If It Ain’t Broke, Don’t Break It

By Andrea Castillo

George W. Bush famously expressed his intention to “abandon free market principles in order to save the free market” during his dismal period as a lame duck one whole year ago. Since then, the government has undergone some substantial changes which are not just limited to the obvious change of administrations, but also include a renewed commitment to intervene in the workings of the economy. Both presidential candidates in the 2008 election campaigned with sweeping promises of government initiatives to rectify the economic problems that plagued our markets. Whether realized through summer, tax-free gas holidays, a la John McCain, or through President Obama’s broader and potent federal, spending-stimulus program, during the election debate both sides of the aisle generally agreed that some kind of government intervention and stimulation were necessary to revitalize the economy.

It doesn’t take much time or effort for an individual to put faith in the convenient solution of allowing our ever-large government to roll up its sleeves and save us from our own greed and ineptitude. As busy college students, many of which may not be familiar with complicated economic concepts, we routinely hear Ivy-League-certified economists and official-sounding government administrators prattle on and on about how many jobs the stimulus is saving, how robust our GDP appears to be, how the financial markets are rising, and how many green industries are being funded. However, we rarely stop to consider what this “stimulus” even is and why anyone could possibly oppose it.

In order to understand opposition to the stimulus, we should look to the past. Way back in 1850, French philosopher Frédéric Bastiat provided us with a remarkable illustration of an embarrassingly obvious economic concept that somehow manages to elude many legislators today. In his essay “That Which Is Seen and That Which Is Not Seen,” Bastiat details an account of a shopkeeper and his son in a small town. The diligent shopkeeper’s son is unruly and bored, so one day he gathers stones and throws them against the side of the family shop. As could be expected, one of the stones hits the front window and shatters it. The shopkeeper, although irked with his boy, shakes his head at the prospect of having to purchase a new window. At this point, a small crowd gathers around the scene of the accident and begins chattering among themselves, as crowds typically do. They shake their heads at the carelessness of the rebellious youth, but they still manage to remark about how fortunate it is that little boys destroy windows, because if they didn’t, window-makers would surely go out of business.

At first glance, the analysis offered by the crowd might seem reasonable and just. After all, the shopkeeper’s loss is the window-maker’s gain. This is a natural and easily observed relationship between buyer and seller with which we are all familiar. However, the moment that someone suggests that we ought to purposefully destroy windows in order to keep the window-makers in business, that person has fallen into the fallacy of the broken window. Of course the window-making guild would be pleased with this kind of thought-process, but what of the other industries? If the boy had never broken the window, the shopkeeper would have spent that money elsewhere. Perhaps the store needed a new employee to help stock on the weekends, which would have given another individual a steady source of income which would be spent on various other items. The shopkeeper might have invested in a new street sign to attract customers, which would have given a fine commission to the local sign-maker. Maybe the shopkeeper wanted to treat himself to a fancy, new pair of shoes, which would have kept the cobbler busy with a new order. However, the fallacy of the broken window led the town to consider only the short-term and obvious benefits to the window-making industry while ignoring the complex market transactions that would have occurred without any destructive intervention.

We can apply this simple illustration to many complicated modern government “solutions” that are presented as one-size-fits-all quick-fixes. Most recently we can see the broken-window fallacy in the popular cash-for-clunkers program, which provided cash incentives for the owners of inefficient cars to buy new cars in order to provide support to the ailing auto industry. (The old cars were later destroyed.) Sure, the stimulus plan and cash-for-clunkers may have created a few jobs in the short-term and it may make certain industries appear as if they are thriving and prosperous. However, it is important to note that such artificial growth will be unsustainable after the government funds run out and will have sapped business from other industries that individuals might have patronized instead. There is little that we can do to stop these programs now; however, it might do us all a bit of good to give credence to the wisdom those who have gone before us have left for us to consider. Just like the shopkeeper had to admonish his son about throwing stones, so must we challenge the conventional “wisdom” of our legislators who often promote short-term fixes to long-term problems.