Meditations on a Broken Window, Part 1

Bastiat vs. the Second Law of Thermodynamics

With all this talk about Bastiat’s “Broken Window Fallacy” in the context of the emerging disaster of Japan, I think it might be interesting to pull it back a bit. Because as I’ve been thinking about the “Fallacy” over the past few days, it doesn’t seem to bear up to a lot of rational or empirical scrutiny.

As a reminder, here’s Bastiat’s parable in full:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. 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.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not 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.

Speaking of things that are unseen, here’s what Bastiat really doesn’t see: entropy — the inexorable march of the universe towards disorder. Or, to put it more collquially: stuff breaks.

Stuff breaks, in fact, all the time.

So let’s take a look at our French glazier. When he’s making his business plans for the year, setting his budgets, preparing his supplies, he is basing this on the number of new windows that will be needed. Now, new windows will be needed in three cases: new construction, replacement of old windows with new ones for aesthetic or functional reasons, and replacement of new windows because windows break.

Let’s say that the glazier has a target for revenues in a year of 6000 francs. He charges 6 francs for a window, so he sells a thousand windows per year. Let’s say of those thousand windows, three hundred of them are projected to be windows sold because windows in the town get broken by children, natural disasters, etc.

Now, let’s move to a world where windows don’t break. Suddenly, our glazier has a three hundred window shortfall, and misses his revenue target by 1800 francs due to a lack of demand. If the glazier wants to hit his target of 6000 francs, he has to raise prices on windows to about 8.6 francs a year–and lets round it up to 9, since part of the reason why a replacement window might be desired is because the glass on windows gets more brittle over time. In a world where windows don’t break, that’s less of a concern.

I think it’s safe to say that the market wouldn’t fight the price hike, because reduced demand will likely reduce supply as people are discouraged from entering a smaller market. So in a world without broken windows, the price of a new window is about 50% higher than it otherwise would be!

In other words, the fact that windows break is actually built into the price of the window. The glazier can afford to charge less for his services because the inevitability of windows breaking means that demand will remain steady enough to hit his revenue targets. Absent broken windows — absent stuff breaking at all — and things would cost more. That’s why particleboard assembled furniture can be sold more cheaply than handmade Amish furniture. The fact of replacement is built into the cost of the assembled furniture — it wears out faster, so you’ll be back.

By ignoring the simple fact of entropy, Bastiat is ignoring the complexities of the economy that are necessitated by the simple fact that items will eventually break. The economy is built around that fact, and prices are built around that fact. It’s a major Unseen factor that Bastiat, notably, doesn’t see.

Update: Based on the comments, I’ve tried to clarify a few points here.

FILED UNDER: Economics and Business
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. EJ says:

    “I think it’s safe to say that the market wouldn’t fight the price hike, because reduced demand will likely reduce supply as people are discouraged from entering a smaller market. So in a world without broken windows, the price of a new window is about 50% higher than it otherwise would be!”

    Thats not exactly right. Lower supply occurs BECAUSE price FALLS, not because the market size reduces. Suppliers react to price. If price remains high, than supply also does.

    The only way that a smaller glass market could result in a higher per window price is if there is some kind of economies of scale to producing more windows. But that doesn’t mean total window spending of the town is less. They are still using up resources that could have bene used elsewhere, which is the whole point of the broken window story.

    Regardless of whether people expect that winodows break or if they dont expect it, it is still a negative that it happens – usefull resources are being spent away that could have been used for something else. You would never want to go break your window.

  2. EJ says:

    “That’s why particleboard assembled furniture can be sold more cheaply than handmade Amish furniture. The fact of replacement is built into the cost of the assembled furniture — it wears out faster, so you’ll be back.”

    And this is just incorrect. It doesnt matter whether the furnature makers can depend on you coming back or not. In a compeditive market prices are not set by the supplier – they are set by what the market rate can give them. So if some supplier of partical board furnature out there is able to produce them for less, then that is the price you have to sell yours at or else you go out of business.

    Partical board furnature costs less because random saw dust scraps are less expensive than hardwood. The cost of producing it is less so the market price is less. Market price is a function of the production cost.

