Question

In Houston, Texas, a common method of robbing a store involves backing a pick-up truck through the front door / windows, quickly filing the bed with merchandise and driving away. Some might say this is actually good for the economy since the store owner must spend thousands repairing the damage, which gets re-spent several times. Fifty thousand in damages might result in $150,000 or more in economic activity and so the crime benefits the economy. Others describe this as the broken window fallacy. What do you think? Is there a difference depending on whether the country, or area, is at full employment?

Answer 1

This is a fallacy. Like every other individual in the economy, the shopkeeper also has limited resources. If the shopkeeper is not repairing his front door he might be spending the same amount in anything else which will create a demand for those products and after counting the multiplier effect that amount will be spending several times.

Regularly robbing a shopkeeper and forcing him to repair his door or window is actually causing loss to the economy. Because of such activities, the shopkeeper will not be able to make any investments in inventory which can lead to a sudden spike in price in case of short-term demand rise. He will not be able to save or invest the same amount in capacity building for his store and generate more economic growth. Robbing a shopkeeper is causing wastage of resources which is always harmful to the economy.

IF the country or area is at full employment this becomes even more harmful. forcing the shopkeeper to spend the amount will cause inflation in the area after taking the multiplier effect into account.