“The American people will never knowingly adopt Socialism. But under the name of ‘liberalism’ they will adopt every fragment of the Socialist program, until one day America will be a Socialist nation, without knowing how it happened.”

Socialist Party presidential candidate Norman Thomas

Wednesday, October 31, 2012

The broken-window fallacy of economics

On Fox News this morning, they were talking about the economic stimulation from recovery efforts that would offset some of the costs of destruction caused by hurricane Sandy. This is short-term thinking and you would think Steve Doocy would be familiar with the broken-window fallacy of economics?

If a shopkeepers window gets broken by a thrown rock, one could view that as a good thing because the glazier gets business from the shopkeeper to repair the window. "After all" as the thinking goes, "how do glaziers stay in business without broken windows"?

What these people do not take into account is the costs-of-lost-opportunity to the shopkeeper. Instead of spending that money to repair the window, he may have invested in new signage for his shop, additional advertising, or a larger order of goods to sell. By Doocy's logic, someone should break all the shopkeeper's windows . If one broken window is good, all broken windows must be better, right?

Sure, money spent with the glazier stimulates the economy the same way as if it were spent by the shopkeeper, but in the aggregate the world is still minus one window. Only production creates prosperity, destruction never creates over all prosperity.

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