  3. Alex Knapp says:

    EJ,

    Thats not exactly right. Lower supply occurs BECAUSE price FALLS, not because the market size reduces. Suppliers react to price. If price remains high, than supply also does.

    In the case of 18th Century French Glaziers, the windows are made to order. Supply, in this case, is not the number of windows but rather the number of glaziers. Reduced demand for glaziers will limit the number of people who want to enter the glazier business. So you can expect higher prices, because when a window is needed for new construction, and windows are made to order, there’s going to be very little wiggle room on the part of the customer when it comes to negotiating the prices.

  4. Alex Knapp says:

    It doesnt matter whether the furnature makers can depend on you coming back or not. In a compeditive market prices are not set by the supplier – they are set by what the market rate can give them. So if some supplier of partical board furnature out there is able to produce them for less, then that is the price you have to sell yours at or else you go out of business.

    Again, reduced demand means fewer suppliers overall. Less competition is going to result in a higher market price.

  5. The Monster says:

    “In other words, the fact that windows break is actually built into the price of the window. ”

    Yes, a given rate of breakage is indeed built in. But any individual act of window-breaking does not create any new wealth; it destroys the value of the window and produces nothing.

  6. Alex Knapp says:

    Yes, a given rate of breakage is indeed built in. But any individual act of window-breaking does not create any new wealth; it destroys the value of the window and produces nothing.

    I’m not sure this is true. Because windows do break, you can buy a window for 6 francs instead of 9. If you’re lucky enough to not have your window break, that’s 3 francs you can use for other things that would otherwise be lost.

    Let’s say, for example, that you invest the 3 francs and after five years, you have 6 francs. Then the window breaks. You pay 6 francs for it. Net loss is zero. Plus, the investment allowed other economic activity to occur that otherwise would not have occurred!

  7. Steven Plunk says:

    Alex, It’s all about timing and getting some value out of the window before it breaks. In business and economics cash flow matters.

  8. EJ says:

    “Again, reduced demand means fewer suppliers overall. Less competition is going to result in a higher market price.”

    But fewer suppliers comes about because demand falls, reducing prices, which pushes some suppliers out of the market and then the price creaps back up to the price it was prior.

    Prices are only higher at smaller quanities if the market space is now so small that economies of scale cannot be reached by the supplying firm and or there are only a coupel of suppliers and they have some pricing power. This may have been the case of a small hamlet in 16th century france, but it is not the case on a broad compeditive national market and therefore is not the case with furnature today. If particle board furnature didnt break, the price of it would not go up because of that fact.

  9. EJ says:

    if there are 100 firms producing 1000 windows each because some break or there are 50 firms producing 1000 windows each because they don’t – this will not have an effect on the market price. It will not go up from 6 franks to 9. The price will remain a function of the cost of producing a window.

  10. Alex Knapp says:

    EJ,

    Where there’s less demand, there’s fewer efficiency gains to be made by scaling up. So costs will go up and margins down. So prices will go up. Additionally, fewer suppliers means less price competition (and more opportunities for collusion), so there’s less downward push on pricing. Couple that with a captive market (face it — there aren’t a lot of alternatives to glass when it comes to windows) and a world with no windows breaking is a world of higher prices.

  11. Drew says:

    LOL Our course is clear gentlemen………immediately hire 1,000,000 brave and stout men.

    Their marching orders: spread to the 4 corners of America, and shoot out every window, streetlight and advertising sign they can find, pour sugar into every car engine, and puncture the tires of every car they can find, infest every home with termites, pour coffee on every piece of furniture one can sit in, create a power surge to fry every piece of electronic equipment known to man, burn food stocks and set fuel on fire, dynamite every bridge you can find, infest people’s clothes closets with parasites………and steal their shoes.

    The economy will roar, simply roar I tell thee…….

  12. Tylerh says:

    Alex,

    If I understand your point, you are dancing around the well-understood idea of depreciation.

