profit made by the glass-maker, but ‘what is not seen’ is the fact that the shopkeeper (had his window not been broken) would have spent that ₣6 on a new pair of shoes AND still had the unbroken window. Because of the broken window, he now has to spend the ₣6 on fixing his window, and therefore he comes out of it all with the mere neutral satisfaction that he had before–that of having an unbroken window. So Bastiat states that in the situation of the broken window, the shopkeeper enjoys one less good than in the situation of the unbroken window. Therefore, Bastiat concludes, destruction gives no economic benefit to society.
However, I noticed Bastiat just went on after that without examining what happened to the ₣6 that went to the glass maker. Suppose the glass maker turned around and used that ₣6 to buy a pair of shoes.
Bastiat claims that in the broken window situation, the shoemaker goes without profit, but really the ₣6 doesn’t just disappear into a black hole when the glass-maker gets ahold of it. The glass-maker could just as easily use that ₣6 to buy a pair of shoes. In either the broken window or the unbroken window scenario, can’t the shoe-maker still sell a pair of shoes, just to a different person in each scenario?
I’m having trouble understanding Bastiat’s logic here. Can anyone help me out?
No, the fallacy is that wealth is created anew, i.e. that after the window is destroyed there is more wealth than there was before, because the shopkeeper's purchase of the shoes (the unseen) is not taken into account. So what is seen is a new window plus the shoes, versus the shopkeeper with his window intact. Seemingly there is more economic activity. The fact that he would spend his earnings is ignored by those who perpetrate the fallacy. What you're saying is both scenarios should lead to the same level of wealth - but that isn't what Bastiat is out to refute if I have understood him correctly.
The fallacy would be: new window + new shoes - broken window > window intact.
Compare with: new window + new shoes - broken window = window intact + new shoes.
Hope that's clearer.
-Jon
I cannot be caged. I cannot be controlled. Understand this as you die, ever pathetic, ever fools.
Irenicus' Diaries.
Jon Irenicus: Hmm but the windowmaker does gain, right? The point is that there is no gain in excess of a situation where the window is unbroken, or am I wrong?
Hmm but the windowmaker does gain, right? The point is that there is no gain in excess of a situation where the window is unbroken, or am I wrong?
No, there is a loss relative to the unbroken window situation. Yes, the windowmaker gains, but his gain is less than the loss of the shopkeeper. How do we know? Because if, in this situation, the windowmaker gains more than the shopkeeper loses, then the following business model would work:
Windowmaker calls shopkeeper and asks how much compensation he would request if the windowmaker broke his window and sold him a new one.
Shopkeeper names a price. Windowmaker pays that price, then breaks the window and sells him a new one.
The problem is - if the window costs $100, the gain of the windowmaker is $100-his costs. The loss of the shopkeeper is $100+opportunity cost.
Jon Irenicus:Hmm but the windowmaker does gain, right?
Quite possibly... but if I steel your wallet then I gain as well. If that was the only thing that was mentioned about such a theft then we'd be turning a blind eye to the fact that you'd just lost your wallet. So yes, the broken window could result in a benefit to certain individuals (just as does theft). However the system as a whole will be down by the opportunity cost of whatever else could be done with people's labor if they weren't fixing broken windows (for example, if the glass maker was making a window for the shoemaker's new offices instead).
Freiheit: Ohhhhhh, I see. Bastiat isn't saying that one broken window is a net loss to society, he's saying that's a benefitless transfer of wealth that shouldn't have been necessary. Is that it?
Ohhhhhh, I see. Bastiat isn't saying that one broken window is a net loss to society, he's saying that's a benefitless transfer of wealth that shouldn't have been necessary. Is that it?
You also have to realize that the broken window might stimulate consumption more, which is a net loss for society. When people save more, they do so because they wish to invest that money indirectly or directly or because they wish to buy more expensive goods (which are usually durable). All of these actions lengthen the production structure and create a more capital-intensive economy (which leads to higher rates of growth).
When the money is spent prematurely on the broken window, it does not have the same positive effect that having saved that money and later invested it or spending on durable goods would have.
Let me make my own charts:
Unbroken Window
Broken Window
So if all that saved money goes to the glassmaker, the shopkeeper has to start saving anew to expand the shop while the glassmaker will inadvertently spend some of that money that would've been saved by the shopkeeper. Since saving and investment is good for the economy, not endless consumption, society ends up at a net loss.
Of course, Bastiat didn't say any of this because he was not an Austrian (you could think of him as a "pre" Austrian). The nature of thrift was really discovered separately by members of the Austrian school like Böhm-Bawerk.
"There is only one innate right, freedom (independence from being constrained by another's choice), insofar as it can coexist with the freedom of every other in accordance with a universal law." - Immanuel Kant
Ohhhhhh, I see. Bastiat isn't saying that one broken window is a net loss to society,
BlackSheep: JohnSchreimann: Bastiat framed it as a young boy breaking the window. And then boy is told directly or indirectly that he has helped the economy. And thus a moral hazard occurs in which vandalism either is considered righteous or that absurd double standards exist in other situations involving the destruction of property. The young boy represents the values of those who do not have any vested interest in property in general. The story is not about private property. It's an absurd on the chain effect of spending that are used to justify less obviously destructive things such as subsidies; Bastiat did several such stories showing economic non-sense. It shows a case where resources are being wasted for no social good. The shop owner is wasting his work for no good for him. And, of course, the glass maker benefits, at least in the short run, as he would benefit would he just stole the money from him. If there isn't much work for glass makers however, society would be better off having some of them working on something else, and the price structure will motivate producers to use resources more wisely.
JohnSchreimann: Bastiat framed it as a young boy breaking the window. And then boy is told directly or indirectly that he has helped the economy. And thus a moral hazard occurs in which vandalism either is considered righteous or that absurd double standards exist in other situations involving the destruction of property. The young boy represents the values of those who do not have any vested interest in property in general.
Bastiat framed it as a young boy breaking the window. And then boy is told directly or indirectly that he has helped the economy. And thus a moral hazard occurs in which vandalism either is considered righteous or that absurd double standards exist in other situations involving the destruction of property. The young boy represents the values of those who do not have any vested interest in property in general.
The story is not about private property. It's an absurd on the chain effect of spending that are used to justify less obviously destructive things such as subsidies; Bastiat did several such stories showing economic non-sense. It shows a case where resources are being wasted for no social good. The shop owner is wasting his work for no good for him. And, of course, the glass maker benefits, at least in the short run, as he would benefit would he just stole the money from him. If there isn't much work for glass makers however, society would be better off having some of them working on something else, and the price structure will motivate producers to use resources more wisely.
Haha. I guess it's a "what is seen and what is not seen" in reading Bastiat then.
Thanks, the last bit clarified the argument for me.
Here's another way to consider the "seen vs. unseen" argument.
You see a lot of people working as soldiers in the US military. Therefore, the government is "creating jobs" and "stimulating the economy".
What you don't see is all the useful work those people would be doing otherwise. Instead of building bombs, factories could be building cars. Instead of working as soldiers, those people could be working as teachers or working in factories. If I have to pay 50% of my income in taxes to support a war, then I don't have the money to buy a new computer or new house.
Government cannot "stimulate the economy". All the State accomplishes is that it moves wealth from one group of people from another group of people.
As another example, you see doctors working treating patients. However, the State has licensing requirements that restrict the supply of doctors. You don't see a lot more people working as doctors and cheaper health care.
The evil of the State is concealed, because the negative effects are usually unseen. When the State "stimulates the economy", it's like going around breaking windows to create work for the glassmaker.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
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