IV. The Art of Economics
In the following sections, analysis will be conducted in adherence to a single principle: a proper study of economics considers not only the immediate consequences of an economic policy, but of its long term, direct and indirect effects; not only on its intended groups, but on all groups, and the community as a whole.
Nowhere is this principle better illustrated than in the wildly persistent economic fallacy: the parable of the broken window; first described by Frédéric Bastiat in his 1850 essay, "That Which is Seen and That Which is Unseen":
"Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—'It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?'"
This fallacy, the idea that destruction is an economic stimulus permeates nearly every system of economic thought, and it results from the forsaking of unseen consequence. At first glance it appears as though the crowd is on to something—if it wasn't for the broken glass, no business would have been created for the glazier.
What is hidden, however, is the shopkeeper whose business the glazier replaces. If the glazier repairs the window for $100, James Goodfellow has lost $100 that he could have spent on another item, say a new suit. While the glazier gains $100 in business in replacing the window, the tailor who would have created the new suit loses $100 in business. Destruction has merely changed the destination of money; it has exchanged a window (which already existed) for a suit (which would have to be created). Thus, rather than a window and a new suit, James Goodfellow has only a window—a window he had before the glass was broken. The result is that the community as a whole is poorer by exactly one $100 suit.
It is through this process of uncovering the unseen, the process of tracing through secondary and tertiary effects which brings the full consequence of economy policy into the light of day.
7 Comments
Farhad2000But does the $100 glass really translate to a $100 suit? The costs of production vary between these two commodities.
Furthermore one can also say glass relies on more input factors (sand, energy, skill) then the clothing (skill, cotton) industry.
imstellar28 says...>> ^Farhad2000:
But does the $100 glass really translate to a $100 suit? The costs of production vary between these two commodities.
Furthermore one can also say glass relies on more input factors (sand, energy, skill) then the clothing (skill, cotton) industry.
It does not matter which two products you chose. To eliminate the variable you are suggesting, simply assume that it was not a broken pane of glass, but a suit that was destroyed in a fire. I'll rephrase the example below:
If the tailor replaces the suit for $100, James Goodfellow has lost $100 that he could have spent on another item, say a second suit. Either way the tailor only receives $100--whether it is to create a second suit, or to replace the first--so he gains nothing. In this example, it is even more obvious that James has lost something, and the other shopkeepers have experienced no net gain. Rather than owning a second new suit in addition to the first, James Goodfellow has only a single suit, as he did before the fire--except he is also out $100. The result is the same as before: the community as a whole is poorer by exactly one $100 suit.
Most examples in real life aren't as simple as the case with two suits, or even the case of a suit and a pane of glass. Real-world economic consequence is often extremely subtle, far-reaching, and indirect--which is why deligent analysis must be used in evaluating economic policy.
Farhad2000Okay what about military spending then? How does one justify the spending of millions of dollars on a single fighter plane, that then has to be maintained? Especially if its with weapon manufactures who lobbied for these contracts?
Am really surprised that you would think that Economics is really an art form at all, lets remember that this social science is still in it's infancy most of its laws and views have been changed over year on year because while it does have some absolutes its been confronted with new information over and over again from the great depression, to military spending, to protectionist trade.
I studied economics for 4 years in University and all I can say that 90% of it is following market trends, and absolute evaluations only can occur years later after all the data has been divulged.
imstellar28 says...^how much of what I am presenting did you receive at university?
Also,modern economics is almost 250 years old, which is older than most other sciences. The theories that describe and predict the behavior of markets are very much laws rooted in science--but the application of those laws is truly an artform.
dgandhi'It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?'"
This fallacy, the idea that destruction is an economic stimulus permeates nearly every system of economic thought, and it results from the forsaking of unseen consequence.
While destruction is not an economic benefit, it is a stimulus, the reality of a mutable universe requires that markets and social systems structure themselves for sustained maintenance of a more or less statistically stable amount of loss due to destruction. It is true that the glass making infrastructure depends on these losses, and that buying glass in an economy where these losses did not take place would cost many times more.
It is nearly impossible to design a house which will require no maintenance for a century, if you include maintenance due to accidental destruction. The same goes for all resources, even information loses value over time, as it is superseded with information derived from larger, and better measured data sets. loss, and damages are a given, if they were not accounted for our economy would not work.
imstellar28 says...^dgandhi, I'm sorry but you are just flat out wrong. Destruction is not an economic stimulus. This is not a theory it is irrefutable fact. Economic stimulus means something which increases production in an economy. It should take little more than a minute's consideration of the above example to realize this. However, since you persists I will prove you wrong via means of counterexample.
If destruction is a stimulus it would beneficial to burn down all our houses during a recession. If it was a really bad recession, we could destroy all our tools, cities, infrastructure, and factories--that would create quite the increase in economic production since we would have to rebuild it all right? No. it would be terrible for our economy, we would be back in the middle ages and our economy would be vastly worse than before.
You are looking at the "stimulated" glass maker but forsaking the "stimulated" tailor, you have failed to understand the principle of unseen consequence.
What I have written here is a concise summary of economic theory. I wrote it with the intention of being as clear as possible but if it is still as clear a mud, I suggest you read chapter 2 and 3 of "Economics in one Lesson" http://jim.com/econ/.
dgandhi>> ^imstellar28 If destruction is a stimulus it would beneficial to burn down all our houses during a recession.
You conflate benefit with stimulus. Destruction, just like artificially reducing interest rates, is a stimulus which does not benefit the market or the society in the final reckoning, but they do stimulate the market in the short term.
Your attempted balancing act neglects to take into account aggregated cost, the fact that the glazier, and the tailor have regular maintenance work makes their services cheaper for everyone, that's the whole point of industrialism. Ignoring that fact is no less farcical than claiming that destruction is beneficial, though I have not made that claim.
The baker has replaced a window he no longer has. Going back in time is not an option, the suit or the window benefit him, right now, to the tune of $100. Pretending the window is still there will not serve him, or your theoretical economy, in any way. While it would be "better" if things did not break, they do, and any economy must deal with that simple fact, or be placed on the pile of useless crap with perpetual motion machines and water powered engines.
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