    An efficient market price does impute the cost of depreciation. Capital goods that depreciate more quickly are worth less then equivalent capital goods that depreciate more slowly (cf Ford Pintos vs Toyota Corrollas, circa 1978). But the lower price does not, in and of itself, make the good “cheaper”, because the drop in price should represent the decreased future utility. People are less willing to pay for windows that get broken more often (Beirut from 1975 to present is a beautiful natural example of this. The price of plate glass is a useful barometer of confidence in near term political stability and therefore a leading economic indicator)

    What you seem to be saying is the higher depreciation can lead to greater economies of scale. An interesting argument, but it begs the obvious question:

  13. Tylerh says:

    If breaking stuff is such a great economic idea, why don’t we bomb our own cities?

  14. Alex Knapp says:

    Tyler,

    What you seem to be saying is the higher depreciation can lead to greater economies of scale.

    Yes. That’s exaclty correct.

    If breaking stuff is such a great economic idea, why don’t we bomb our own cities?

    I didn’t say breaking stuff is a great economic idea. I said that our economy is already build around the idea that stuff breaks, which renders Bastiat’s argument too simplistic to be useful.

  15. wr says:

    Maybe the real lesson here is that the modern economic world cannot be summed up in a 150 year old parable about a glazier. And that those who insist that such a parable contains all the answers to what will happen in the wake of one of the world’s great natural disasters look like ideological fools.

  16. sam says:

    “which renders Bastiat’s argument too simplistic to be useful.”

    Drew finds it useful…

  17. Greg Ransom says:

    You’ve got to be kidding.

    Have an application in at the Onion?

  18. Thunderlizard says:

    Now, let’s move to a world where windows don’t break. Suddenly, our glazier has a three hundred window shortfall, and misses his revenue target by 1800 francs due to a lack of demand.

    Incorrect.

    Doesn’t stand up to even the most cursory “rational or empirical scrutiny.”

    If the quantity of real resources possessed by society in this goods-are-indestructible world increases, but consumption doesn’t, then the phenomenon you’re observing is deflation. Same amount of money, buys more stuff.

    Painfully Obvious Solution to your problem? Central bank prints 1800 francs, buys 300 windows, prints some more franks to buy lumber that is no longer going to termite-repairs, etc, hires some repairmen who are no longer employed to construct a new community center. There’s no “crowding out” because, as you already asserted, there was no demand for these now-unneccessary repair goods. There’s no inflation, because the supply and demand curves on the private market are identical.

    The only difference is that, in the indestructible world, there’s a brand new community center with 300 windows, available for public use. Maybe we can hire Jean Valjean to run the place as a halfway house for parolees!

    This is a better world than the one we inhabit. Bastiat was right.

  19. michael reynolds says:

    Maybe the real lesson here is that the modern economic world cannot be summed up in a 150 year old parable about a glazier. And that those who insist that such a parable contains all the answers to what will happen in the wake of one of the world’s great natural disasters look like ideological fools.

    Bingo!

    Truisms are almost never true. Which is itself a truism, I suppose.

    Hmmm. Mind: blown.

    LIfe is more complicated than economic theory because life includes humans who are not numbers but free actors whose motivations and actions are often irrational. And because setting aside crazy humans, life itself comes equipped with a degree of randomness.

    Life is not A or B. It’s always, E: all of the above. We live our lives and make our decisions within a sort of Venn diagram composed of DNA, Experience, Free Will and Random Chance. The interactions and overlaps make it a fool’s errand to try and reduce homo sapiens to an equation or a truism.

    Economists think in terms of numbers and as is inevitable with numbers people they attempt to reduce life writ large to numbers writ small. It never works. Never will work. Irrationality and randomness are not quantifiable and manipulable.

  20. john personna says:

    Alex, you went of in a pointless discussion that had nothing to do with the underlying fallacy.

    Remember, the central question is when you have a good, working, thing, can there be excess benefits in destroying it? Bastiat rightfully doesn’t care about entropy because that is not the problem he is addressing. He is not asking what happens when naturally breaks or wears out.

    Really, I have a hard time even getting my arms around these strange misreadings of the fallacy or the strange arguments invented by people who just don’t want to believe it.

    Bastiat was right on that what you don’t see, when you destroy a ting and then fix it again, is all the other things you could have done with the same energy and resources.

