On the Broken Window Fallacy and the Benefits of War

November 3, 2009 at 2:58 am 2 comments

Since the name of this blog is taken from an essay by nineteenth-century French economist Frederic Bastiat, it seemed appropriate that I comment on this posting by the Ludwig von Mises Institute.

One of the most famous examples of the difference between good economics and bad economics is the parable of the broken window I won’t spoil it for you by explaining the broken window fallacy (I’ll let you read it for yourself), but to give an analogy, politicians are always the first to claim that military activity is good for the economy because it encourages spending and gets money flowing. After all, we’ve all heard about how World War II got us out of the Great Depression (it couldn’t have been the drastic reductions in government spending by two-thirds at the end of World War II).

In reality (and as pointed-out by Tom Woods here), military spending does not do any favors for the economy. It diverts resources away from useful production to the production of goods that will be intentionally destroyed. That spending that is stimulated by war is spending that could otherwise have been used to invest in goods actually desired by the consumer; goods that could help to improve the quality of life.

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