Thought for the day
“We must, however, acknowledge, as it seems to me, that man
with all his noble qualities... still bears in his bodily frame the indelible
stamp of his lowly origin”
-
Charles Darwin (English, 1809-1882)
Word for the day
Sooth (n)
Truth, reality, or fact.
(Source: Dictionary.com)
Teaser for the day
Should the government have handled the “US VISA denial to
Modi” case the same way it handled Devyani Khobragade case.
Remembering the “broken window fallacy”
Idling through some blog I stumbled into my favorite Bob McTeer’s following post that
explains in simplest possible words how misdirected subsidies and wasteful
expenditure in itself seldom leads to acceleration of economic activity. Though
Bob had written it in the context of US economy, I find it more relevant in
Indian context, especially when we are in the midst of the season of
benevolence.
“Some teenagers throw a brick through a baker’s window. The
gathering crowd said what a shame, but soon focused on the silver lining: much
helpful economic activity will be set in motion when the baker has the window
replaced. The repairman has more income to spend on something else, and the
seller of something else will have more income to spend on still something
else, and so on until we have an expansion of economic activity that is some
multiple of the initial repair job.
Bastiat called it a fallacy because, while the spending chain
originating with the broken window, does generate economic activity, it does so
at the expense of other spending chains that don’t occur because this one did.
In other words, had he not had to spend his money on window repair, the baker
would have spent on something else, and the beneficiary of that spending would
have new income to spend, etc. The broken window didn’t create net new economic
activity. What it did was divert economic activity from one set of players to
another. While some people benefit from the spending that took place, others
are harmed (probably unknowingly) by the diversion of spending away from them.
Broken windows do not add to the wealth of nations. They
diminish it by destroying part of the nation’s capital stock and productive
capacity. Surely the nation would be better off if unbreakable windows could be
produced as easily and cheaply as breakable windows. Surely, the nation, and
the world, would be better off if trains, planes and automobiles could run on
water rather than on the product of those South Texas oil fields.
The Broken Window Fallacy is a great tool for understanding much
of what goes on today. We are confronted daily by pitches for government to
spend on this or spend on that to generate economic activity without anyone
pointing out that the economic activity that does not take place because of
that that does. One classic example is what I call “stadium socialism.” The
franchise owner gets local governments to help finance a new stadium on the
grounds of all the new business it will generate locally. Left out of the
equation is what spending is cancelled by the use of resources in this way
rather than other ways and the locations that miss out on the stadium windfall.
This doesn’t necessarily mean that I wouldn’t do it if I were the local mayor,
but it probably does mean I wouldn’t do it as president.
The broken window fallacy is reproduced over and over every day,
but rarely is it as clear as glass.” (BoB
McTeer’s Economic Blog)
