The “Broken Window Fallacy” of Keynesian Economics June 12, 2020 by Dan Mitchell

There’s much to dislike about Keynesian economics, most notably that it tells politicians that their vice – buying votes by spending other people’s money – is somehow a virtue.

Advocates of Keynesianism also can be very simplistic, sometimes falling victim to the “broken window fallacy” described in this short video.

Bastiat is perhaps most well-known for his insight on this fallacy.

He explained that a good economist was capable of recognizing the difference between the seen and unseen (if you want to be wonky, the difference between direct effects and indirect effects).

Sadly, there are many people today who don’t grasp this distinction.

You probably won’t be surprised to learn that Paul Krugman is in this group.

And now we have a new member of the club. In a piece for Axios, Felix Salmon reveals he still believes in this primitive form of Keynesian economics.

There’s one big non-political reason why luxury stores were targeted by looters: Their wares can now be sold for top dollar, thanks to the rise of what is often known as the “circular economy.” …Instead of stealing goods they need to live, looters are increasingly stealing the goods they can most easily sell online. …Economically speaking, looting can have positive effects. Rebuilding and restocking stores increases demand for goods and labor, especially during a pandemic when millions of workers are otherwise unemployed. …The circular economy helps to reduce waste and can efficiently keep luxury goods in the hands of those who value them most highly.

To be fair, Salmon would have been correct (though immoral) if he said looting had a positive effect on looters.

But it definitely doesn’t have a positive effect on merchants (who lose money in the short run and probably have higher insurance payments thereafter), on consumers (who are likely to pay more for products in the future), or on the overall economy (because of the unseen reductions in other types of economic activity).

Let’s wrap up with a cartoon on the topic.

P.S. If you like humor about Keynesian economics, here’s the place to start.  You’ll find additional material here, here, here, here, and here.

P.P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

P.P.P.S. To be fair to Keynes, he wrote that taxes should never exceed 25 percent.