Few fields are as riddled with fallacies as economics—not because the principles are flawed, but because the people applying them are.
One of the reasons for the vast number of fallacies present in economics is simply due to the selfish nature of humans. Though each economic group would share a common desire with groups that are similar in nature, they would also have selfish The Broken Window Parable and What It Teaches Us.
Few fields are as riddled with fallacies as economics—not because the principles are flawed, but because the people applying them are.
One of the reasons for the vast number of fallacies present in economics is simply due to the selfish nature of humans. Though each economic group would share a common desire with groups that are similar in nature, they would also have selfish desires that antagonize all other groups. So, as a result, certain public policies will benefit, perhaps, only one group at the expense of others.
But selfishness isn’t the only cause. Many fallacies arise from the short-sightedness of our own biased minds. In which we only see what can be seen immediately and ignore the consequences in the long run. This is where the distinction lies between a bad economist and a good one. A bad economist will see only the direct consequences of a proposed policy while a good economist looks deeper into consequences in the long run.
“It’s easy to nod along with these ideas in theory. But in practice, even when we know the long-term cost we still fall into the same traps. Take a child that knows eating too much candy will get him sick but then why does he do it anyway? Or perhaps the man who smokes know that he is, in the end, damaging his lungs? And yet that does not stop any of us from our actions does it?
In economics, as in life, what we don’t see often matters more than what we do. This is the central lesson of Henry Hazlitt’s classic Economics in One Lesson, and it begins with a deceptively simple story: a broken window.
The Broken Window Parable
This is a parable written by Frédéric Bastiat in his 1850 essay “That Which is Seen, and That Which is Not Seen”.
The parable is about a boy breaking a window in his father’s shop. This spectacle gathers a good amount of people who, seeing the shocked shopkeeper, tried to console him. “If glasses were not broken, then where would the glazier make his money?” they said.
A reasonable consolation it is too, this misfortune, however tragic, has its bright side. If glasses were not broken, then where would the glazier earn his money? But this reasoning has a mighty flaw; one that some of us might even make today. It was deducted only from the things that they could see, not which they could not.
Let us say that the shopkeeper spends $200 to fix the glass window. Now although the glazier benefited from this, the $200 could have also been spent elsewhere. The glazier’s gain in business is simply a loss to a baker or perhaps to another shopkeeper. So in fact, that gain was not a gain at all.
To put it simply, it is a fallacy that deceives us to believe that destruction may have some value economically.
How do we apply it?
The simplest way to apply this fallacy in our life is to be cautious of new policies. Any policy that destroys value or redirects it away from more productive uses under the guise of “job creation” or “economic stimulation” should be viewed skeptically.
Then there are economic arguments, some of which hypothesis that wars might be good for the economy. For example, Creative Destruction by Schumpeter and the Post World War-II economic boon. Their theory relies on the idea that war creates growth in the economy. However, the point still stands, the money used on war or peace-time defense spending could be somewhere else that helps the economy.
Therefore, we must be careful of the Broken Window fallacy and remember to always read through the unseen.