Bastiat uses this story to introduce a concept he calls the broken window fallacy, which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian School frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.
Bastiat's original parable of the broken window went 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 have 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.
Thus, the child did not bring any net benefit to the town. Instead, he made the town poorer by at least the value of one window, if not more. His actions benefited the glazier, but at the expense not only of the shopkeeper, but the baker and cobbler as well.
Austrian economists, and Bastiat himself, apply the parable of the broken window in a more subtle way. If we consider the parable again, we notice that the little boy is seen as a public benefactor. Suppose it was discovered that the little boy was actually hired by the glazier, and paid a franc for every window he broke. Suddenly the same act would be regarded as theft: the glazier was breaking windows in order to force people to hire his services. Yet the facts observed by the onlookers remain true: the glazier benefits from the business at the expense of the baker, the cobbler, and so on. Bastiat demonstrates that people actually do endorse activities which are morally equivalent to the glazier hiring a boy to break windows for him.
A common interpretation of the gross domestic product is that increased GDP means the economy is healthier. Some would say that this interprets the proverbial "broken window" as a positive, and that some form of Genuine Progress Indicator would be a more realistic indicator of economic health.
Another interpretation is that (in a more modern society) the money would not go to the baker or the cobbler, if the shopkeeper was doing well enough for that money to go into a vault that would not be used for a long time.
Both of those interpretations can be seen as flawed: in a modern economy, the window owner's money (if the window was still intact) would either be spent on consumption, or saved for future consumption as an investment in the economy (in today's world, perhaps via a bank or brokerage account). Both of these options serve to increase GDP at a higher level of economic efficiency and utility than if the window is broken.
More importantly, war destroys property and lives. The economic stimulus to the defense sector is offset not only by immediate opportunity costs, but also by the costs of the damage and devastation of war. This forms the basis of a second application of the broken window fallacy: rebuilding what war destroys stimulates the economy, particularly the construction sector. However, immense resources are spent merely to restore pre-war conditions. After a war, there is only a rebuilt city. Without a war, there are opportunities for the same resources to be applied to more fruitful purposes. Instead of rebuilding a destroyed city, the resources could have been used to build a second city or add improvements.
An example of the costs of war is the many projects postponed or not started until after the end of World War II in the United States. The pent-up demand for roads, bridges, houses, cars, and even radios led to massive inflation in the late 1940s. The war delayed the commercial introduction of television, among other things, and the resources sent overseas to rebuild the rest of the world after the war were not available to directly benefit the American people.
Common examples of special interest groups practicing the broken window fallacy might be:
"Ghastly as it may seem to say this, the terror attack—like the original "day of infamy" which brought an end to the Great Depression—could even do some economic good. [...] the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending.
While there is no direct claim in the editorial that the terrorist attacks would lead to overall economic gain, Williams inferred that Krugman was talking about a net economic good for the United States, and in response wrote:
"Would there have been even greater 'economic good' had the terrorists succeeded in destroying buildings in Los Angeles, San Francisco, Chicago, Philadelphia, Boston and all other major cities? Of course, you and I know that is utter nonsense. Property destruction always lowers the wealth of a nation.
in Le Corbusier's The Radiant City (1967) you find this sentiment when it comes to those that supported road projects that led to today's suburban sprawl "...The cities will be part of the country; I shall live 30 miles from my office in one direction, under a pine tree; my secretary will live 30 miles away from it too, in the other direction, under another pine tree. We shall both have our own car. We shall use up tires, wear out road surfaces and gears, consume oil and gasoline. All of which will necessitate a great deal of work ... enough for all."