By extraordinary coincidence there is a phenomenon that has given rise to two completely different theories in two completely different disciplines of the social sciences: broken windows.
The broken windows theory
In psychology/sociology there is a theory called “Broken Windows Theory” and it refers to a peculiar phenomenon that was first observed and described in academia in the 1960s by Philip Zimbardo.
The Broken Windows effect is simply this: if you abandon two identical nice cars in two similar neighborhoods, except that one of the cars has a broken window, something peculiar will happen. The car with the broken window will be subject to vandalism to a far greater extent and much faster than the other car. Zimbardo did experiments to show that this takes place.
He concluded the following: if property looks like no-one cares about it, broken, unfixed, lack of maintenance, then people will not respect it. The logic that underpins this phenomenon seems to be: “if you are not careful with your own property, why should we be?”
He also conducted the same experiment with a good neighborhood and a bad neighborhood, where he abandoned two identical cars with no broken windows. In the good neighborhood the car was left alone, whereas in the bad neighborhood it was quickly vandalized. From this he deducec that living in neighborhoods that are in a state of decay slowly rots away respect for property rights in general, and so, he concluded that material decay (broken, unfixed windows if you like) thereby is a causal factor in laying the cultural foundation for crime.
This theory was at the heart of the “tough on petty crime” policy enacted during the 1990s in New York, which is considered the broken windows theory applied to law enforcement. Small, low-level crimes erode the respect for the law in general, if allowed to flourish. By cracking hard down on even minor crimes and misdemeanors, the result would also reduce more serious crime, according to the theory. Based on the fact that crime rates in New York fell dramatically in the wake of this policy, and that similar results were achieved elsewhere when copied, is empirical support for the theory.
The broken window fallacy
Far away from the world of sociology is another effect named after broken windows, namely what in economics is referred to as the Broken Window Fallacy. It is named so after its inventor, no other than the famous French (yes, French!!!) economist and political philosopher Frederic Bastiat.
In 1850 he published an essay called “That which is seen, and that which is not seen” in which he argues that destruction, and the spending to fix it, is never a net benefit to society.
He starts by showing that fixing a broken window generates positive economic activity. Someone makes money from fixing the window and more windows will need to be manufactured, creating more jobs in the window industry. All of this is visible positive effects of a broken window, but Bastiat points out that there are invisible losses — things that never come into being because the resources were spent on fixing broken windows instead.
Suppose the window was never broken. Then the window owner would simply have spent the money on something else instead, like a laptop. Then there would still be economic activity, and job creation, except in another field. The only difference between these two scenarios is that there would be one window extra in the latter example. Everyone would be better off if the window was not broken at all. And so Bastiat draws the conclusion that destroying wealth is actually not good for anyone.
While this may seem like an obvious point, when stated in laymen terms, a whole branch of economics called Keynesianism is built on the idea that destruction (consumption) creates wealth.
Are they related?
Since these two very different phenomena share the same name it is tempting to think that they may be connected somehow, that they are really part of the same phenomenon. But an initial analysis fails to support this conclusion.
Psychologically the Broken Windows Fallacy is motivated by the exact opposite of the Broken Windows Effect. In the Broken Windows Effect the visibility of destruction and decay motivates even more destruction and decay, whereas in the Broken Windows Fallacy a broken window is considered positive because people fail to see the invisible destruction that is generated in the economy.
Second, while the Broken Windows Effect is entirely a psycho-social phenomenon, the Broken Windows fallacy is almost entirely an economic phenomonen. And as we have seen, to the degree that there is a psychological component in the Broken Windows Fallacy, it is the opposite of the Broken Windows Effect.
Clearly then we would have to conclude that any relationship between the two phenomena would simply be a mere pun.
However, even though the effects are very different it turns out that they indeed interact and that knowledge of this interaction can improve our understanding of both.
