[breaks glass and robots come to sweep it up]
Look at all these little things! So busy now! Notice how each one is useful. A lovely ballet ensues, so full of form and color. Now, think about all those people that created them. Technicians, engineers, hundreds of people, who will be able to feed their children tonight, so those children can grow up big and strong and have little teeny children of their own, and so on and so forth. Thus, adding to the great chain of life. You see, father, by creating a little destruction, I am in fact encouraging life. In reality, you and I are in the same business." - Jean-Baptiste Emanuel Zorg, The Fifth Element
I mentioned the broken window fallacy in my last post on Paul Ryan, and thought it would be good to go over it a bit more here.
The fallacy of the broken window is possibly the most famous parable in all of economics. It was originally created by Frédéric Bastiat, a french economist, in 1850. It's essential purpose is to show that destruction does not help the economy, but in fact, hurts it. While this seems painfully obvious to most people, this fallacy comes up a lot, especially with politicians.
The parable basically goes like this.
A shopkeeper's careless son breaks a window. The shopkeeper was upset by this, naturally, but whenever he talked to anyone about it they just said "That sucks, but what would happen to the glazier if no one ever broke windows?"
The shopkeeper must now pay six francs to the glazier to fix his broken window. This act of destruction has therefore encouraged trade. That's obvious, or as as Bastiat said, "that which is seen".
It is wrong, however, to say that breaking windows is a good thing, that it benefits society, and that it encourages economic growth, then you are ignoring "that which is not seen."
If the window had not been broken, the shopkeeper could have spent his money on something else such as shoes, and he would still have his window. All these things are not seen, and that's what has been lost.
This accident has kept the shopkeeper for improving his life, but instead must work to get back where he already was.
The moral of the story is, of course, that destruction destroys things. It very clearly shows the idea of an opportunity cost, that is, the cost of what the shopkeeper could have done with his time and resources. If breaking windows really helped the economy grow, how much more would economic good could we do if we destroyed the entire house instead? Or even the rest of the town?
This fallacy has sneaked into modern economic theories in many ways.
By inflating the money supply, the Federal Reserve "encourages investment" by making the dollar worth less and less, making people want to buy things.
Keynesian's so called "wartime prosperity" employs men and scarce resources so that they may be blown up while also blowing up the other countries men and scarce resources.
During the Great Depression, farmers were payed to not grow crops and kill excess livestock so that the price of food would go up under the Agricultural Adjustment Act while people were starving. Destroying crops not put food in people's bellies.
Obama's "Cash for Clunkers" program bought up old cars with taxpayer money, then had those cars destroyed to encourage people to buy new cars.
Why, just a year ago Paul Krugman spoke of how faking an alien invasion would theoretically save the economy! These people are nuts!
"If we discovered that space aliens were planning to attack and we needed a massive build-up to counter the space alien threat, and inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, "whoops, we made a mistake," we'd [still] be better..." - Paul Krugman
Economic growth is no different than GDP to these people. Just a number on the screen. Spending, even wasteful spending, is what's important to them, and because of this flaw they miss the entire point of spending: Production. The purpose of the economy is the satisfaction of man's material desires by the production of goods and services.
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