The so-called Broken Window Fallacy was first introduced by Frédéric Bastiat in his 1850 essay “Ce qu’on voit et ce qu’on ne voit pas” (“That which is seen and that which is not seen”). In brief, it goes like this:
A shopkeeper’s son breaks a window in his father’s shop. Now the father has to purchase a new window from the glazier, say at 250 euros. (In Bastiat’s text hte price was six francs but you won’t get a new window for six francs today, especially since France has switched to the euro.)
To the onlookers it may seem that the careless child has supported the economy by providing trade for the glazier. The glazier now has 250 euros which he wouldn’t have had if the boy were more careful. He can re-invest the money in his business or spend the money on a holiday for himself and his family.
Does this mean that breaking windows is a good thing because it supports the economy? Of course not. The broken window, and the resulting trade between shopkeeper and glazier, is That Which Is Seen.
The 250 euros that the shopkeeper spends on a new window, he won’t spend on a new suit for himself, or to extend his shop. The money is simply lost to society. The trade that the shopkeeper will NOT be making is That Which Is Not Seen. The glazier may be happy to have sold a window to the unfortunate shopkeeper but the tailor is stuck with the suit he was hoping the shopkeeper would buy.
If you extend the situation to the whole town, then before the accident the town had a window and the shopkeeper had 250 euros. After the accident the town had a window and now the glazier has the 250 euros. But without the accident, the town could have had a window and a new suit, and the 250 euros to boot. The accident has made society as a whole poorer, not richer.
(Some economists have argued that the shopkeeper might actually want to replace the window, since the new window is better than the old one. Thus, the society should become richer by breaking an old window and replacing it with a new and better. But this presupposes that the old window was worse than nothing, i.e. that it actually had negative value.)