Broken Windows and Shattered Dreams

As do many events, the historical power outage a few weeks ago apparently brought out a vast amount of economic illiteracy on talk radio.

Specifically, some callers (and sadly, even hosts) offered forth the bizarre notion that disasters (like the blackout), natural or otherwise, are good for the economy, because they create jobs for people who have to clean up the mess.

This is called the "broken window" fallacy, named that after the example used in the first (or at least best-known) description of it by the brilliant French economist Frédéric Bastiat in his famous essay What Is Seen And Not Seen. Bastiat describes a man who breaks a window, and a crowd of people who gather around, proclaiming it a good thing, because it will create employment for the window repairer and revenue for the glass manufacturer.

The fallacy lies in the fact that the proponents of the argument are ignoring opportunity costs. These are, simply put, the cost, to an individual or to society, of spending something on one thing that could otherwise have been spent on something else that perhaps might have had more value. As Bastiat explains, the money spent on replacing the window could instead have been spent on some other thing that would not only have created similar employment, but left the window owner better off, rather than simply restoring the status quo prior to the breaking of the window.

Taken to its logical conclusion, believers in the broken window fallacy would apparently have us demolish all of our cities once per decade so that jobs could be created by not only the demolition and cleanup, but by rebuilding them. In fact, if we want to have a truly robust economy, we could do it every year, and have farmers pull up their crops before they mature as well so they can employ themselves putting in new ones every month.

Of course, such a point of view ignores the fact that wealth was destroyed in order to recreate it, and it seems an unlikely path to increasing net value. Such beliefs are due to an inability to distinguish between (or indeed, even recognize) wealth creation and job creation. The two are, in fact, entirely independent of each other.

Imagine that we instituted a government program to hire everyone to dig holes, and then refill them (some of the programs in the vaunted New Deal weren't much more productive than this). This would create jobs for all, but it creates no wealth at all, and it would only work until the government ran out of money because insufficient taxes were coming in from productive activities, or everyone starved to death because no one was growing any food.

On the other hand, if I write a column and put it out on the web, gratis, for people to read (which in fact I do on an almost daily basis), and people enjoy reading it, or become more informed (things that probably happen more rarely), then I've created wealth in the sense that I've improved their lives, but no jobs were created thereby.

Sadly, it's a fallacy to which space enthusiasts (and particularly NASA enthusiasts) are prone as well. Often, when touting some proposed space project, they talk about how many "jobs" will be created in Houston or Huntsville or Florida, or in the district of some California contractor. And when someone says that "money is wasted by sending it into space," they assume that the critic is stupid, or confused, and respond, "Not a single dime is sent into space. We don't fill up the rockets with bushels of money and send it off to Mars. Every dollar is spent right here, on good old Mother Earth." And even more amazingly, they say it as though it's an effective rejoinder.

But of course, they're attacking a strawman argument, because no serious critic of the space program literally believes that we are shipping currency to the heavens.

Yes, of course paying NASA astronauts, managers, engineers and support people, and their counterparts at the contractors creates jobs for them, just as it would if we took the same amount of money and employed people to dig holes. The issue, of course, is not whether they have "jobs" and receive taxpayer dollars, and recirculate it in the economy--it's what they create, or don't, and whether or not their creation is as valuable as some other use of the money that it took to create it.

What were the opportunity costs of building the current International Space Station? Could that money have been spent in some way that would have made us a wealthier nation? Indeed, could it have been spent in a way that would have advanced us much further in space? Well, at least, we have a space station, finally. But could those many billions of taxpayer dollars and almost two decades (yes, time has opportunity costs as well) have provided more than a crippled facility, barely capable of supporting a half dozen people at continuing costs of billions per year?

There's no way to know. It is, in Bastiat's words, one of the things that "are not seen."

Or consider the X33 program. For that, we got many jobs for many engineers for many years, with nothing to show for it except a half-assembled vehicle in the California desert--a monument to managerial incompetence.

Unfortunately, when NASA has such programmatic failure (or even more spectacular ones, such as the loss of the Columbia), they are perversely rewarded by getting even bigger budgets, on the ostensible basis that they failed because they didn't have enough money (rather than the programs were mismanaged by the agency, or micromanaged by Congressmen more concerned about "jobs" than wealth or programmatic achievement).

But sadly, such failures are more than just broken windows.

They're shattered dreams.

Rand Simberg is a recovering aerospace engineer and a consultant in space commercialization, space tourism and Internet security. He offers occasionally biting commentary about infinity and beyond at his Web log, Transterrestrial Musings.

Respond to the Writer