Some of my friends have fallen too much in love with the idea of the broken window fallacy.
The idea is quite simple. It's a kind of anti-silver lining in the clouds thing. A kid throws a brick through the window of a bakery.
Everyone thinks that sucks. But then some "wise" economist observes that this isn't really so bad. Now the window maker will have some work. And the window maker will be able to spend that money at the dressmaker, who will be able to spend that money at the bookshop, and the bookshop keeper will spend the money at the bakery. We're all better off.
That's the fallacy. The truth is that we're not better off. The money spent on the window is money that could have been spent creating new things. If the baker didn't have to buy a new window, he could have invested in suit from the tailor or a new oven to bake bread.
This is all rather straight forward. What some of my friends miss is the idea that a broken window can, in fact, improve conditions in the short run. They act as if we're always immediately worse off. But that's simply not true.
Let's say that there are no new ovens worth buying. The baker doesn't want a new suit. And the window maker is starving to death because no one needs a new window.
So someone breaks a window.
What happens now? Well, the money that was being saved by the baker gets transfered to the window maker, who is no longer starving.
You can object that there's no net benefit to society. You can object that this kind of wealth transfer is immoral.
But one thing you cannot say is that it didn't make a difference. Of course it did. Wealth got spread around. The baker was made poorer, the window maker wealthier.
Questions? Comments? Email us at
Follow John on Twitter @ twitter.com/Carney
Follow NetNet on Twitter @ twitter.com/CNBCnetnet
Facebook us @