A reader asked an important question regarding MR and the broken window fallacy. For those who aren’t familiar with the broken window fallacy – this is the idea that destruction can be stimulative. So, when a hurricane destroys parts of a town the town must then be rebuilt. This appears stimulative to some because it means people will be put to work rebuilding the town and earning income from rebuilding the town. But is the town really better off after they’ve restored the town to its previous condition? Monetary Realism would say no. Why? Because MR focuses on real living standards and the most precious form of wealth we are all seeking – time.
The MR Law: “We generate improving living standards through the efficient use of resources resulting in the optimization of time”
When the hurricane wrecks the town we must then spend our time rebuilding what we have already built. This might appear stimulative at first, but it hasn’t really increased our living standards. After all, we’ve just spent our time rebuilding a town we had already built previously. So, once we’ve rebuilt the town we have not improved our living standards at all. In fact, because we’ve been forced to rebuild what we had already built, our living standards have been reduced through the waste of time. Of course, this has a nice big fat ceteris paribus added to it, but I hope you catch the basic point….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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