Exploring the Broken Window Fallacy

In 1850, Frederic Bastiat, a member of the French assembly and perhaps the earliest member of the Austrian School (though it had not yet been founded, his contributions to the Austrian School's teachings are central to our way of understanding the economy) wrote an essay titled "What is Seen and What is Unseen". At the time, there was a push by many assemblymen and French citizens to engage in forms of industrial protectionism. The objective of this, they argued, was to give domestic industry time to grow so that it could more suitably compete with foreign industrial interests. In some cases, there were calls to seize or destroy foreign-held factories to allow French industries to use or rebuild them, and at one point M.F Chamans (a fellow politician) argued that if the French government were to burn Paris itself to the ground, then trade would increase rapidly to fund the rebuilding and that such economic activity would make the whole of France better off.

In writing his essay, Bastiat sought to enlighten his countrymen about the real effects of the actions they had proposed. He starts with what is commonly called the Parable of the Broken Window, the bulk of which goes as follows:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has 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.

What Bastiat is attempting to say here is that, although we may see the destruction of this window as a benefit to the glazier, and that paying the glazier helps keep him employed. Extrapolating that view to the whole economy, one would be inclined to suggest that such destruction,, in varying forms and functions, actually helps the economy grow and advance over time. The flaw Bastiat seeks to highlight here is that, although this theory holds weight when one looks at all the visible factors, it does not take proper account of what is not seen, namely the events which could have happened had the window not been broken: the shopkeeper could have spent his money another way, and in so doing had both a working window and something else; he could have saved his money, allowing him to better invest in his business in the future or pay for his son's education. Any number of actions could have been performed with those six francs, but his actions are now determined for him by the actions of his son. Because the shopkeeper would not have chosen to fix his window had his son not broken it, clearly that was not his preferred use for that money, and being forced to fix it causes him to gain less utility than he could have.

From this, we clearly see the concept of Opportunity Cost at work, though the term would not be coined for another 60 years. We also see that, although some economists suggest destruction (or destruction by another name, such as War) as a means for growing the economy, such actions merely lock us into a single course of action, which does not provide us the utility yielded by being able to choose for ourselves.