The Broken Window Fallacy in the Broken Windows Effect
Why are broken windows not fixed in bad neighborhoods? The knee jerk reaction of many people is to blame poverty: they don’t have money to fix the broken windows. The proposed solution to the problem is Keynesian: to stimulate the neighboorhood economy by pumping in government subsidies. But all to often the effect of such government intervention is the exact opposite of what the proponents expect: even more poverty and broken windows.
It turns out that in trying to fix the Broken Windows Effect, many people commit the Broken Windows Fallacy. They make the mistake of only focusing on the visible and immediate cause of broken windows remaining unfixed, namely lack of money, or poverty as it is referred to. But what causes poverty? These causes are typically very diffuse and mostly invisible: institutional lack of respect for private property, high taxes, complicated regulations, lots of prohibitions, massive bureaucracy or in general: lack of economic freedom.
So the people who only see the visible causes of the Broken Windows Effect, will tend to promote policies (subsidies and other interferences in the market economy) that in the long run causes poverty and decay for all.
The Broken Windows Effect in the Broken Windows Fallacy
Stimulus packages, bailouts, subsidies. We have all heard the chant that the economy needs to stimulated with freshly printed money in order to promote economic growth. Generally this is referred to as Keynesianism and amazingly it is the dominant view among leading economists of the day, including a famous Nobel laureate such as Paul Krugman.
The main argument for Keynesian stimulus policies is psychological. The argument goes like this: in an economic downturn, people’s mood will turn darker, they will start losing a bit of their positive faith in the future, and as a consequence they reduce their spending. There are dark clouds emerging on the rosy red sky, and people then start saving for a rainy day. But with less spending, shops have to close, factories that produce consumer goods are shut down, people are fired, which in turn leads to even less spending, and so the mood grows even darker. The economy is in a vicious negative deflationary cycle.
So in fact, it turns out that the main thrust of Keynesianism is a psychological argument very similar to that of the Broken Windows Theory. In both cases economic decline leads to a darker mood which amplifies and sediments the decline, Sure, say (some of) the Keynesians, there will be some negative economic effects from the stimulus policies, but the alternative vicious mood spiral is far worse.
Traditionally the critics of Keynesianism has promoted largely an economic argument against it, arguing that an inflationary policy will destroy the capital structure of society and thereby slowly eat away its productive capabilities. In contrast the Broken Windows Theory provides a psychological argument against Keynesianism. It goes as follows:
A stimulus package or a bailout may stimulate particular industries in the economy, but for the rest of the economy it feels like a broken window: the taxes that finance the stimulus package simply takes away the hard earned money from successful people and gives it away to people who have squandered away their money. And the window will not be fixed. The money that is taken away from the tax payers will not come back to them. All these government programs, taxes and regulations remain as unfixed broken windows in the economy. This has two psychological effects in society:
Effect #1: It takes a toll on the psyche of the producers.
The producers start thinking “if I can’t keep the fruit of my own labor, why should I bother to work so hard?” So they withdraw. They work less, they employ their minds with chess or World of Warcraft instead of doing productive work, they do drugs or they move abroad. This was a major theme from Ayn Rand’s famous novel Atlas Shrugged. She called it brain drain. Windows that are broken by force by hooligans that go unpunished make producers depressed and lose hope in humanity, and they gradually lose the motivation to stay in the world. As a consequence productivity falls, and amplifies the downward spiral in the economy.
Effect #2: respect for private property and individual rights deteriorates
Enactment of policies that disrespects private property and individual rigths energizes the looters and motivates others to join the looting gang. This is the broken windows effect applied to laws and regulations. Bad laws and regulations promote even worse laws, and this effect is never taken into account by the adherents of Keynesianism.
So it turns out that the two Broken Window metaphors actually are related and intertwined. Understanding the relationship between the two actually provides an additional line of attack against Keynesianism in the area where it claims to be strongest: animal spirits. Keynesian economics is not just bad in terms of the capital theory, but it also generates a negative mood among producers which reduces the productivity of the economy, and it invigorates the people who like to get money for free at the expense of other tax payers.