Economics is haunted by more fallacies than any other discipline, observed Henry Hazlitt in his classic 1930s work “Economics in One Lesson”.
And quite a few are still around: today's news is full of the fallacies that governments can create jobs (they can't), borrowing has no consequences on the future (it does) and that bankrupt banks are somehow more special than bankrupt motor manufacturers (they aren't).
The particular one Hazlitt was describing is still common, but actually dates back to 1850. It's called the Fallacy of the Broken Window and was described by French political economist Frederic Bastiat in the form of a parable.
Say a little boy throws a brick through the window of a baker's shop. The baker has to buy a new window costing six francs, benefiting the glazier. The tailor also benefits because the glazier takes the money and buys a new suit. Far from being a vandal, the little boy is actually an economic benefactor, because he triggers economic activity that benefits many people.
Bastiat pointed out that this conclusion, while tempting on the surface, is false. Instead of having a window and some money, now the baker only has a window. Because he would have spent the money he had to spend on the window somewhere else, it remains hidden.
"The theory is confined to that which is seen," says Bastiat. "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 incident has prevented."
Confusion reigns supreme
Unfortunately, this misunderstanding is alive and well today. Take just about any economic statement from the Business Software Alliance (BSA), for example.
Here is a typical one from a few days ago, Firms lose R3.1bn to pirates, which claims that "reducing the software piracy rate in SA by 10 percentage points would have a multiplier effect and increase those economic benefits, generating 1 200 additional jobs, R480 million in tax revenue and R6 billion in spending in the local IT sector over the next four years".
Today's news is full of the fallacies that governments can create jobs (they can't), borrowing has no consequences on the future (it does) and that bankrupt banks are somehow more special than bankrupt motor manufacturers (they aren't).
Paul Furber, ITWeb journalist
The problem with this statement is not that the numbers are a complete thumbsuck, although I think they are. No, the real problem is here we have the Fallacy of the Broken Window alive and well.
People who don't pay for software by definition spend it somewhere else, creating jobs, paying taxes and generating additional spending in the local IT sector. I am not suggesting that people shouldn't pay for software - I personally would have been out of pocket for many years if they hadn't - only that the BSA (and IDC) is wrong thinking that the packaged software industry is somehow the most efficient allocator of capital in the market.
It isn't, and it isn't even a particularly large market either. Eighty-five percent to 90% of all software is written in-house and isn't for distribution. The software that runs the latest Airbus, for instance, is over a billion lines of code - 10 times the size of the Vista and Linux kernels combined, but it isn't for sale and never will be.
What the BSA is claiming is that if SA's piracy rate drops to 0% overnight, other spend will be unaffected. That's a silly claim and the sooner it stops making it, the sooner I will be open to considering its other ones.
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