    (I’ll just add that the fallacy (no scare quotes) has stood 150 years bright minds looking at it.)

  21. michael reynolds says:

    By the way, I’m not saying that people should stop studying economics, or forming theories of human behavior. But they should approach their work with humility and with a bit of a philosophical overview so that they don’t then turn around and ram their dumb-ass theories down our throats.

    The reason the regulated free market works is because it is the system with the fewest false assumptions. For example it does not, as Marxism did, assume humans would behave rationally taking only what they need and contributing whatever they could make. It also doesn’t assume rationality on the part of businessmen. Fewer false assumptions = more durable system.

    The results are messy and imperfect, and in that they conform well to reality which is the same.

    Attempts to impose a perfect system inevitably require false assumptions that sooner or later degrade the system.

  22. john personna says:

    “In the case of 18th Century French Glaziers, the windows are made to order.”

    Who cares? What energy and resources would they spend on re-making a good window? What might they have done otherwise?

    This is really dumb.

  23. michael reynolds says:

    JP:

    No, you’re the one not getting it. Bastiat was pointing to things unseen and excluding those unseen things that he was not aware of, or didn’t want to see. You’re doing the same thing: you’re trying to draw a box and the box does not contain all the facts, only those that fit within the box.

    (I’ll just add that the fallacy (no scare quotes) has stood 150 years bright minds looking at it.)

    And the theory of witchcraft lasted for millennia.

  24. Alex Knapp says:

    John,

    You’re missing the point – Bastiat’s argument is too simplistic to be useful, because a significant portion of the economics of window-making is based around the fact that kids will break windows.

    Now, this might break down in a situation of large-scale destruction. But the Bastiat is missing quite a bit in his examination of this singular broken window.

  25. john personna says:

    Speaking of dumb, I really don’t get how michael gets from “humans are irrational” to “break the window.”

    WTF, really.

    If humans are irrational, why would they be better off with no window?

    It is insane.

  26. john personna says:

    Sorry michael and alex, you are both trying starter arguments that have been tried and failed for the last century.

    They fail.

    I don’t even know what michael is doing with drawing boxes bullshit, but I think his box is smaller than mine, because he doesn’t want to look at the net-loss to the poor guy who lost the window.

    Any you alex, you want to claim that since window-breaking is natural, there is not net loss to the poor guy with the broken window? You think he’ll gain life benefit somehow.

    You are pro-glazer and anti-shopkeeper, is that it?

  27. Alex Knapp says:

    John,

    I’m saying the net loss can’t be calculated if you don’t take into acocunt that stuff will break, and prices and economic forecasts are based around the assumption that stuff will break. No doubt even Goodfellow’s shop is based around the economics of consumption and depreciation!

    Bastiat is basing his theory on assumptions that don’t conform to the real world.

  28. john personna says:

    You know Alex, in the other thread people tried to find refuge in a simple “confusion” argument as well. Let’s get back to the core. It doesn’t matter if it is one shopkeeper with one window, or a whole town with a whole town of windows.

    Bastiat says there is no net benefit to destroying window(s), regardless of the economic progress we think we see. Why?

    The window owner suffers, the window make prospers.

    For there to be net benefit the window maker would have to benefit by some margin MORE than the window owner suffered.

    When the window owner is paying for his broken window, how the heck is that possible?

    It doesn’t matter what depreciated cost the old window had. It matters that the owner had to pay full price for the new window right then, not when he wanted to, not at his choice. It was a DISRUPTIVE demand on the window owner.

  29. john personna says:

    (You aren’t thinking that the window owner gets a new window at the COST of his old one, are you?)

  30. Alex Knapp says:

    John,

    My point is that (a) if windows didn’t break in the normal course of every day life, the shopkeeper would have spent more on the original window and (b) in a world where stuff regularly breaks, a competent shopkeeper will have factored in the cost of potential repairs and maintenance on his situs and budgeted accordingly.

    Bastiat turns the broken window into a singular event involving six francs. My point is that the possibility of the window breaking is one already contemplated in the normal course of doing business, and so the net loss — if any — is not nearly as large as Bastiat suggests, and in any event the net loss is certainly not the entire cost of a new window.

