Broken Windows, the Government, and the Economy

© Can Stock Photo Inc. / Elenarts

Frederic Bastiat, a 19th century French thinker, gave us a number of enduring ideas including the “broken window fallacy.” His idea went like this:

When the shopkeeper’s son accidently breaks a window, bystanders assure the shopkeeper that it is a good thing, since the glazier will profit, money will circulate, and everyone will be better off. Bastiat names these things as “what is seen.” What is unseen is that the shopkeeper would actually have spent that same money on a pair of shoes or a book or some other good. The glazier’s gain is the cobbler’s loss, and society is poorer by one pair of shoes—after you consider what is unseen.

So imagine a society in which 98 people are gainfully employed in producing goods and services, and 2 people work in necessary, worthwhile and cost-effective ways to regulate the efforts of the 98. If we concede that some level of regulation is necessary, one might conclude that this society shares the output of 100 people.

Now imagine a combination of circumstances that leads to a program to provide better paychecks to five of the workers. The society elects to hire the five to dig holes and fill them in again for generous wages, thus providing “good jobs” for all. What is seen is that everyone has a paycheck, money keeps moving, and thereby everyone benefits. But what is unseen is that society has permanently lost the output of five workers, so the standard of living on average must decline by 5%. No wealth or advantage is created by the digging of holes, when everything is tallied up.

Worse yet, the five might instead be employed in unnecessary regulation of the other workers. If those five spend their days interacting with other workers, the output of five more workers is lost to their oversight. The standard of living on average then must decline by a total of 10%.

Our purpose in writing is not to argue about regulation in general, or the impact of new rules on community banks and financial advisors, or the proper level of government employment. Rather, we are hoping that people will think about what is unseen, as well as what is seen, in matters of public debate. Those of us looking to elevate our economic understanding would do well to start with the Wikipedia article on Bastiat.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.