In recent years, many people, at least in certain circles, have become familiar with Bastiat’s broken-window fallacy and have come to recognize that Keynesian macroeconomic policy amounts to little more than this fallacy writ large.
Perhaps even more important is what we might call the unbroken-leg fallacy. This is the presumption, which underlies all sorts of state intervention, both macroeconomic and microeconomic, in the market system, that the participants in markets are perfectly capable of acting more productively but, owing to various “market failures,” are not doing so on their own and require state action to repair the situation. The fallacy is that this reasoning completely ignores the countless ways in which the state’s own intrusions and engagements in the economic system in effect “break the legs” of private-sector actors by distorting prices (including interest rates), penalizing productive actions, and subsidizing destructive actions. Having invaded the economic order like the proverbial bull in a China shop, the state’s kingpins, functionaries, and intellectual bootlickers then have the chutzpah to blame “market failures” for the wreckage they themselves have created — an ever-changing hodgepodge of bad incentives, misdirected state efforts, and ominous fears about further unsettling state actions to come.
Owing to the built-in feedback that occurs in a genuinely free, profit-and-loss-based market system, people do not systematically err and fail in their multifaceted efforts to coordinate their own economic activities — unless, that is, the state runs amok, breaking their legs willy-nilly and crippling the operation of the price system. Economic analysis and policy-making that disregard this reality rest on a fallacious foundation.