The Fallacy Of The Broken Window Fallacy

  By VennerRoad, 9th Aug 2016

The great French economist Bastiat

War, misery, death and destruction can bring great wealth to the few. Why can we not all have the wealth without the war?

In a New York Times op-ed on September 14, 2001, ie in the immediate aftermath of the day the world changed, economist Paul Krugman wrote: “Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could even do some economic good.”

At page 212 of his 2012 book The Twang Dynasty, the legendary guitarist Deke Leonard writes something even more grandiose: “Then came Pearl Harbour. The American war machine swung into action, creating new factories, new jobs and higher wages. And the longer the war lasted, the more prosperous the country became.”

But: “The end of the war threatened that prosperity” so the Government “engineered a consumer boom”.

Leaving aside the sheer scale of human suffering the Second World War brought plus the mass subversion of human rights and all the other horrors the Western response to the 9/11 attacks gave us, it is a quaint idea is it not that mass destruction can bring about prosperity? This is what Libertarians call the broken window fallacy. The French economist Frédéric Bastiat (1801-50) tackled this in his essay Ce qu’on voit et ce qu’on ne voit pas.

The refutation of the broken window fallacy is simply to extend the destruction, instead of breaking a single window, you smash up the entire neighbour, then everybody benefits, right? If you still do not understand how silly this is, imagine it is your own property that is destroyed. Would burning down your house or your business really make you more prosperous? Of course not.

Nevertheless, both Krugman and Leonard have a point, while at the macro-level, the wealth of the community is diminished by destruction, and indeed while it is also diminished for some at the micro-level, some people do profit from war, indeed a few profit from it enormously. An arms manufacturer, a security company, even a private clinic, may profit handsomely from a war in say the Middle East. Their employees will be paid, maybe working overtime, and their shareholders will reap enormous profits. But ultimately, who pays?

Then there is the inescapable fact that if the war had not occurred and if the resources that were put into the war were directed into other endeavours, the world would indeed be richer. So why can this not be done?

The simple answer is that while the laws of physics are immutable, the laws of economics are not, or at the very least, those laws that relate to the production of goods and services are not. As Professor Quigley points out in his classic Tragedy & Hope, wars are not run on money, but by the proper marshalling of real resources, in other words, human action. The usual flim-flam about there being a shortage of money does not apply, because governments simply over-ride the banks: you will provide the money, they say, and the banks do. If you do not believe that, answer this question, has any government, any sovereign nation, lost a war because it ran out of money? If the answer is no, and it surely is, then we should strive to create a war economy for peace, one that allows us to increase the goods and services in the world for the benefit of all mankind rather than for the benefit the few the broken windows currently benefit.

On August 8 this year, Paul Krugman wrote another op-ed for the New York Times, in which he suggested now was the time to borrow. The reality is that governments do not need to borrow money when they can simply create credit in order to stimulate economic activity, as Ellen Brown pointed out in a recent article. And no, this would not cause inflation - the stock response; the idea is far from original, and can be traced to the Guernsey Experiment of the early Nineteenth Century, if not earlier. As Brown also points out in her article, the only real barrier to this is legal; in Japan, it is the Public Finance Act; in Europe it is the Maastricht Treaty; and in the United States, it is the Federal Reserve Act. In short, the banksters and their frontmen have created a worldwide monopoly, what the great Major Douglas called the monopoly of credit, or the dictatorship of finance. Again, if this monopoly can be broken in war-time, it can be broken in peace, even if in the meantime we have to break a few windows to bring it about.

To Wikinut Articles Page