Broken Windows

2003-03-19

Joshua Zader argues that the post on "quality depression" by Shane McChesney to which I recently pointed commits the fallacy of the broken window. This economics fallacy was first elucidated by the great French economist Frederic Bastiat in his essay What Is Seen And What Is Not Seen. In brief, one commits the fallacy when one argues that destruction (e.g., the breaking of a window) is good for the economy or at least for some sector of the economy (e.g., window companies). Bastiat notes that this is a fallacy because it focuses only on the visible effect (economic success for the window company) while ignoring the invisible effect (the fact that the person whose window was broken now has less to save or to spend on other goods and services). Indeed, Bastiat argues that "it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa".

I was interested in Shane's post mainly for its connection to open-source software. His broader point is interesting but questionable. First, simply as a matter of fact, we are not in a depression, let alone a recession; certainly the economy is not doing as well as it was a few years ago (can you say bubble?), but at least in the USA the economy is still growing, unemployment has gone up a bit but is quite reasonable by historical standards, productivity continues to improve, and so on. Second, there are many reasons why people are not spending as much (or on certain items) as they once did: household debt is extremely high, more people are out of work, people's expectations are gloomy, and so on. So we don't need the increasing quality of (certain) goods to explain (relative) bad times for the economy as a whole or certain industries.

The facts that Shane cites are more accurately seen as evidence for creative destruction (a concept made famous by the great Austrian economist Joseph Schumpeter) than for economic depression. A company making higher-quality goods induces not general misfortune but misfortune for companies in the same industry whose goods are not of such high quality. Thus the quality of Shane's Toyota Celica is not bad for the economy at large, but it is bad for, say, Ford (if its quality is not as high or its prices are not low enough to justify the lower quality). Similarly Dell products may be bad for Gateway, cheap new hosting services may be bad for established competitors, and so on. This is the normal roiling of the economy, wherein some companies prosper if they better meet the needs of buyers and other companies falter if they do not.

What's more interesting are truly disruptive innovations. Open-source software may well be such an innovation, since it provides (in general) higher-quality software for no cost whatsoever. It's hard to compete with free, especially when the quality is so high. As I noted, the ever-improving software provided by the Linux community is slowly destroying companies like Sun, or at least some of their core product lines. It's also destroying Microsoft's market in server software, and perhaps someday their desktop near-monopoly as well (personally I haven't run Windows in over 4 years, and Linux is becoming more and more user-friendly every day as a desktop OS -- plus it's rock-solid and effectively virus-free). Yet companies like HP and IBM are earning billions of dollars on services related to open-source technologies. A disruptive technology like Linux is a creative force that makes other participants in the market adjust or die. That may seem destructive if you work for Sun or Microsoft, but on balance it's good for consumers of technology (higher quality, lower cost) and thus the exact opposite of a purely destructive act such as breaking a window. And besides, Microsoft can't blame Linux for its misfortunes -- after all, Bill Gates and company don't seem to need any help in breaking their own Windows. ;)


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