  31. Steve Verdon says:

    Speaking of things that are unseen, here’s what Bastiat really doesn’t see: entropy — the inexorable march of the universe towards disorder. Or, to put it more collquially: stuff breaks.

    Stuff breaks, in fact, all the time.

    Oh for the love of God….

    Of course there is depreciation, it still does not negate the zero sum nature of the problem in question. The problem in question is not dealing with depreciation but the destruction of a still productive resource. Sheesh.

    In other words, the fact that windows break is actually built into the price of the window.

    Sure, expected breakage is built in, the case in the parable is not expected breakage but unanticipated breakage. So you are quite simply wrong here…and else where.

    Reduced demand for glaziers will limit the number of people who want to enter the glazier business. So you can expect higher prices, because when a window is needed for new construction, and windows are made to order, there’s going to be very little wiggle room on the part of the customer when it comes to negotiating the prices.

    If demand shifts, thus inducing fewer glaziers then it isn’t clear where price is going since you have two counter-veiling effects. Whichever one dominates is an empirical question. This applies here as well,

    Again, reduced demand means fewer suppliers overall. Less competition is going to result in a higher market price.

    Your chain of reasoning is simply flat out wrong. Go get a piece of paper, draw a supply and demand lines. First shift demand to the left, then supply. Do it several times so that you get prices that are below the initial price level, above the initial price level and exactly at the initial price level. Note that what is going on are changes in parameters other than price or quantity. In short, supply and demand “curves” are in reality hyper-dimensional depending on a number of different variables and trying to reduce it to 2-dimensions can lead you to false conclusions unless you are very careful…which in this post you are not.

    Tyler wrote:
    What you seem to be saying is the higher depreciation can lead to greater economies of scale.

    To which Alex responds:
    Yes. That’s exaclty correct.

    Economies of scale refer to the costs of a business as the quantity produced changes, not returns to scale, although the two are linked. If markets are competitive then economies and returns to scale line up in reverse. A firm that has increasing returns to scale will have economies of scale. The same firm will have diseconomies of scale when returns to scale are decreasing, and no economies of scale when returns to scale are constant. In a competitive market firms will operate in the range of constant returns to scale thus there are no economies of scale. Note that the above relationships are if and only if relationships–i.e. if we have constant returns to scale then that implies no economies of scale and no economies of scale imply constant returns to scale.

    If you have the less than competitive markets in either the input market(s) or the output market(s) the above does not hold. The exact nature of economies of scale are then hard to pin down and really come back to being an empirical question. That is, even if the firm is on the decreasing returns to scale portion of its underlying production function, if it can get a bulk discount for one or more inputs it might experience economies of scale.

    I see no data here. No markets being analyzed, save for hypothetical ones…in short there is nothing here that allows us to draw general conclusions. Nothing.

    Do markets factor in depreciation? Yes. Does that mean that is the driving mechanism behind our economy? No! Economic growth is not fully understood. There is no single theory. For example, endogenous growth theory looks precisely at the issue of economies of scale and returns to scale as being one of the drivers. Another factor is inequality–i..e some level of inequality might be necessary, but too much could hamper growth. While in the older exogenous growth models one of the main drivers was deprecation, its role has been reduced with the addition of newer models that include other factors that can impact growth.

    Maybe the real lesson here is that the modern economic world cannot be summed up in a 150 year old parable about a glazier. And that those who insist that such a parable contains all the answers to what will happen in the wake of one of the world’s great natural disasters look like ideological fools.

    WTF, you really should stop poasting. Nobody is saying, that the parable “contains all the answers,” but that it doesn’t mean that natural disasters end up making us better off. If they did we should start calling them natural successes or winners.

  32. john personna says:

    My point is that (a) if windows didn’t break in the normal course of every day life, the shopkeeper would have spent more on the original window and (b) in a world where stuff regularly breaks, a competent shopkeeper will have factored in the cost of potential repairs and maintenance on his situs and budgeted accordingly.

    Neither of these (strange) claims has any bearing directly on the fallacy.

    In the world without an intentionally broken window the shop keeper doesn’t need a window. Windows last 50 years. If the “competent shopkeeper” set aside monies it was for that rare occurrence, and not because some dick window glazer decided to BREAK the normal risk pattern.

