Broken Window Fallacy Fallacy

In an indirect fashion, I'll be discussing the third unproductive drain in today's entry. I will discuss the Parable of the Broken Window, which economists of the Austrian School refer to as the "Broken Window Fallacy." In considering the school of thought named for Henry George, I have come to the conclusion that labeling the Parable of the Broken Window a "fallacy" may well be a fallacy, as well.

A brief description of the parable: When something is broken (such as a window), the automatic assumption is that this is a bad thing. Upon further reflection, however, one can observe that the broken window provides employment for others: the one that make the glass, the one that forms it into a pane, and the one that fits it in place. They can, in turn, spend the money they made on the broken window elsewhere, including, of course, the place where the window was broken in the first place. This, goes the parable, everybody benefits. Destruction is an economic benefactor, extending all the way from acts of petty vandalism to war itself. War is good for the economy!

Austrian economists rightly point out that, had the owner of the window not spent that money on the window, he would have spent it on something else. He might have eaten out a few more times than otherwise, providing employment to cooks and waiters. He might buy a new piece of furniture, providing employment in the furniture trade. Nobody loses anything because of intact windows; money that is not spent there will be spent elsewhere. Certainly, money not spent on bombs and bullets by one side, and on a total rebuilding by the other, could be better spent!

However, there is something the Austrians overlook. While the man of unbroken windows can spend it on nice dinners, new cars, furniture, improvements to his house, better food than he could otherwise afford, or what have you, there are a few other things he could spend it on. He could buy stock in a bank, buying his way up the monetary pyrimid as described in Unproductive Drains Part 2. He can also buy land, whether in the form of a rental property, a vacation home, or indirectly by purchasing stock. The stock is probably the least offensive of purchases, since at least some of that money goes toward capital improvements, and therefore jobs, whether in the creation or the utilization (though some of it also goes to bid up the price of land, as well...). The other two, however, do little more than bid up the price of land--the price of access to both living space and work. If you've been reading this blog for a while, you know what I'm trying to say here. If not, look forward to Unproductive Drains Part 3.

With the broken window (or the exploded bomb), there is no question: the money spent is going to be spent in a manner that profits a tradesmen of some sort in some way. With the unbroken window (and the peace economy), that money could be spent in a manner that profits someone else. However, it also could be spent in a manner that raises the individual's position on the pyramid of "legitimate" dishonest gain.

Thus, the Fallacy of the Broken Window is only half fallacy. It shouldn't be economically beneficial, but because of all the institutional distortions our half-free economy has, it is. It not only diverts money that would otherwise be spent on something that would benefit the community around them (as well as the individual spending it); it also diverts money that would otherwise be "invested" into the unjust distortions to bend them to the individual's favor.