Wednesday, September 26, 2012

A fallacy of the broken windows fallacy

The Austrians have attacked Keynesian economics for about 70 years. Their blame (not criticism because what they argue is neither logical nor evidence-based at all) is based on a Bastiat's argument made about one and half century ago, which is called "the fallacy of broken window". I have found this blame very improper.
Of course, Bastiat probably did not write it to criticize stimulus programs, which didn't exist in the 1850s; rather, he seemed to criticize the people who believe destruction leads to production and we should destroy things.
If we break a window to buy another window, the entire economy will not be stimulated. It is simply to move resources from one place to another. In Bastiat's story, the glazier will appear to be better off by selling a newly produced window but the shoemaker will lose because he has to spend on what he would not have to if the boy had not broken the window in the first place. Plus, since the glazier has to spend his time and resource on something that would not be necessary, it will eventually lead to waste of his time and resources. As a result, the entire community ends up being worse off.
However, does it mean that the shoemaker must not buy a new window? It is much more stupid to leave the window broken because it can give the shop a bad image. If it is winter, the shoemaker may suffer from the cold. In summer, his shoes can be damaged by rain water through the hole in the broken window. Then, the shoemaker's rational choice is to buy another glass. He may lose some of his existing funds, but his business may not yield loss any more due to the broken window.
As liquidationists, the Austrians are supposed to say "Leave the window broken, and it will fix by itself." A broken window will be eliminated eventually (and quickly) without any further shoemaker's action. The invisible hand will fix it! Since the Austrians are liquidationist, they should believe any attempt to replace the broken window with extra expenditure will cause greater damage to the shoemaker's business.
Am I being ridiculous? Yes, I am. However, what the Austrians believe has exactly the same logic.

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