The Valley Torah Scroll

In 2019 – when I first started at the VT Scroll as the Opinion Editor – I wrote a relatively bulky article titled “UBI: An Unexpected Antidote”. In it, I discussed the merits of universal basic income as a replacement for the current welfare regime – particularly in how it could reduce bureaucracy. Notably, I argued at the time that UBI was preferable to conventional welfare – but not a good idea in a vacuum. I won’t speak to the validity of it’s core idea, although there is much to doubt; regardless, the article presents us the opportunity to consider and refute a common fallacy without malice – okay, perhaps an ounce of malice. 

A fallacy is an incorrect belief or line of argument, often with the superficial appearance of logic. Perhaps the most outstanding fallacy in the article was the broken window fallacy – which occupied a significant place in my arguments for UBI. It’s nicely illustrated here following my quoting the prominent economist Milton Friedman:

“One can see why Milton Friedman supported it, as it engenders a more competitive free-market society in allowing workers to better negotiate consensual contracts with employers, pursue additional education, and grow the economy with consumer spending.”

Schneur Friedman, UBI: an Unexpected Antidote

In essence, I argued that the UBI money given to citizens would grow the economy as those recipients made purchases, which in turn would make businesses more profitable, etc. Can you spot the fallacy? The line of argument above ignores half of the entire equation – where the money came from. It’s true that the recipients and the businesses they patronized would grow wealthier, but the money was taken away from others who – alongside the businesses they would have spent their money at – are now poorer. To be facetious this is equivalent to cutting off the bottom of a blanket, sewing to the top, and claiming you’ve made the blanket longer.

The broken window fallacy draws its name from the parable originally used to illustrate it by French economist Frederic Bastiat in 1850. He described an incident werein a child broke a baker’s window, forcing the baker to hire a glassmaker to replace it. The town then concludes that the child should be praised, after all, he has grown the economy by giving the glassmaker work.

The issue is what Bastiat describes as ‘what is not seen”, in the window case this refers to the loss of spending the baker would have otherwise done – buying new shoes – but now cannot as he is forced to replace the window. In effect the scenario simply represents a shift of resources from the shoemaker to the glassmaker, a net zero without any growth. When one includes the loss of the window, it becomes clear that the episode presents a net decrease in the societies’ wealth.

The case of UBI is another instance of this priciciple as wealth is being shifted from one place to another leading some industries to decline as others grow, and, ultimately, not creating any new growth in the economy. 

Knowing the flaws in this line of thinking proves helpful beyond old articles, UBI, and bakery windows.

One prominent example is war, and the persistent myth that it benefits the economy. The logic being that during a war the government spends enormous sums of money hiring military personnel as well as spending money on hardware – thus creating jobs and wealth in the armament industry. The issue again is what’s not seen, namely, that the money spent has to come from somewhere. That somewhere will either be taxation, inflation – essentially a hidden tax, or debt – which will need to be serviced and repaid later using one of the previous two. So, the government forcibly diverts resources away from civilians towards its own goals. As a result of this goods consumers would have voluntarily purchased to improve their quality of life are produced in smaller quantities, while weaponry is produced in far greater quantities. For evidence of this one need only look to the rationing of domestically manufactured goods such as cars and tires in the midst of World War Two. While it may seem like a net zero growth scenario, in actuality, the forced production of armaments – with little productive use – rather than expansions in production capability or new consumer goods mean that the scenario presents a net negative. 

We’ve considered three examples of the the broken window fallacy in this article, yet, if one keeps an eye out for instances of it in the news, public policy, and every other area they’ll encounter it startlingly often. The words of journalist and economic writer Henry Hazlitt remain true:

So we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments’ thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. 

Henry Hazlitt, Economics in One Lesson

While we’ve discussed the fallacy in robotic terms such as “net zero” or “net negative”, one must realize that the consequences of falling prey to it lead to real decreases in quality of life for individuals – such as more expensive goods or less employment opportunities. By keeping an eye out for this fallacy we might avoid the tragic results it inevitably begets.