What is the broken window fallacy?

First coined by French economist Frédéric Bastiat in 1850, this is one of the most common fallacies in economics and is still incredibly relevant today as most policy decisions are made with no regard to opportunity costs👇

Suppose you are the owner of a bakery, one day someone throws a rock through your front window and it shatters.

The broken window fallacy mistakenly believes that this damage to property will result in positive economic effects by creating jobs and stimulating economic growth.

This assumption is flawed because it ignores the opportunity cost of repairing the broken window. The money you must now spend to repair your window is exactly how much less money you now have to spend on anything else such as buying other goods or investing in new technologies.

As such, the economic activity generated by fixing the broken window is completely offset by the economic activity that could have been generated had the window not been broken in the first place.

The net effect is that the economy is just as well off as it was before.

This fallacy highlights the importance of understanding and considering the opportunity cost of all actions, especially when involving policy, business, and environmental decisions.