Bastiat’s ‘broken window’ problem is regularly cited in aid of the argument that ‘public’ expenditure is not beneficial and does not lead to any increase in wealth. In summary, expenditure on repairing a deliberately damaged window does not generate wealth, because the expenditure on its repair takes away money that would otherwise have been spent at the shoemaker, the grocer or in some other fashion. Bastiat makes the same argument by extension against expenditure by the state.
It is not immediately clear why repair to the window when damaged by weather or natural wear and tear seems ‘good’ while repairing deliberate damage is ‘bad’. Clearly there is an opportunity cost for the owner of the window. However from the perspective of the glazier there is no difference. The money he receives can be spent as he wishes and to him represents real additional wealth. Moreover, when it is spent it generates further wealth for others down the chain of spending – the multiplier effect. This is the nature of money – it goes round and round…
Imagine however if the glazier had paid someone to go around breaking windows in order to generate business for him. The effect would have been the same but in this case the glazier would generally be seen as behaving illegally. Regardless of the cause, be it accident or design, the repair of a broken window adds no value to the economy as a whole – its effect is not additive but redistributive.
Applying the argument to the treatment of pollution raises interesting questions. It is often argued by the same people that requiring industry to reduce or remove pollution is a tax on wealth generation. This is not the case for (at least) two reasons.
First, as I have argued elsewhere, if an action is morally correct it applies to the institutions we create
as much as to individuals since institutions cannot act of their own accord –
they require individuals to act for them. The concept of a corporate person in
this context is nonsense. That post develops this idea in relation to the issue of pollution.
Second, a business creating pollution is in the position of the breaker of windows. Requiring them to pay for cleaning up their own pollution or better still preventing it in the first place, is not a tax on wealth creation but a perfectly reasonable act – the window breaker is forced to make reparation not the window owner.
There still remains the issue of redistribution. It may be that some people make no little or no contribution to the economy as a whole because of a dependance on state benefit. Redistribution by means of minimum wage policies could therefore remove them from benefit and allow them to contribute in their own right. Moving money from the employer to the employee in this way may not of itself lead to a net increase in economic activity but by removing the call on the state for welfare, it reduces the contribution required by the state, which does. The state however will inevitably find other things to spend the money on ...
