Creating Jobs by Breaking Windows

Like anyone who grew up playing with GI Joes, I still find military hardware neat—an enthusiasm tempered only by the massive costs involved. Most folks are familiar with the mental model of “guns or butter,” but this idea was plainly lost on the BBC in this article on the two new aircraft carriers to be laid down in Scotland. According to the BBC, these two great efforts will “create” thousands of jobs. Simply put, they will do nothing of the sort. True, we will observe thousands of Scots heading to the yards, but what we will not see are the thousands of others who would have been going to work somewhere else, had a portion of society’s scarce resources not been redirected towards these floating behemoths.

While a society certainly needs protecting, and the freedom of the seas is essential to global prosperity, such projects do not “create” jobs—they simply redirect them from somewhere else. Economists classify the BBC’s mistake as the fallacy (sometimes parable) of the broken window. In the fallacy of the broken window, some punk kid breaks a baker’s window. A bystander quickly remarks that the damage is a good thing, stating authoritatively that the breaking of the window will boost employment by providing work for a glazer. What the bystander does not see are all the other things the baker may have done with the resources now dedicated to re-glazing. You are probably thinking that this makes perfects sense (and that is because it does). However, as you listen to the news coverage of the aftermath of Hurricane Gustav or even the presidential race (politicians love to talk about “creating” jobs), I can guarantee that some candidate or pundit will count the devastated homes and commit the fallacy of the broken window. The fallacy of the broken window is translated into MBM through our mental model of opportunity cost. Opportunity cost defines the cost of something not as mere dollars and cents, but whatever else could have been done with the time or resources at hand. Every “created” job must be paid for with another job (or jobs) somewhere else. Unfortunately, the victims never know what has happened to them, nor do they see the broken window that has put them out of work.

Comments

[David McGinnis]

But what about the people that are completely unemployed. Shouldn't we use tax payers' money to pay them to build pyramids??

[Michael Uehlinger]

I fear that these workers' resources were not being utilized effectively before the shipyard jobs, hence the term "creation" of jobs. However, the operative word is that the resources "should" have been put to better use, and the fact that they were not is a separate failure. Should this be the case, would such "job creation" (job redirection) serve to just artificially increase wages? The inference is that the high cost of labor is stifling real job creation, and job redirection keeps costs/wages artificially high.

[Alastair Walling]

Michael,

I would argue that job redirection does not keep wages artificially high but artificially low. Wages are a function of production—a society consumes what it produces. If a single pioneer enters a new land, then his “wages” are only what he can produce. If another pioneer joins him in the territory, then the wages of their society is the sum of what they can produce. The same is true if you add another 300 million pioneers and recreate the U.S, economy. [For more on this I would recommend F.A. Harper’s Why Wages Rise, available here http://mises.org/books/whywagesrise.pdf]. If a society decides to build an aircraft carrier, then the resources used are redirected from producing things actually consumed by the populace (and we can’t eat or wear aircraft carriers). In essence, members of the society are surrendering a portion of their wages in order to produce a public good. Furthermore, underutilized labour usually finds something else to do, and the “saving” of these jobs has served to impede creative destruction and delayed the inevitable reallocation of these labour resources to more value-adding opportunities.

Sorry this was on the fly, but let me know if it doesn’t answer your question.

AL