A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.Now, let's examine a recent Paul Krugman post:
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
Broken Windows and the iPhone 5
There’s been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy. I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture.
The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.
In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” (sic) theory, in which destroying some capital can actually be a good thing under depression conditions.
Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.Notice a few things here. Krugman has the "broken window fallacy"---and it is singular, not the way Krugman has it as plural---completely mixed up. First, the broken window and the iPhone are consumer goods, not capital. But more significant, in his version, there is no hoodlum destroying a good we desire, the window. The destruction of the window by a hoodlum results in labor and capital being moved to build and replace the window versus being used in another sector of the economy if the window hadn't been broken. (Note again, capital is not destroyed but moved to a different use within the economy). But, overall, the fallacy shows us that destruction of valuable goods by hoodlums (even consumer goods) distorts the economy and makes us less well off.
In Krugman's example, there is no hoodlum damaging anything. Thus, there is no broken window. What is occurring instead is a superior product is being made---so superior that some are willing to throw away an old consumer good, in preference for the new consumer good. This is improving the economy, not resulting in a backward movement of the economy because of a hoodlum.
Krugman seems to get about half this in his comment, which supports my new suspicion that Krugman has trouble thinking more than two layers deep. Remember, the man completely misunderstands the baby sitting co-op example that he states led him to Keynesianism in the first place, and he doesn't understand Austrian business cycle theory, and now this.
I mean, think about it, Henry Ford's Model T replacing the horse and buggy is somehow an example, in Krugman's mind, of the broken window fallacy!