War and the broken window fallacy
There is a famous parable that illustrates a careless shopkeeper’s son breaking a window at the store. Among the onlookers of the scene, they utter that the destruction of the window has a silver lining. Its damage will increase trade activity, as the shopkeeper will now hire glaziers to repair the window.
The argument begs that destruction increases economic activity, while completely disregarding the unintended consequences, or unseen costs. The most obvious being that the shopkeeper cannot spend the money he used for repair on other goods he previously intended to trade for. What if he intended to use that money to purchase new capital that would increase his productivity? Not only would this have benefited his consumers, but the company that sold him the capital, the companies that sell individual parts that make up the capital, and so forth.
“But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, ‘Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.’ It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.”
This is Frederic Bastiat’s well-known broken window fallacy.
This fallacy has plagued many politicians, distorting their ability to realize the subtle consequences of their policymaking. It is commonly employed regarding war, natural disasters, and among other events that lead to catastrophic outcomes.
Indeed, it is a common misconception shared among many that war is good for the economy, and they point to WW2 as a prime example. Do you think wartorn Europe, all the homes and business leveled to dust, was a good thing? Families and businesses were left with nothing, and instead of using their money for growth, had to dedicate it to rebuilding. What would be better? Engaging in trade to grow and add to what was already built, or engaging in trade to start over? Yes, war does rally resources and dramatically increases productivity, but the ignored factor is where the productivity is directed.
The problem lies in the productive factors not being utilized for augmentation, rather devastation. What would generate a greater return on investment; investing $8 million on research and development to launch an innovative product, or a tank whose service life may be cut short if it is destroyed in battle? Which of these two investments would increase activity that benefits both consumer and producer? War does spur economic activity and can provide the victor with wealth from the spoils it plunders, however, its rippling effect will not achieve the potential growth that a market without war may. Instead, war reallocates scarce resources from the private sector to public policymakers whom have a notorious tendency to spend wastefully. This is known as the Pareto efficiency, which is a state of reallocation that makes it impossible to redistribute resources to make one individual better off without making another worse off. Instead of a company producing groundbreaking products that grant consumers inexpensive goods, giving them the ability to save or live more affordably, its production is allocated towards producing weapons that have little use to the consumer. It should also be noted that war is overwhelmingly financed through debt and deficit spending, which undoubtedly has Keynesian economists salivating. I need not explain the dangers of mass unsustainable debt.
The United States have spent over $5 trillion dollars on war since 2001. This extraordinary amount confiscated from the private sector ultimately created a deadweight loss. The disregard of the classical economic principle introduced by Bastiat has enforced the American military industrial complex, which is nothing more than a means for politicians to spend money that isn’t theirs. It reallocates and ultimately misallocates funds from the private sector that inhibits productive investments, and instead directs them towards devastation. Like many other government policies and maneuvers, they only see what lies before them instead of computing the unseen effects their actions create. War is not good for the economy, rather a surrogate of economic inefficiencies.
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