The Broken Window Fallacy

Broken Window Fallacy. When someone breaks a window, fixing the window does not really help the economy because that is money you would have spent on other things anyway so it is a net zero (no loss no gain) to the economy. This is the way I heard it anyway.

So, this idiot was trying to make a hole in the above fact. his example was an old laptop that was covered by renter’s insurance. If something happened to the laptop, the replacement would be better and therefore more efficient.

The trouble with that analogy is that insurance companies do not typically pay original cost. They might pay replacement which would be a four or five year old laptop. Basically, that is zero replacement value as far as an insurance company is concerned. If you have been paying a huge premium, you might get a new laptop or original cost reimbursement. However, the difference is in the premium you paid.

You should have been upgrading your laptop to make yourself more efficient and saving money on the premium. You are not creating value by having this situation happen, you are catching up on an inefficiency.

If you make money over the premium you pay, you are getting other people’s money, the people who paid in on premiums and did not make a claim.