    Bastiat turns the broken window into a singular event involving six francs. My point is that the possibility of the window breaking is one already contemplated in the normal course of doing business, and so the net loss — if any — is not nearly as large as Bastiat suggests, and in any event the net loss is certainly not the entire cost of a new window.

    Seriously?

    You seriously now rest your argument on the idea that shopkeepers should EXPECT glaziers to go out and break windows whenever business slows?

  33. john personna says:

    Alex, exactly how often should glaziers go out and break windows?

    Have you thought this through to an optimum interval? I hope it isn’t every week!

  34. Alex Knapp says:

    John, they don’t have to break windows. You’re missing the point. My point is that windows will break, one way or the other, and people will make economic calculations accordingly. That’s why Bastiat’s point here is stupid — it posulates an economic environment in which stuff breaking takes people by surprise instead of being a planned for occurance.

    As it happens, I disagree with the folks who say that a large scale disaster is beneficial for the economy. But that doesn’t mean that Bastiat’s parable isn’t equally stupid.

  35. john personna says:

    (I think Alex’s error is that he sees a “possible cost” as “no cost.” Never mind that a shop keeper could keep an emergency fund for any number of possibilities. It is still a tragedy for the shop keeper when the emergency fund has to be tapped, and the of course re-stocked. Heck, he might even raise prices for all of us, right? He didn’t know how bad the neighborhood was getting.)

  36. john personna says:

    “John, they don’t have to break windows.”

    Then you are not discussing the fallacy. You are rambling about something unrelated.

  37. john personna says:

    The fallacy is about a choice. Is it better to have a broken window, or a whole one. It is about a break from normal wear and tear, a break from normal odds of damage.

    Black swan events, like tsunamis, come in against all normal expectation of odds.

    We would not have expected a shop keeper in Indonesia or Japan to have understood the real odds of a wipe-out in his lifetime.

  38. Alex Knapp says:

    We would not have expected a shop keeper in Indonesia or Japan to have understood the real odds of a wipe-out in his lifetime.

    I agree! But I would expect a shopkeeper in a neighborhood full of kids to anticipate the risk that a kid might break his window!

  39. Steve Verdon says:

    Then you are not discussing the fallacy. You are rambling about something unrelated.

    With a heavy helping of horribad economics too.

    The fallacy is about a choice. Is it better to have a broken window, or a whole one. It is about a break from normal wear and tear, a break from normal odds of damage.

    Black swan events, like tsunamis, come in against all normal expectation of odds.

    We would not have expected a shop keeper in Indonesia or Japan to have understood the real odds of a wipe-out in his lifetime.

    Just repeating this because it highlights everything wrong with the original post by Alex. The parable is absolutely not about depreciation.

  40. Drew says:

    “Drew finds it useful…”

    Sam has lost his mind.

    The whole post and thread is bizarre on its face. We are supposed to entertain the notion that paying twice for the utility embodied in the production of any good or service produced is a worthwhile goal?

    Wait……………….Alex informed us last week that the size of government didn’t matter. From that perspective, 2x is a bargain. NOW I get it……..

  41. Steve Verdon says:

    I really hope there wont be a part 2. Follow the first rule of holes and stop digging.

  42. john personna says:

    I agree! But I would expect a shopkeeper in a neighborhood full of kids to anticipate the risk that a kid might break his window!

    Just to grind it in … so say there are two brothers, one opens a shop in new town A, and one opens shop in new town B. Some years later, town B gets a window-breaking trend.

    Would you say that the brothers, with and without broken windows, are enjoying the same success?

    If brother in town B got a tingly spidey sense that window breaking was going to increase, would that somehow reduce his loss?

  43. Steve Verdon says:

    The whole post and thread is bizarre on its face. We are supposed to entertain the notion that paying twice for the utility embodied in the production of any good or service produced is a worthwhile goal?

    Well people are irrational…and apparently stupid too.

  44. Alex Knapp says:

    Just to grind it in … so say there are two brothers, one opens a shop in new town A, and one opens shop in new town B. Some years later, town B gets a window-breaking trend.

