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The Broken Window Fallacy

In November I spoke at an environmental conference in Ocho Rios, Jamaica hosted by Sandals Resorts and the University of the West Indies. The conference featured a keynote address by Arthur Hanson, Ph...


In November I spoke at an environmental conference in Ocho Rios, Jamaica hosted by Sandals Resorts and the University of the West Indies. The conference featured a keynote address by Arthur Hanson, Ph.D., a senior scientist at the International Institute for Sustainable Development (IISD) in Winnipeg. Dr. Hanson described many parts of the world where whole ecosystems are in danger of imminent collapse. The presentation set the tone for the whole conference, the saddening contents of which impressed me.

However, Dr. Hanson asked me a question at the end of my presentation, the answer to which is not simple. In his presentation he had referred rather negatively to Bjorn Lomborg’s new book The Skeptical Environmentalist: Measuring the Real State of the World. In more than 500 pages of carefully annotated text and charts, Mr. Lomborg (a statistician and former GreenPeace activist) questions the conventional assertions of environmentalists about the planet’s worsening condition. Dr. Hanson asked my opinion of writers who promote contrarian views such as Mr. Lomborg who, for instance, disputes the theory of Anthropogenic climate change.

I found the question challenging. On the one hand, I completely share Dr. Hanson’s concerns about the world’s collapsing ecosystems. (He and I even shared a visceral experience of this during the cab ride from the airport. Flooding from a recent storm — exacerbated by Jamaica’s severe topsoil erosion — has washed out the road in places.) On the other hand, I’m a “skeptical environmentalist” myself already in agreement with Mr. Lomborg on many points — to the extent that I’ve read excerpts of his book in the newspaper.

Reflecting on the matter upon my return, I re-read an op-ed clipping from the Financial Post in which public policy analyst Brian Lee Crowley summarized the thoughts of French polemicist and economist Frdric Bastiat, whom he calls “the man who saw what wasn’t there.” I feel that Bastiat’s ideas are useful in the sustainable development debate.

Bastiat was a member of the National Assembly two centuries ago in France’s Second Republic whose writings lampooned the economic sophistry of his colleagues. The ideas that Bastiat demolished with his stark logic will sound eerily familiar to Canadians.

Bastiat’s most important lesson concerned the idea that every transaction has two kinds of party. As Mr. Crowley wrote: “Those who are visible parties to it, and those who are touched by its consequences, but are invisible if you look only at the transaction itself.” This is similar to the modern observation that “there’s no free lunch.”

Bastiat illustrated this idea with the “broken window fallacy.” If I go into a shop and buy something — a bar of soap, say — the transaction enriches both the merchant and myself. The shopkeeper gets my money and I get my soap. I have closed the door on other things that I might have done with my cash, but I have done so freely.

But what if I am a vandal and smash the shop window? Some people will argue that I have created a sort of economic value, since the shopkeeper will hire a glazier to repair it. This creates work for the glazier and windowpane manufacturer.

Bastiat’s insight was that the shopkeeper initially had both his money and his window. The vandalism may “create work” for others, but it represents a net loss to him since he must pay again for something he already owned. Such deeds gradually impoverish the community as a whole. Bastiat pushed the example further. If the broken window really creates economic value, why not hire a professional window breaker to smash a thousand windows, and thereby create a thousand times more value? Obviously, that would be ludicrous.

Yet, Bastiat noticed that governments often attempt to create economic value in ways that are equally fallacious. Job creation programs, tolls, tariffs, special taxes, subsidies and other forms of intervention are touted as beneficial. In Canada, dairy and poultry producers, for instance, are protected from foreign competition, as are airlines. Farmers are subsidized to grow uneconomic crops, and forest products, oil and gas production, steel and aluminum smelting are rife with invisible handouts and exemptions. The unions defend this as job protection, but Bastiat would suggest we do away with the whole thing. Why? Because the community ends up paying more for milk, eggs, airfares, grain, paper, fuel, cars and so on — money that could have been used otherwise. Bastiat believed that the public good is best served by abundance, choice and low prices, not the state as “that fiction by which we seek to live at one another’s expense.”

Which brings us back to the assumptions behind sustainable development and Mr. Lomborg’s controversial book. I believe we should welcome Mr. Lomborg’s writings, whether we agree with them or not. Many environmental protection activities are tremendously worthwhile, but some programs, I suspect, are tantamount to the hiring of professional window breakers. When legitimate environmental issues must compete for scarce funds with false or trivial ones, the public interest is poorly served.

The debates for and against the views of the Lomborgs of the world are critical in sorting out which environmental priorities pass Bastiat’s test. While I believe in sustainable development (how could I support anything else?), I will consider policy options in light of Bastiat’s “broken window fallacy.” If doing so leads me to end up in Mr. Lomborg’s camp from time to time, that’s fine with me.

Guy Crittenden is editor-in-chief of this magazine. Send your letters to:

gcrittenden@corporate.southam.ca


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