One of Frederic Bastiat's famous parables is called "The Fallacy of the Broken Window." It describes a shop keeper whose young son breaks a window. He is forced to employ a glazier to repair it. It conveys his thoughts on economics and the circulation of money. It goes like this:
" Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass?
If you had been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation— 'It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?'
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, 'Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.'
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. "
WHAT IS THE FALLACY? IN ALL OF THIS ECONOMIC ACTIVITY, IT IS FORGOTTEN THAT IT COST THE SHOPKEEPER TO REPAIR THE WINDOW! HAD IT NOT BROKEN, HIS SIX FRANCS COULD HAVE INSTEAD BEEN SPENT ON SHOES, IN WHICH CASE HE WOULD HAVE HAD A WINDOW AND A NEW PAIR OF SHOES.
An economy can be broken by taxes. While it is certain that money paid in taxes does flow through the macro economy generally, had it been retained by the populace it would have been spent on other things.
That benefit flows through the macro economy to a much greater degree.
This is called the accelerator principle or the multiplier effect. It has been calculated that $1 left in the economy creates as much as $24 in economic activity. And $1 paid in taxes will create only $3, and that depending on what it is spent!