Monday, July 20, 2015

#033: Broken Window

Once upon a time, there was a baker who owned a small shop within a small town. One day, a boy threw a rock through his glass window, shattering it. The baker rushed outside to inspect the damage, while the boy was chided by his father for what he had down. After chiding his son, the father addressed the baker in an effort to consul his anger.

“I know my son broke your window,” the father told the baker, “but think of it this way: now you will spend money to hire a glazier to replace your window. The glazier will then have more money for which to spend it on what they see fit, and the next person who receives that money will be able to spend it within the community. Everyone will have more money than they had before, and the community will be richer because of it.”

The baker simply shook his head, and told the father: “Had you son not broken my window, I would have spent my money on a new suit. The tailor whom I bought it from would have had more money to spend it on what they saw fit, and the next person who received that money would have spent it elsewhere within the community. But now I must use my money I would have spent on the suit to replace my window. The community has not gained a window, it has lost a suit, and everyone is poorer because of it.”

The moral of the story: destruction does not create prosperity, but destroys it. Destruction only takes money out of an economy that would have otherwise been spent on something else more profitable within it.

This may sound like a charming little story, but it’s far from “charming” when the destruction isn’t a broken window, but a natural disaster or terrorist attack, like when Paul Krugman argued that both Pearl Harbor and the September 11 attacks served as economic stimuli. (I wish I were making that up!)