The Broken Window Parable
The parable begins with a simple scenario: a shopkeeper’s window is broken by a mischievous boy. The shopkeeper now has to pay the glazier to fix the window. Observers might note that this act of repairing the window benefits the glazier, who earns money and, in turn, spends it on other goods and services, thereby stimulating economic activity.
The Seen and the Unseen
Frédéric Bastiat used this parable to illustrate a fundamental principle in economics—the difference between the seen and the unseen. The seen is the immediate economic activity that results from the repair: the glazier getting paid. The unseen, however, is what is often overlooked. In this case, the unseen is what the shopkeeper could have done with the money if the window hadn’t been broken.
Opportunity Costw
The concept of opportunity cost is central to the fallacy. Opportunity cost represents the benefits an individual, investor, or business misses out on when choosing one alternative over another. In the case of the broken window, the shopkeeper could have spent the money on other goods or services, such as buying a new suit or investing in his business. This potential economic activity is lost because the funds had to be redirected to repair the window.
Misleading Economic Stimulus
The fallacy warns against the mistaken belief that destruction or loss is beneficial for the economy because it creates jobs and generates spending. For example, some might argue that natural disasters, wars, or acts of vandalism can stimulate economic activity through reconstruction efforts. However, this perspective is misleading because it ignores the lost opportunities—the resources used for rebuilding could have been employed elsewhere to create additional value.
Practical Implications
Understanding the Broken Window Fallacy has practical implications for policymakers and economists. It underscores the importance of considering the full picture, including the indirect effects of economic activities and policies. For instance, during economic downturns, government spending on public works can stimulate activity, but it’s crucial to consider whether this spending is the most efficient use of resources and what alternative opportunities might be foregone.
Really interesting and informative article. Although this makes a lot of sense but I still don't understand how this is a loss for the economy as if we assume it costs ₹100 to repair the glass. Now had the glass not been broken, the shopkeeper would have invested that money in the economy but now instead of the shopkeeper, the glazier will do the same thing. So at the end isn't there a net investment of ₹100 in the economy both ways. I am an engineering student not an economics student so I might be missing something here.
ReplyDeleteEconomic Impact:
DeleteWithout Breakage:
Shopkeeper: Has ₹100 and a window.
Spends: ₹100 on a new suit or investment, which directly adds value to the economy.
With Breakage:
Shopkeeper: Has ₹100 and a broken window.
Spends: ₹100 to repair the window, no new value added.
Glazier's Spending (Example):
Glazier: Receives ₹100 for the repair.
Saves: ₹30 (not immediately contributing to the economy).
Spends: ₹70, which circulates back into the economy.
Economic Interpretation:
Wealth Destruction and Opportunity Cost:
Without breakage: The economy gains a window and a new suit, both of which add immediate value.
With breakage: The economy only restores the window, missing out on the new value that could have been created by the shopkeeper's original spending.
Impact of Savings:
Without breakage: The full ₹100 could be spent on new goods/services, fully stimulating the economy.
With breakage: The glazier saves ₹30, so only ₹70 circulates back, reducing the immediate economic impact.
While the glazier does spend some money, the net economic impact is still lower. The shopkeeper's potential to create new value is lost, and part of the glazier's earnings are saved rather than spent immediately. This demonstrates that the economy not only misses out on the original potential investment but also experiences reduced immediate economic activity due to the savings.(in short run)
Thank you now I understand it fully
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