The Broken Window Fallacy is an argument which disregards lost opportunity costs associated with destroying property of others, or the price of externalizing costs onto others.
A classic example of the Broken Window Fallacy is an argument which states that breaking a window generates income for a glazier, but disregards the fact that the money spent on the new window cannot now be spent on new shoes.
Another example of this fallacy is the argument for redistribution of wealth, or taxing those in higher income brackets more heavily in order to give to people who work less skilled jobs or don’t work as many hours.
The net effect of this is lost opportunity. Had those in the higher income brackets been taxed at a more fair, flat rate, they could have invested that saved tax money in businesses and created more jobs (an unseen benefit), but instead, their money is being stolen for the immediate seen benefit of handing out money to those in a lower income bracket.
While this will foster more spending (consumerism), it will not directly foster more value creation. It only recirculates the current wealth.
What fosters creation of value in the economy is hard work, not paper handouts.
Hard work promotes creation (making new widgets).
Handouts perpetuate consumption (redistributing and recirculating the widgets).
While at first glance robbing the rich and giving to the poor might seem like the most caring approach to managing the economy, in the long run, it actually hurts jobs – and consequently hurts everyone.
The lower wage earners have little incentive to work more – as they’ll get paid extra anyway – and the higher wage earners have less incentive to work more – because their money is going to get stolen anyway.
Their hard-earned money is going to be spent on people who want to work less rather than on jobs for people who want to work more and create new value.
This discourages everyone from working hard and creating value.
This wealth distribution externalizes a price onto higher wage earners. While redistributing the wealth may temporarily “fix” things – stimulating spending in the economy by the lower income bracket – in the long run, it damages the job creators of the economy – the “rich people”. Like them or not, they are our friends when it comes to helping the economy – if we’ll stop trying to rob them. If we hurt them, we hurt ourselves.
(Note: I am writing this as someone who is currently in a very low income bracket.)
Also, please note: I am not saying that it’s wrong to ever give to those in need. But the choice of where our money is allotted should be largely our prerogative. Why? Because we want to be assured that we are giving to someone who wants to work hard (has a good work ethic) and/or is in need, disabled, or otherwise preoccupied in serving family/community, and not someone who is perfectly capable of working more but isn’t really trying.
We want to be reasonably assured that our money is being entrusted to diligent and/or truly needy hands, rather than squandered on some lazy kid’s newest toy.
In this example, taxing “rich people” to give to the poor is breaking the window to “create money” for the window fitter.
But we had to destroy to create. We disregarded the fact that now the rich person can’t spend as much money on job creation (new shoes).
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