The Broken Window
If you want to understand economics, you have to understand the principle of what is seen and what is not seen. Many people see the immediate effects of an event or action, but do not consider that which is not seen. For instance, the natural catastrophe in Japan in 2011 was considered positive for the economy. But is destruction positive?
The Story about the Baker
Making an incorrect conclusion about destruction and growth is illustrated by the story about the broken window. One day, a young hoodlum throws a brick through the window at the local bakery. Furious, the baker runs outside, but the kid is gone. A small crowd congregates in front of the broken window, and each person starts to reflect on the situation.
They try to comfort the baker, saying that this misfortune has a positive side in spite of it all, because the broken window will create work for a glazier. The money earned by the glazier will then be passed onto the butcher when the glazier buys meat, and so on. In other words, the broken window starts a chain of value creation. To hear the crowd tell it, the young hoodlum has actually contributed positively to society.
What about the Tailor?
The crowd is right that initially the broken window means the glazier gets a job, but what really happened? The baker wanted to buy himself new clothes for the money he needed to spend on the window. Now all he has is a new window and no new clothes. The money that would have gone to the tailor would have been passed on in society the same way as with the glazier.
The glazier’s profit is the tailor’s loss, and no net wealth creation has taken place. The crowd sees only the baker and the glazier, but not the tailor, because the clothes he was going to sell to the baker never show up in the story. They just see the things that can be seen directly, and not the things that can only be seen indirectly.
- At first glance, destruction can seem positive, because it creates new jobs
- On the other hand, destruction removes the opportunities for other jobs
- Example: A baker who needed to buy new clothes has to spend the money on a new window after vandalism
- Now he is left with just a new window and no new clothes, instead of a window and new clothes
- The glazier made money, while the tailor lost
- The new window is the thing that is visible, and it is easy to think that the destruction has created new wealth
- Therefore, the total is less positive: Window + clothes = 2 > Just window = 1