    Would you say that the brothers, with and without broken windows, are enjoying the same success?

    I didn’t say there wasn’t a loss. I’m saying the loss isn’t the full value of the window. Especially if the brother in Town B purchased property insurance.

  45. Alex Knapp says:

    We are supposed to entertain the notion that paying twice for the utility embodied in the production of any good or service produced is a worthwhile goal?

    Please state where I said this.

  46. Steve Verdon says:

    If brother in town B got a tingly spidey sense that window breaking was going to increase, would that somehow reduce his loss?

    Well if he were rational, don’t laugh, he might engage in hedging…say purchase insurance or buy up windows and store them where they can’t be broken by rock tossing hooligans, thus reducing his costs….possibly even getting a bulk discount.

    Still, this means he has invested in something that is not immediately returning much on his investment say like expanding his shop/opening a second store, or simply hiring another clerk to help with sales. So while that kind of expectation and subsequent actions might make him better off than in their absence he is still worse off without the uptick in window breaking.

    I didn’t say there wasn’t a loss. I’m saying the loss isn’t the full value of the window. Especially if the brother in Town B purchased property insurance.

    Both of these are reductions in overall welfare. Even insurance is the result of not having perfect information.

    Please state where I said this [paying 2x for something is better than 1x].

    Now I’m confused, are you saying there is some validity to the broken window fallacy, just that you disagree in terms of degree? If so, I don’t think you really get the point of the fallacy/parable. It isn’t about depreciation, it is about a sudden loss of a productive/valued asset due to the actions of another. It really is a parable about opportunity costs when you get right down to it.

  47. Alex Knapp says:

    Both of these are reductions in overall welfare. Even insurance is the result of not having perfect information.

    Not disputing that. I’m simply pointing out that these reductions are inevitable, because we live in a world where entropy exists, where kids will break windows, and you have to plan accordingly.

    It isn’t about depreciation, it is about a sudden loss of a productive/valued asset due to the actions of another. It really is a parable about opportunity costs when you get right down to it.

    I get the point Bastiat is trying to make. I’m merely pointing out that his parable doesn’t make sense because the economy is organized around the idea that stuff does break, and opportunity costs are lost. Inevitably. So while Bastiat is looking the “Unseen” loss of 6 francs into the economy, my point is that the loss isn’t 6 francs — it’s less than that. And in part 2 I plan on exploring if the fact that stuff does break might actually turn out to have some net benefits.

  48. Steve Verdon says:

    Alex,

    He is making the point that such breakage isn’t going to result in a net gain. Even if we log it off to “entropy”. Adding capital to deal with depreciation is NOT a net gain for the economy. It merely keeps things at status quo.

  49. Alex Knapp says:

    Steve,

    He is making the point that such breakage isn’t going to result in a net gain.

    I do get that, but I think that he’s also missing the implications of depreciation. I think that this parable is too simplistic and too divorced from the real world to have real value in understanding economic systems.

  50. john personna says:

    Alex, for Bastiat’s fallacy to be false you have to show that net-welfare increases following an unexpected disaster.

    Saying that he could plan, or that disasters occur, just describes something else that we know about the world (it isn’t all roses). It does not disprove the fallacy, or show a net increase in welfare.

    Sure, stuff wears out and that is a continuing drag on the economy. It is not a continuing source of wealth.

  51. Alex Knapp says:

    Alex, for Bastiat’s fallacy to be false you have to show that net-welfare increases following an unexpected disaster.

    A kid breaking a window isn’t an unexpected disaster.

  52. john personna says:

    I don’t think you are going to show that net-welfare increases on an “expected” kid broken window either.

    It gets back to that little test. If breaking windows is actually good (gasp) how often should we break them?

  53. sam says:

    Drew says:
    Tuesday, March 15, 2011 at 15:52

    sam says : “Drew finds it useful…”

    Sam has lost his mind.

    The whole post and thread is bizarre on its face.

    Alex wrote:

    “I said that our economy is already build around the idea that stuff breaks, which renders Bastiat’s argument too simplistic to be useful.”

