In class, we have talked about disasters driving the economy, or money spent to stimulate the economy. However, there are economists that say this really doesn't help and explain it with the "Broken Window Fallacy" theory.
Research what this theory is. And provide your answer to:
1. BRIEFLY summarize the theory
2. If this theory is true, explain why government money spent on rebuilding after a natural or man made disaster seems to create jobs and stimulate the economy inspite of the "Broken Window Fallacy"
“SUMMARY OF THE BROKEN WINDOW FALLACY THEORY”
The “Broken Window Fallacy” theory was first expressed by the great French economics, Frederic Bastiat when he used the story of a broken window to illustrate the why destruction doesn’t benefit the economy.
Frederic Bastiat’s tale cited a story of James B (the shop keeper) whose son threw a stone at a glass window and got the window broken. The community/onlookers gathered around the scenario and said that the boy has done the community a service which his father (the shop keeper) will have to pay for. (Beattie, 2008)
James B, has to contact the Glazier who will fix the window that was broken. In replacement of the broken window, James B has to give some money to the glazier to buy a new window and fix it in replacement of the broken window.
The summary of the theory is the movement of money in circulation from the shop keeper (James B) and the glazier who fixed the broken window in relation to the economy and its benefits.
There are two sides to the theory which are the “seen and the unseen” sides. The seen sides
Analysis of the theory is illustrated below:
JAMES B (the shop keeper) (Unseen)
James B has to spend money to replace the broken window. (Loss)
The glazier has to receive money to replace the broken window. (Gain)
James B would have used the same money to purchase other things like: buying shoes for his wife, additional books to his library, investment etc. which also increases jobs, sales and helps the economy as well.
The glazier having received the money used it to purchase food, shoes, transportation, etc.
His wife loses because she will not be able to have the shoe and the shoe producer/seller too will not sell.
The glazier has money to buy shoe for his wife and the producer/seller sells.
Reduction in income/savings of James B’s money.
Additional money for the glazier who earned the money from his service.
Destruction destroys the prosperity of the baker, things and places.
This creates job for the glazier, artisans, the manufacturers of the glass, the transporters, etc.
The destruction leaves some people desolate and deserted as their things/properties have been broken/destroyed. Emotionally and physically traumatized. It also damages/destroys wealth.
2. If this theory is true, explain why government money spent on rebuilding after a natural or man-made disaster seems to create jobs and stimulate the economy inspite of the "Broken Window Fallacy"
The economist believes that money can circulate from people in an economy without destruction. This is the belief and opinion of the economist that people doesn’t have to use their moneys to repair destroyed properties or things
Why government spend money on rebuilding after a natural man-made disaster:
There are two ways to these theory.
Government: The angle when the government pays more money to rebuild the damaged/destroyed property and earn more taxes when this has been done. This creates higher taxes and inflations
Taxes, subsidies, tariffs,
People: This creates jobs for some people through finance and public works programs like construction, buildings, who later pay taxes. These citizens would have paid less taxes and use their money on other things.
This has a lot of consequences which are not seen when natural or man-made disaster happens. The truth is that we don’t have to damage/destroy properties for people like