Saturday, March 12, 2011

Japan's Tsunami - The Broken Window Fallacy Returns

by Steven Horwitz

Nightly Business Report

March 11, 2011

The earthquake and tsunamis in Japan have already led otherwise smart people, including economists like Larry Summers, to fall for one of the oldest fallacies in economics: the broken window fallacy. Summers has already said that this may temporarily benefit the Japanese economy. The argument that such disasters are good for economies are as old as the fallacy they rest on.

The fallacy was first identified by the French economist Frederic Bastiat in the 19th century with his story of the young hoodlum who breaks a window in a tailor's shop. The townsfolk grumble about it until one person points out that it means more business for the glazier. They then note that the glazier will spend that income on something else, and that income will in turn get spent and so on. Soon they've convinced themselves that breaking the window is a boon to the town.

Of course the fallacy here is that all of that spending just replaces the very same stream of spending that the tailor could have initiated by buying anything else, but also having a functional window if the boy never breaks it. All the boy does is force the tailor to spend $100 cleaning up a mess rather than actually adding to his wealth.


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