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The broken window fallacy and unintended consequences

Robert Pagliarini

Your Other 8 Hours

9:30 AM EDT, September 30, 2013

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Have you heard the parable of the broken window? It's a wonderful example of unintended consequences that applies not only to businesses activity and government regulations but to individuals as well. Fans of the book "Freakonomics" are given a front row seat to watch the dramatic and always surprising (they are "unintended" after all) effects of unintended consequences. But in our haste to laugh and condemn the short-sighted thinking of others, we often don't see the unintended consequences we are creating in our own lives.

The parable of the broken window, or often called the "broken window fallacy," was introduced by French economist Frederic Bastiat in 1850 in his essay, "That Which is Seen, and That Which is Not Seen." The parable is about a shopkeeper's son who accidentally breaks a window at his father's store. A bystander laments with the shopkeeper but explains that the broken window is actually a blessing, because now the window replacement company gets to earn money replacing the window. We see the window repairman smiling widely. He's made some money, and we may even see him celebrate by stopping off at the local cafe and ordering a round of espressos for his crew that worked so hard fixing the shopkeeper's window. This one broken window has created a windfall for the community. People are working, money is exchanging hands and everyone is thrilled because the boy was so careless.

This, according to Bastiat, is what is seen, and this is where most of us stop in our analysis. We stop at the surface but miss everything else that happens because it is not seen. But what is it that is not seen in this little town with the broken window? What are the unintended consequences? What if the shopkeeper had planned on buying a new pair of shoes for his wife, but now because of the expense of fixing the broken window, he can't afford to? Who loses here? Well, the wife for one (and to those who are married certainly know, the husband), but also the shoemaker. The money that would have been directed to the shoemaker now won't make it there. This is what is not seen. The broken window helps the window repairman -- this is quite visible -- but the struggling shoemaker doesn't even know what he lost.

Of course, nobody would be dumb enough to celebrate a broken window would they? Sadly, yes. In the wake of Hurricane Sandy (and every other natural disaster or calamity), experts sound off on TV and in newspapers about how the storm will be good for the economy. "Think about all the reconstruction and jobs this will create!" they gleefully chirp. It's the broken window fallacy all over again. And what's even more surprising is that even well-respected Nobel Prize-winning economists get this wrong. In a New York Times column written just a few days after the terrorist attacks of September 11, 2001, Nobel Prize winner Paul Krugman wrote, "the terror attack could even do some economic good." It's deja vu all over again.

So what does the broken window fallacy have to do with you? Just about everything. I'm guessing there is a great deal of evolutionary value in paying full attention to what's immediately in front of us (think about a tiger chasing you) and much less value in contemplating what is not as obvious. However, regardless of why we become blinded to the future, it can have devastating consequences on our lives.

I'll skip the political and economic implications of the broken window fallacy for another day -- politicians routinely create policies and legislation based on what is seen while neglecting to consider what is not seen -- and instead I'll implore you to consider your own short-sightedness. What decisions and behaviors do you engage in that produce unintended consequences? Consider the ramifications of your actions that are not seen today, or maybe even a week, month or year from now, that will ultimately affect your happiness, health and relationships.

(Robert Pagliarini is a CBS MoneyWatch columnist and the author of "The Other 8 Hours: Maximize Your Free Time to Create New Wealth & Purpose" and the national best-seller "The Six Day Financial Makeover." Visit YourOther8Hours.com.)