The Broken Window Fallacy

Hello Everyone!

I'd like to address a myth that I think has very serious consequences. Namely, the idea that war is good for the economy, that WWII brought the US out of the Great Depression while the New Deal was ineffective, and that wars like Vietnam and Iraq or the build up of weapons are the only way to prevent a big permanent economic downturn that will make the 1930's look like fun.

Now some cynics will respond "So what? If so many people are willing to support Vietnam or Iraq for money, they are so morally bankrupt that it's no good trying to convince them that their money is safe either way." Of course, there's a truth in that. But one thing I've learned not to underestimate is the power of uncertainty in keeping people from taking a clear cut position one way or another.

For example global warming deniers may not be keeping people from action so much by making them feel that there is nothing to worry about. They effect may be more about keeping people in a state where they are just not sure, and thus in a state of paralysis where they don't think, "OK this problem is real. What do I do about it? Should I start using public transit more or biking to work sometimes? And after that then what? How can I help carbon neutral energy get off the ground? What do I need to back politically?"

Similarly if people believe that various wars or build up are warding off some horrible economic depression, they might not so much be thinking "Yes! I support the war because I want to have more money." They may be looking around at who in their community might lose their job and then decide that they just don't know if opposing the Iraq War is the right thing to do. And indeed for most people that sort of uncertainty can create sort of fear of unknown consequences.
When people look at the differences between Vietnam and Iraq era protests, a lot has been made of the draft as a factor. However many people who protested the Vietnam War were in no real danger of being drafted. Could one overlooked factor be the differences in the economy? Could it be that the Vietnam War happened mostly during a prosperous period (though after the war came some nasty recessions), while Iraq has occurred during a miasma of recessions, economic uncertainty, various bubbles, and a sort of disconnected fear over both terrorism and the possible loss of one's job?

Usually the argument for war being good for the economy boils down to the fact that a certain amount of manufacturing goes into making weapons and hardware, manufacturing uniforms, and providing the war effort with other material needs. However, this assumption has been referred to by some, as "The Broken Window Fallacy". A concrete example of this error would be something like this:

A child throws a baseball or a brick into the window of a baker's shop. Therefore the baker has to spend $250 on a new window. This means that the window maker has made a $250 profit and now has money to spend at the dressmaker's, the candy maker's, the milkman's and perhaps other local businesses. Therefore the young vandal, has actually done the community a favor because going around breaking windows actually stimulates the economy.

But does it? Of course, the $250 that the baker spent replacing his broken windows is $250 that he can't spend on something else. He also might have saved the money, and in fact, a population where a lot of people have substantial savings has concrete benefits over one where everyone spends everything on a hand to mouth basis, as the credit bubble has demonstrated all too well.
And if all the neighborhood kids take a lesson and continue to break the baker's window he may put off or cancel a larger project to upgrade the bakery, which would lead to far more jobs than simply fixing a window.

Similarly the money spent on weapons and on the Iraq War, is also money that could be spent on a number of things whether by the government or by private citizens. The most popular suggestion is typically schools. But one major need in the US, is to fix the lagging infrastructure with regard to roads and water related things such as treatment plants or pipes. Other projects could theoretically include things such as promoting solar thermal power plants, building public transits, preventing erosion in the Midwestern United States, and other worthy projects.

Another thing that "everyone knows" in the myth that war is good for the economy is the notion that WWII brought the United States out of the Great Depression. Now that one may have succeeded at stopping Hitler, but it was not good for the US economy. In reality the Great Depression ended long before WWII and was significantly alleviated by The New Deal. During WWII, a different kind of economy took hold and with rigid price controls, rationing, shortages, increasingly state planned industry, and with a very large military to artificially suppress unemployment counts. Therefore most of the peacetime indicators of economic prosperity became misleading if not meaningless. Also after WWII, there was another recession in 1948-1949, before the DOW reached 1929 levels in 1953. So WWII may have defeated Adolf Hitler, but it did not have anything to do with ending the Great Depression.

What is the real agenda when people say that Roosevelt's programs did nothing to alleviate The Great Depression? Sometimes it's about a laissez faire ideology in which any government intervention is frowned on. But in the current American context, there is an inevitable pro-war subtext. Basically the message goes:

"Internal government actions are useless in the face of economic depressions. Only warfare and arms build-up can protect you from job loss and a life of poverty."

The threat/warning becomes inescapable. Wars are seen as not just a matter of defense, but a last ditch effort to avoid ending up sleeping on the streets, or ending up like the many Wall Street brokers who committed suicide or started selling apples because they lost everything.

But the broken window fallacy has implications for environmental destruction. Environmental activist David Suzuki once suggested that ruining public water was profitable because people would "have to" drink bottled. As it turns out bottled water is not much of a solution to ruined water. More importantly, you once again have the classic broken window scenario where the economic winners are obvious, but the losers may be harder to identify.

The moral here is not to give any false credit to naughty children who go around breaking windows, or naughtly leaders who go around invading other countries for no good reason.

Say Goodnight Readers!!