In the wake Harvey and Irma, I did some reading on the Broken window fallacy. It makes sense on it's face that after paying the glazier for the broken window, the shopkeep could not spend his six francs elsewhere, so nothing of value was gained from the breaking of the window.

In the modern world though, the shopkeep probably sets some portion of his funds aside (in the form of either paying an insurer or landlord (who in turn pays his insurer)). Let's also take the child out of the equation and say the window was broken by something an insurer wouldn't deny a payout on, like a very very localized hurricane (it only broke one window, but shattered it to pieces!).

The shopkeeps six francs would not have gone to pay for shoes or bread or the like, they would have gone to the insurance company, possibly at a higher value (let's say he made no claim in a year, with 12 monthly premiums at 1 franc a piece to pay for a six franc window).

For the insurer, he may use some of these funds to pay for his own shoes, but as a responsible insurer he knows he needs to keep a few liquid francs in order to pay out for things like broken windows -- Ergo he probably wouldn't have spent the six francs either.

In this model, it seems like the glazier has produced a product and received payment to nobody else's detriment; ergo the broken window fallacy has broken.

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    $\begingroup$ The six francs comes out of the insurer's profits, so someone is "worse off." However, I am unsure what the question is, as currently stated. Is the question whether GDP (volume of economic activity) is higher as a result of broken windows, or is "society better off" as result? As a Keynesian, I can agree with the argument that GDP could be higher, but at the same time, we are not "better off." That is, we cannot equate higher GDP with a better outcome. $\endgroup$ – Brian Romanchuk Sep 11 '17 at 19:31

No, they don't negate the broken-window fallacy.

You're overthinking it, and that's leading you to the wrong conclusion.

The breaking of the window represents a loss of wealth. The activities around it are neither here nor there - they do not change the fact that the breaking of the window represents a loss of wealth.

The existence of functional insurance markets just means that there are somewhat efficient markets to estimate the cost of that damage.


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