The Broken Window

Saturday, July 31,  2010

By Alwyne Todd

The nineteenth century French economist, Frederick Bastiat, was renowned for his ability to express complex economic principles in a way that could be understood by the man in street.

In one of his parables he tells of a mischievous boy wandering idly down a street on a quiet Sunday afternoon. As he draws near a baker’s shop

sporting a large plate glass window, the lad spots a half brick lying on the pavement. He grabs it and hurls it through the window, then runs around the nearest   corner, straight into the arms of a man, who, having heard the crash of glass, hauls
the boy back round the corner where a small crowd is gathering.

“Call the police,” insists one fellow. “No,” says another, “just give the boy a good hiding and send him on his way.”

Then a little old lady from the back of the crowd pipes up. “I say he deserves a medal! Times are hard and many men are out of work. There’s a good side to this disaster. The window has to be mended which means there’s a job for the glazier. And when the glazier spends the money he earns, he’ll create work for other people. The prosperity will multiply and spread in ever widening circles.”

Bastiat does not say what course of action was finally decided upon but he does point out that someone was being forgotten. It was, of course, the baker. After paying for the replacement window, he would have no money to spend on the new suit he was planning to buy. So, the benefit created by the job for the glazier, is cancelled by the job lost by the tailor.

The ultimate result is worse than merely neutral – the society as a whole is now poorer by one plate glass window. The opportunity of new investment has been lost.

One would be almost ashamed to relate this simple tale were it not for the fact that  we hear it almost daily, in various guises, from the mouths of politicians, trades unionists, journalists, captains of industry and, sad to say, some economists. It was around at the time of the German ‘economic miracle’ after the Second World War.

On 20 June, 1948, Ludwig Erhard, the German Minister of Economics, his country’s industry devastated and the whole of Europe groaning under rationing and controls, put in train a course of action that within a decade made West Germany the most robust economy in Europe. He chose a long weekend, when the allied control commission was on leave, to remove all rationing and price controls. The effect was salutary. Within weeks goods emerged from the black market to fill the shops – and  the machinery of German commerce and production began to hum.

But, instead of recognising what Ludwig Erhard had done, many claimed that it was the devastation itself that spawned the recovery. There was talk of ‘pent up demand’  and of the thousands of construction jobs waiting for the return of the soldiers to civilian life.” Here was The Broken Window fallacy on a grand scale.

Others claim that it was because of the millions of dollars Germany received from the American people in the form of the Marshall Aid plan. They forget that Britain received more Marshall aid than Germany but continued to drift along in economic stagnation, eventually to earn the dubious title of the ‘economic sick man of Europe’. Today, there can be little doubt that the German recovery occurred in spite of and not because of the devastation of war. There is even less doubt that the German miracle was rooted in the drastic actions of Ludwig Erhard on that red-letter weekend in June 1948.

Today the broken window fallacy thrives in its job creation variant. It is the favourite ploy of politicians and vested interests to justify a huge range of regulations, many of which lack merit on any other grounds.

The United Nations’ panel appointed to study climate trends has determined that mankind’s production of carbon dioxide will exert a warming effect on the earth’s atmosphere. To counter this, apart from a few commonsense palliatives, like  encouraging the use of domestic solar hot water systems and better methods for insulating buildings, the main thrust worldwide is to replace carbon-based power sources with ‘renewables’ such as wind, solar and wave power. The problem is that these alternative power sources are vastly more expensive than the cheap, reliable power on which our modern civilisation has been built. Although deployed on a fairly large scale throughout the world, nowhere have they proved to be commercially
viable. In fact they would not exist without the expenditure of billions of dollars in taxpayers’ money on subsidies and tax breaks. To give further impetus to persuade investors to enter the field of renewable power production, to gradually wip

Some of the incentives being offered to encourage reluctant householders to produce their own electricity through solar electric roof panels could have been devised by Lewis Carrol. Apart from subsidising the installation costs, some authorities have promised that electricity utilities will pay the householder for the power thus  produced at prices far higher than current standard domestic rates per Kw hour. A cottage industry in electricity production!

But if the looming climate change catastrophe is real, should we not be prepared to accept the threat to our comfortable modern living standards posed by such a drastic increase in fuel and electricity costs? Well, according to the powers that be, no.
We just have to think of the huge industry that will spring up producing those vast

areas of wind turbines and solar collectors, the thousands of jobs that will be created, and the outwardly spreading circles of prosperity that will result. Isn’t this our old friend the broken window?

Talking about windows, the medieval tax on windows had the unintended consequence of thousands of windows being bricked up. You can be sure that somebody, somewhere, said “Think of all those extra jobs for bricklayers.”

Author: Alwyne Todd is a member of the Council of the Free Market Foundation.