    I said you found the simplistic Bastiat thingy useful… 🙂

  54. Steve Verdon says:

    A kid breaking a window isn’t an unexpected disaster.

    No, not on par with what we have recently seen, but it is something that most people aren’t going to plan for in their monthly expenses.

    A person getting a window installed due to normal wear and tear might expect that window to last for several years. The kid breaking the window is a low probability event.

    It is using a parable to drive home the point of opportunity cost. Maybe nothing all that spectacular these days, but back in 1850 its not bad.

  55. michael reynolds says:

    That does it. I’m getting a bat and breaking the mother**cker’s window myself.

  56. Janis Gore says:

    Please don’t. I’m Mr. Goodfellow’s assistant and I have to clean up the damn glass.

  57. Alex Knapp says:

    I don’t think you are going to show that net-welfare increases on an “expected” kid broken window either.

    It gets back to that little test. If breaking windows is actually good (gasp) how often should we break them?

    John,

    Again, you’re missing the point by seeing the window-breaking as a singular event, and not an expected event in a series of events that the economy has already organized around.

  58. KipEsquire says:

    The BWF is not, in any way shape or form, about glaziers or the price of glass when you add in your own whatever-makes-my-oh-so-contrarian-position-plausible assumptions.

    It’s about the jacketmaker who suffers, unseen, because the shopkeeper is now minus some wealth.

  59. KipEsquire says:

    “If breaking stuff is such a great economic idea, why don’t we bomb our own cities?”

    We did. It was called “Urban Renewal.” How’d that work out? See also, “Suzette Kelo.”

  60. […] by the comments to my previous post, I think a lot of people didn’t understand what I was getting at, so let me try to simplify […]

  61. Michael Reynolds says:

    Kip:
    Actually no, we do it every day and call it fashion, fad or status.

  62. MichaelB says:

    So Alex, your argument is that the shopkeeper is only losing 3 francs instead of 6? 12 francs for two windows, instead of 9 francs for one expensive one? The shopkeeper is still out an extra 3 francs.

    As pointed out above your numbers are pretty unbelievable, but even accepting them I don’t see how it changes the story. Just because the economy has adjusted to the fact of broken windows doesn’t make them a good thing.

  63. john personna says:

    michael, can you imagine how much RICHER we’d be if our stuff didn’t wear out, and we only had to replace the things we wanted to?

  64. Janis Gore says:

    Doesn’t all this talk pretty much go out “the window” when Mr. Goodfellow goes to talk to the glazier and comes home to find that his home, wife and children have been swept away by a tsunami?

    Mr. Reynolds is up the coast, bitching about the price of delivery of the newest Sub-Zero, and finds out there no place to put it?

  65. Janis Gore says:

    War is somewhat predictable.

  66. michael reynolds says:

    JP:

    Actually, I think that was the USSR: Have shoe, wear shoe out, replace shoe.

    Here in the west we buy and toss out shoes largely as fashion dictates.

  67. Janis Gore says:

    Typically, we don’t sleep cold, thirsty and hungry in the process.

  68. Steve Verdon says:

    BTW Alex, your “observation” is in error because you are assuming that this kind of thing is not present in Bastiat’s model. However, he is discussing why breaking a window in a functioning economy, is not to be considered a net gain for the economy. His reasoning is precisely the same as why replacing capital depreciation is not a net gain either…it merely preserves the status quo. If net investment were zero–i.e. new capital expenditures exactly offset capital depreciation we’d be in a steady state where consumption was fixed. The presence of depreciation would not make goods more or less expensive.

  69. MichaelB says:

    John,

    Yeah, that would be great! We would all be massively richer. We’d need bigger houses to store all our stuff, though since houses presumably also last forever we’d have all the space we’ve ever built, so maybe it would be enough already. And contra naysayers who suggest it would destroy the economy, it would lead to a booming business in second hand goods. Actually, as I type that it seems like an interesting thought experiment. What would happen to garbage? My first thought is that we’d have very little – stuff lasts forever so why throw it out? But, lots of things get thrown out because they’re not wanted anymore instead of being worn out or damaged.

  70. john personna says:

    Is michael reynolds just defending his own financial planning at this point?