Great Wikipedia analysis of Bastiat's broken window fallacy

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.


War

Some claim that war is a benefactor, since historically it often has focused the use of resources and triggered advances in technology and other areas. The increased production and employment associated with war often leads people to claim that "war is good for the economy." Others claim that this is an example of the broken window fallacy. The money spent on the war effort, for example, is money that can't be spent on food, clothing, health care, consumer electronics or other areas. The stimulus felt in one sector of the economy comes at a direct—but hidden—cost to other sectors.

More importantly, however, war literally destroys property, buildings, and lives. The economic stimulus to the defense sector is offset not only by immediate opportunity costs, but also by the costs of the damage and devastation of war. This then becomes the basis of a second application of the broken window fallacy: it is claimed that the rebuilding that follows war and its destruction provides a further stimulus to the economy, this time mainly in the construction sector.

However, immense resources are spent merely to restore things to the condition they already were before the war began. After the war, the nation has a rebuilt city; before the war, it had a city and time in which its labour could have been used for more fruitful purposes. Further, the fixed amount of natural resources could have been used to build a second city rather than to rebuild a destroyed city, hence highlighting the occurrence of waste. An example of this in America is that many highway and bridge projects that were planned in the late '30s had to be put off until after the end of the Second World War, and the pent-up demand for not only roads, but houses, cars, and even radios led to massive inflation in the late '40s. The war also delayed the commercial introduction of television, among other things, and the resources sent overseas to rebuild the rest of the world after the war were not available to directly benefit the American people.


Special interests and government

Bastiat, Hazlitt, and others equated the glazier with special interests, and the little boy with government. Special interests request money from the government (in the form of subsidies, grants, etc.), and the government then forces the taxpayer to provide the funds. The recipients certainly do benefit, so the government action is often regarded by the people as benefitting everyone. But the people are failing to consider the hidden costs: the taxpayers are now poorer by exactly that much money. The food, clothing or other items they might have purchased with that money will now not be purchased—but since there is no way to count "non-purchases," this is a hidden cost, sometimes called opportunity cost. Bastiat referred to this in his essay as "what is not seen". Because the costs are hidden, there is an illusion that the benefits cost nothing.
Hazlitt summarized the principle by saying, "Everything we get, outside the free gifts of nature, must in some way be paid for." Robert A. Heinlein popularized a summarization/acronym of the concept called "TANSTAAFL" (There Ain't No Such Thing As A Free Lunch).


Terrorism

Economist Walter E. Williams and commentators Jonah Goldberg[1] and Robert Tracinski,[2] accused economist Paul Krugman of committing the broken-window fallacy soon after the September 11, 2001 attacks. 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. [...] the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending."[3]

While Krugman made no direct claim that the terrorist attacks would lead to overall economic gain, Williams inferred that Krugman was talking about a net economic good for the United States, and in response wrote:

"Would there have been even greater 'economic good' had the terrorists succeeded in destroying buildings in Los Angeles, San Francisco, Chicago, Philadelphia, Boston and all other major cities? Of course, you and I know that is utter nonsense. Property destruction always lowers the wealth of a nation."[4]


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