Wednesday, April 07, 2010

The Broken Window (or Side Mirror) Fallacy Explained

It is great when life presents you with a perfect opportunity to illustrate the abstract with examples ripped from the headlines.

In this case, to be specific, the thing being ripped was a side mirror on a car and I think it presents me with a perfect "teachable moment," as it were, for an old (but deceptive) economic fallacy. That fallacy is the "broken window fallacy."

The inspiration? Again, it is my girlfriend/muse, and it arises from something unfortunate that happened to her.

The Story

Unable to find parking near her place of employment, she found a parking space some blocks away. She parked her car and made her way to work. There was one nagging thought on her mind, it seems. She had suffered misfortune (or, rather, her car had) on this particular street before when a side mirror had been knocked off a few years ago.

When she returned to her car, guess what happened again? Yep, side mirror dangling by the electrical wires, along with other collateral scraping and denting. To add insult to (mechanical) injury, the offender didn't even leave a note. Such is the cruelly competitive world of parking in a large city.

When she told me this story, my first reaction was naturally one of sympathy and understanding. I mean, it is bad enough to have to deal with unexpected car repairs, worse when the offender will not do the right thing and just own up to it.

Then, as ever, I got to thinking. I focused in on the "do the right thing" part. If this person had left a note, and had been honest enough to pay for the repair, the parallel I am about to draw would not work (at least not directly). Because they didn't, it does.

I will come back to the "do the right thing" bit in a moment, but first, the theory.

The Broken Window Fallacy Applied

We now have my girlfriend with a broken side mirror on her car. She is obviously not happy about this and the money that it will cost to repair. This much is clear. What is not so clear here is if anyone benefits from this situation.

It might be said that someone indeed does. My girlfriend will have to pay to have the mirror replaced, making herself less well-off (by the amount she has to pay for the repair). Who IS made better off, or so the first part of the fallacy goes, is the mechanic who does the repair.

He is made richer by the same amount that my girlfriend was made poorer, all the while providing productive work for a mechanic and the whole supply chain that put that mirror in the mechanic's hands.

So, according to this view, the asshole who did the damage was a public benefactor, creating work and profit where none might have happened before. Sounds sensible, no?

Well, no, it doesn't, actually. In fact, if you think about the broader implications, it seems downright foolish.

What the above view fails to take into account is that the money my girlfriend had to spend to get the mirror fixed is no longer available to her to put to another use. Let's say (for sake of example and because she just bought one) she wanted to buy an espresso/cappuccino maker before the mirror was broken. Now that it has to be repaired, she will not buy the cappuccino maker. This makes her one mirror and one cappuccino maker poorer.

So, as it happens, that asshole was just that and nothing more. He did not cause benefits; he cost people money. He was just an asshole.

Differing Interpretations and the Bigger Picture

Let's keep the theoretical disagreements simple: Keynesians would say that the asshole was a public benefactor because he helped to boost aggregate demand and stimulate the economy in a small way. Austrian school economists, and Frederick Bastiat (who first articulated the "broken window" idea in this essay in 1850) would argue that my girlfriend was made poorer and their might be other motivation behind the actions of the asshole (what if he was in collusion with local mechanics to cause damage?)

As for larger implications, well, think about large-scale calamities: war, terrorist attacks, natural disasters. Keynesians, or supporters of the asshole, would say that these things raise aggregate demand and can stimulate the economy in times of recession or depression. This is where the oft-repeated (and ultimately wrong) notion that WWII got us out of the Great Depression comes from.

What this view fails to see is that things like war, terrorist attacks and natural disasters are REALLY COSTLY TO BEGIN WITH! Yes, these calamities do raise demand for certain goods and services, but the opportunity cost (trade-offs) are usually not worth it.

Seeing something like World War II, the 9/11 attacks or Hurricane Katrina as ultimately beneficial to the economy is just plain naive. It is almost like the idea of burning the village in order to save it.

  • Causing damage and costing people money does not ultimately make people richer. It makes them poorer.
  • Actions often have consequences that are unintentional, but real nonetheless.
  • If you hit someone's car, be considerate of their property and just fess up. You are making people better off (mentally and economically) by doing so.
  • Did I imply that Keynesians are assholes? Sort of. Paul Krugman certainly is.
  • I again thank my girlfriend/muse for the inspiration. See the benefits of dating someone who lives the life of the mind? You never know what you'll inspire.


Dustcarts said...

With automotive technology going at a high rate of speed, these mirrors serve more than one purpose today. Technology has provided them with other capabilities such as automatic dimming.

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