The Broken Window Fallacy

A bum throws a rock through a bakery window and escapes. The shopkeeper, who had been saving to buy a new suit, now must use that savings to pay a repairman to fix the window.

The repairman uses his income to purchase goods from local merchants which will provide employment and wealth to others in increasingly widening circles. The baker is clearly a victim while the bum and the fixer are clearly beneficiaries.

The broken window fallacy by Frederich Basiat is a model to demonstrate the hidden victim in a number of situations. The tailor, who loses the sale of the suit, is the hidden victim in the original broken window model.

This fallacy is disguised in wage and price controls, public works, tariffs (import taxes), government debt, and other regulations. We can see public works, but not the taxpayer who must pay for them, or the invisible capitalist who is crowded out in the capital market.

Pay attention to what is seen and what is unseen. Henry Hazlitt in Economics in One Lesson concludes: 1) Don't look at only the short term. Look at the long term too; and 2) Don't look at only some groups. Look at all groups.

Essay and discussion

Use the broken window model to identify the four parties in the following cases:

A Japanese farmer grows rice for sale in Japan. The Japanese government stops foreign rice from entering Japan.

The government builds a bridge over a river at a point where a bridge is not necessary. Do this for the two cases for financing through direct government taxation and through government bond issue.

Vocabulary

fallacy, victim, beneficiary, disguised, regulations, public works, crowd out